Insurers must detail conferral of discretion in ERISA benefits cases.

Employee Retirement Income Security Act (ERISA) health and pension plan administrators must spell out, in unambiguous language, whether they have the discretion to accept or deny workers' medical claims, the U.S. Court of Appeals for the Seventh Circuit has ruled. Under the decision, health and pension plans can no longer use subjective standards, such as "satisfactory proof," to determine whether workers are entitled to benefits.

Like the Second, Eighth, and Ninth circuits before it, the Seventh Circuit confronted what boils down to a standard-of-review issue in ERISA cases that "has been plaguing the courts for years," said Mark DeBofsky, a Chicago lawyer who represented Carolyn Herzberger in Herzberger v. Standard Insurance Co. (No. 99-1944, 2000 WL 202653 (7th Cir. Feb. 23, 2000).)

"This [decision] is going to be beneficial in terms of putting plaintiffs on a more even playing field in proving their cases," DeBofsky said.

Herzberger sought medical disability benefits for chronic fatigue syndrome, but Standard Insurance Co., her employer's benefit plan administrator, denied her claim. A psychiatrist for Standard determined that Herzberger's physical symptoms were caused by depression, which the company categorizes as a mental disorder and for which it caps coverage at two years. The trial court found that under the wording of the insurance policy, Standard had discretionary power to decide these types of coverage questions.

Under ERISA, an unambiguous conferral of discretion means an appellate court has to decide only whether the plan administrator's decision was unreasonable, a relatively light burden for administrators to prove.

Conversely, a finding that a claimant is entitled to de novo review because of an ERISA plan's ambiguous language would have allowed the appellate court to decide the case on its merits, without deference to the insurer's decision. In Herzberger's case, the Seventh Circuit found that de novo review was appropriate, so her claim for coverage will now be decided by a judge.

"An employer should not be allowed to get credit with its employees for having an ERISA plan that confers solid rights on them and later, when an employee seeks to enforce the right, pull a discretionary review rabbit out of his hat," Chief Judge Richard Posner wrote in his opinion for the court. "The employees are entitled to know what they're getting into, and so if the employer is going to reserve a broad, unchanneled discretion to deny claims, the employees should be told about this, and told clearly."

DeBofsky was pleased that the influential chief judge emphasized Congress's desire to bring uniformity to the treatment of employee benefit plans.

"The ERISA statute was enacted by Congress to promote uniform standards so that companies that administer benefit plans didn't have to worry that the plans would be interpreted differently within different jurisdictions," DeBofsky said. "But what was happening, certainly in the Seventh Circuit before Herzberger, was that identical insurance policies were being construed differently as far as the standard of review goes. Who would know what they were getting?"

Sue Horner, a San Diego trial attorney who has handled these types of cases, said she, too, was encouraged by Posner's reference to uniformity because a uniform interpretation of an employer's ERISA plan will benefit employees who continue to work for a company but are transferred to another state and fall under another court's jurisdiction.

"Application of a different standard of review in different circuits under the same policy would undoubtedly result in inconsistent administration of the policy, to some employees' grave prejudice," Homer said.

The Seventh Circuit's decision follows similar ones handed down in 1999 by the Second Circuit (Kinstler v. First Reliance Standard Life Insurance Co., 181 F.3d 243), the Ninth Circuit (Kearney v. Standard Insurance Co., 175 F.3d 1084), and, a year earlier, by the Eighth Circuit (Brown v. Seitz Foods, Inc., Disability Benefit Plan, 140 F.3d 1198).

Only the Sixth Circuit Court of Appeals has ruled that discretion may be conferred to the plan administrator when the policy states only that benefits decisions will be based on "such proof as shall be required by the plan administrator." (Perez v. Aetna Life Insurance Co., 150 F.3d 550 (6th Cir. 1998).)