LTD Plan Strikes Out (Again) at 7th Circuit re Plan Administrator Discretion
Argument that SPD Confers Discretion Lays an Egg
typical of Supreme Court cases that set a new standard to interpret ERISA,
the Firestone Tire and Rubber Co v. Bruch decision (1989) announced,
but did not sew up tightly, a rule governing denial of benefit claims.
Firestone ruled that an employee gets "de novo" review (no deference to the plan
administrator) in court, unless the benefit plan gives the administrator
discretion to determine benefits and interpret the plan document. If the
latter is true, the plaintiff must meet a much heavier burden: proving that
the plan administrator acted arbitrarily and capriciously.
A line of cases struggling to apply this standard has focused on the plan language to the effect that the plan administrator will pay benefits upon receipt of satisfactory evidence that the participant is entitled to them. The Seventh Circuit's decision in Herzberger v. Standard Insurance Co. (2000) found that the law refuses to recognize discretion based on such language, but because of ambiguity among the rulings pre-Herzberger the court suggested this provision: "Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them."
In a recent case, Schwarz v Prudential Insurance Co. of America (2006), the plaintiff had sought long term disability benefits under a Chicago law firm's LTD plan one year after she left the firm. Prudential, the plan's underwriter, denied the claim, and the relevant provision in the plan stated: "We may request that you send proof of continuing disability, satisfactory to Prudential, indicating that you are under the regular care of a doctor."
Schwarz sued Prudential over the denial of claim. By the time the Schwarz case made its way to the Seventh Circuit, the court had just decided another case involving the same plan and the same underwriter. The court there found no discretion and sent the case back to the trial court to apply the de novo standard. Diaz v Prudential Ins. Co. of America, 424 F3d 635 (7th Cir. 2005).
Reacting to Diaz, Prudential argued in the Schwarz case that, although the plan contained that language, the summary plan description provided that Prudential had discretion in granting benefits. The Seventh Circuit was unpersuaded.
Had Schwarz relied to her detriment on the SPD, that document would have mattered. But where the SPD says the administrator has rights, and the plan says the administrator does not, the latter controls. The plan document is "more complete - the original, as it were, which the [SPD] excerpts and translates into a language that may be imprecise because it is designed to be intelligible to lay persons..."
Citing Section 1022 of ERISA, the court inferred from the statute that an SPD was "an accurate summary, [but] not an unnegotiated enlargement of the administrator's authority." Were the SPD to control, the court noted, it would be allowing "the tail to wag the dog."