Group Long-term Disability Coverage and Erisa

• Publication year: 2004
• Pages: 87
• Citation: Vol. 33 No. 5 Pg. 87

33 Colo.Law. 87 Colorado Lawyer 2004.

2004, May, Pg. 87. Group Long-Term Disability Coverage and ERISA

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87

Vol. 33, No. 5, Pg. 87

The Colorado Lawyer
May 2004
Vol. 33, No. 5 [Page 87]

Specialty Law Columns
Tort and Insurance Law Reporter
Group Long-Term Disability Coverage and ERISA
by Shawn E. McDermott

This column provides information concerning current tort law issues and insurance issues addressed by practitioners representing either plaintiffs or defendants in tort cases In addition, it addresses issues of insurance coverage regulation, and bad faith

Column Editor:

William P. Godsman of the Law Office of William Godsman, Denver - (303) 455-6900, wgodsman@qwest.net

Shawn E. McDermott

About The Author:

This month's article was written by Shawn E. McDermott, Denver, a sole practitioner and Of Counsel to the McDermott Law Firm in Cañon City.
His practice includes personal injury, workers' compensation, and insurance litigation, including ERISA denials of coverage - (303) 964-1800, mcdermottlawfirm@qwest.net.

This article provides a background of ERISA-governed long-term disability coverage. It addresses the benefits determination process, claim denials, administrative appellate review, and filing of suit against a plan administrator.

When an insurance carrier denies a claim for long-term disability ("LTD") benefits provided through a private employer's group plan, the Employee Retirement Income Security Act ("ERISA")1 is likely to govern the process. A practitioner's failure to understand the true impact of ERISA could result in simple mistakes with grave impact on the client's claim.

The internal appeal with the insurer is almost always the most critical stage of the entire process - including subsequent litigation, if suit must be filed. Thus, practitioners must understand the true importance of taking on such an appeal. Although the odds are heavily stacked in favor of the insurer in claims governed by ERISA, appropriate handling of the claim denial is vital.

ERISA reaches into all areas of employee pensions and other benefits. This article, however, focuses on the handling of LTD claims offered under an employer-provided group benefits package and the steps to be taken when the claim has been denied. This article also provides basic information on ERISA that should help the practitioner identify an ERISA case and avoid common mistakes. The ERISA-governed disability claim process and a response to a claim denial, as well as tips for submitting the administrative review, also are addressed. Finally, limited review of ERISA litigation issues is provided.

Basic ERISA Information

ERISA was passed by the U.S. Congress in 1974 to regulate employee benefits. Most people who participate in a pension or group insurance plan through a private employer or employee organization are covered by ERISA.

ERISA regulates "employee benefit plans." These plans exist in two forms: (1) "employee pension benefit plans"; and (2) "employee welfare benefit plans," which are established and maintained to provide health benefits, disability benefits, death or unemployment benefits, prepaid legal services, vacation benefits, day care centers, scholarship funds, apprenticeship and training benefits, and other similar benefits.2

When ERISA was first adopted, the legislation was hailed as a major success in advancing employee interests, at least regarding the overhaul of the private pension industry. However, in the thirty years ERISA has been in effect, many would argue that it has become better known as a shield against consumer interests in the administration of non-pension employee benefit plans, such as LTD benefits.3 ERISA is frequently used by the plan or plan insurer to prevent employees from having the legal redress and remedies they would have had under state laws existing before the adoption of ERISA.4

To complicate matters, a review of the statutes rarely provides a complete answer to a specific question. Further, the circuit courts are divided on interpretation of important issues, including the standard of review, scope of discovery, and admissibility of evidence.

Definitions of Key
ERISA Terms

It is essential to have a working knowledge of technical definitions of important ERISA terms.5 Commonly used terms follow in alphabetical order.

Group Policy: If LTD benefits provided by the plan are insured by the plan sponsor, the insurer issues a group insurance policy.

Pension Benefits: These benefits consist of payments to retirees, based in part on years of service.

Plan Administrator: According to most courts, this is the company or person responsible for making the decision to deny or pay benefits. It typically is the insurance company issuing the LTD group policy, if the plan is insured.

Plan Document: All of the plan's rules and terms are spelled out in the complete employee benefit plan document. Often, the "plan" is the insurance policy itself. (See also definition of "summary plan description," below.)

Plan Participant: Typically, this refers to the employee enrolled in the plan. The plan participant also may be referred to as the claimant or insured.

Plan Sponsor: The employer or a union providing the plan is the plan sponsor.

Summary Plan Description: A summary of the "plan document" (defined above) explains the available benefits, claim procedures, permissible benefit offsets, how and when benefits are payable, and how to appeal if benefits are denied. The information often is provided in the form of an employee benefits booklet.

Welfare Benefits: These benefits include any benefit that is not a pension benefit, such as: disability, health, or life insurance; pre-paid legal services; or non-monetary benefits, such as day care services.

Elements of ERISA-
Governed Plans

Most private sector employee benefit plans are governed by ERISA. Nonetheless, it is incumbent on a practitioner to verify that the benefit plan is truly governed by ERISA. The purchase of an insurance policy by an employer does not automatically establish the existence of an ERISA plan. If the plan benefit is insured, and the claimant questions the applicability of ERISA, the insurer has the obligation of establishing that this federal law governs the insurance policy.6

The threshold issue in determining whether the court has jurisdiction pursuant to ERISA is whether the employee's claim relates to insurance coverage he or she obtained through an "employee welfare benefit plan."7 By statute, there are five elements that must be met to constitute an employee welfare benefit plan.8 The plan must be (1) a plan, fund, or program (2) established or maintained (3) by an employer, employee-organization, or both (4) for the purpose of providing medical, surgical, hospital care, sickness, accident, and other benefits (5) to participants or beneficiaries.9 If all elements are satisfied, the plan is governed by ERISA, as opposed to state common law.

Plans Not Covered by ERISA

Several kinds of plans are not governed by ERISA. These include: (1) group plans established or maintained by governmental entities or churches for their employees; (2) plans that are maintained solely to comply with applicable workers' compensation, unemployment, or disability laws; (3) plans maintained outside the United States primarily for the benefit of nonresident aliens; and (4) unfunded excess benefit plans.

In addition, there is a "safe harbor" that may exempt an established plan from ERISA.10 Relevant U.S. Department of Labor ("DOL") regulations provide that ERISA does not apply to group or group-type insurance programs where: (1) no contributions are made by an employer or employee organization; (2) participation in the program is voluntary; (3) the sole function of the employer is to permit the insurer to advertise the program to employees, and the employer only collects premiums through payroll deductions for the insurer; and (4) the employer does not profit from administration of the plan.11 If the insurance program meets the criteria set forth in the safe harbor regulations, or the benefit plan is otherwise not deemed an employee benefits plan, ERISA does not apply and state law governs.

Fiduciary Standards of
Plan Administrators

The ERISA statutes set forth standards and rules governing the conduct of plan fiduciaries.12 In general, persons who exercise discretionary authority or control over management of a plan or disposition of its assets are "fiduciaries" for purposes of ERISA.13 Fiduciaries are required, among other things, to discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive...