Benefits denial under ERISA plan arbitrary and capricious.

Byline: Barry Bridges

A three-judge panel of the 1st U.S. Circuit Court of Appeals has held that an employee was wrongfully denied long-term disability under his employer's benefits plan in violation of the Employee Retirement Income Security Act.

Affirming a trial judge's award of back benefits, interest and attorneys' fees to the claimant, the panel found that defendant Aetna Life Insurance Co. was "arbitrary and capricious" in classifying plaintiff John Lavery's condition as pre-existing.

Lavery had first consulted a physician about a suspicious lesion during the plan's three-month lookback, with a different doctor later diagnosing melanoma within the coverage period. The parties' dispute centered on their respective characterizations of the initial visit.

Significantly, Aetna retained discretion to interpret the provisions of the plan in making coverage decisions as the claims administrator. But it also was the plan underwriter responsible for paying benefits.

In the 1st Circuit's view, the company's analysis of Lavery's benefits did not demonstrate that it minimized the structural conflict of interest inherent in its dual roles.

"[W]e find that Aetna's denial was less the decision of a reasoned fiduciary and more the product of an arbitrary attempt to justify a preferred result, and so Aetna's decision is not entitled to deference," Judge William J. Kayatta Jr. wrote for the panel. "Aetna's resolution of the relevant ambiguity [concerning the plan's definition of 'pre-existing condition'] was arbitrary and an unconflicted fiduciary would likely have found coverage."

The 29-page decision is Lavery v. Restoration Hardware Long Term Disability Benefits Plan, et al., Lawyers Weekly No. 01-206-19. The full text of the ruling can be found here.

Conflict of interest

Representing the plaintiff was Boston's Stephen S. Churchill. Lori A. Medley of New York City was counsel for the defendants. Neither responded to requests for comments.

But several local ERISA attorneys weighed in on the decision.

Mark B. Morse of Providence said the ruling takes a practical look at what a plan administrator's conduct was, as opposed to what its statements were.

He said an administrator typically describes how a conflict of interest was addressed, making sure that the record reflects how an "iron curtain" was erected between the decision-making and underwriting functions.

"But you can make that claim all you want. The conduct here, such as supervisors overriding...