How will a federal judge make a decision about an ERISA lawsuit? There are two standards of review in ERISA cases: (1) the de novo review standard and (2) the arbitrary and capricious standard (also called the “abuse of discretion” standard). The judge will determine which standard applies to your disability based on the language in the policy itself. Specifically, both parties and the judge will review the LTD policy to determine whether it includes a discretionary clause that allows the insurance company to interpret the policy.
The Arbitrary and Capricious Standard
The “arbitrary and capricious” standard is a standard of review that applies to most ERISA long term disability claims. The court will review the disability plan or policy to determine whether the plan administrator has been given discretionary authority to administer the plan and make disability determinations under it. In other words, a plan is not required to use certain “magic words” to create discretionary authority for a plan administrator. What is required is a clear grant of discretion to the administrator. For example, if the insurance plan provides the insurance company with “full discretion to determine eligibility for benefits and to construe and interpret all terms and provisions of the Policy,” then the arbitrary and capricious standard applies. This standard does not require the court to merely rubber-stamp the administrator’s decision. Instead, under the arbitrary and capricious standard, a plan administrator’s decision will not be deemed arbitrary and capricious as long as a reasoned explanation, based on the evidence, can be offered for a particular outcome. It is worth noting that the arbitrary and capricious standard is the least demanding form of judicial review. Therefore, the court must review the quantity and quality of the medical evidence and opinions on both sides of the issue. Make no mistake: this does not bode well for the claimant. It is much more in favor of the plan administrator or insurance company. The court will uphold a benefit denial determination if the decision is rational, considering the plan’s provisions.
The De Novo Review Standard
A de novo review is a more favorable standard of review for the policyholder. With a de novo review, the judge will independently review the entire administrative record (your entire claim file) and determine whether you are disabled and entitled to benefits under your group disability insurance policy. The abuse of discretion standard, on the other hand, applies where a plan grants the fiduciary discretionary authority to determine eligibility for benefits. Essentially, to reverse a disability denial under the abuse of discretion standard, the judge must find that the insurance company’s decision was “arbitrary and capricious,” acted unreasonably, and that there was no rational basis for the decision.
Note: Multiple states have sought to ban the use of discretionary clauses in disability policies. Unfortunately, most long term disability ERISA policies provided by employers contain discretionary clauses. That means the abuse of discretion standard is commonly applied by federal courts, not just in Florida but throughout the rest of the country.