Abuse of Discretion Proper Standard for Benefit Provider also Administrator

July 24, 2007 (PLANSPONSOR.com) - The 5th U.S. Circuit Court of Appeals has upheld a summary judgment in favor of an employer who served as both insurer and administrator for its short-term disability plan, agreeing with the lower court's abuse of discretion standard of review in the case.

According to the opinion, Alfred Wade challenged the lower court’s decision, claiming the abuse of discretion standard was inappropriate since a conflict-of-interest existed because his employer, Compaq Computer Corporation, acted as both insurer and plan administrator. The appellate court disagreed and ruled the conflict-of-interest consideration should be taken into account during the review, but the abuse of discretion standard was appropriate.

In addition, Wade argued that procedural violations in the processing of his short-term disability request justify an award to him for short-term disability benefits, the opinion said. Among other things, Wade pointed out that the denial was communicated to him orally and not in writing, the denial did not explicitly explain the specific plan provisions on which the denial was based, and he was not given proper instructions for appealing the denial of his claim for benefits.

The appellate court pointed out that while the Employee Retirement Income Security Act (ERISA) does contain specific requirements for the communication between plan participants and administrators, several courts have established a “substantial compliance” test. According to the opinion this means the “technical noncompliance with ERISA procedures will be excused so long as the purpose of section 1133 has been fulfilled.”

The appellate court concluded that the plan fulfilled the requirements of ERISA section 1133 for requirements of communications with participants. “The statute and regulations do not require compliance with Section 1133 at each and every level of review of a Plan’s internal claims processing,” the court said.

Wade applied for short-term disability after being diagnosed with depression and attention deficit hyperactivity disorder and a psychiatrist’s recommendation that he not work. Compaq outsourced review of short-term disability claims to ValueOptions, a disability care management service company. After two doctors hired by ValueOptions confirmed Wade’s diagnosis, but said he was not disabled, the company called him to say his claim had been denied.

A ValueOptions appeal committee reviewed Wade’s claim and the initial denial and affirmed the denial, saying only “the clinical information provided does not meet ValueOptions’ Short-term Disability criteria.”   The letter also explained to Wade that he had the right to appeal to Compaq and provided an address and phone number, but no other details on how to appeal, a deadline for appeal, or information to submit for an appeal.

The Compaq Welfare Benefits Administrative Committee, comprised of only one Compaq employee, reviewed the claim and again it was denied. Wade then filed suit against his employer.

The opinion in Wade v. Hewlett-Packard Development Company LP Short Term Disability Plan is here .