Disability Benefits Policy Language Warrants Arbitrary and Capricious Standard of Review Despite Enactment of Anti-Discretionary Statute

A federal court in New Jersey recently applied the arbitrary and capricious standard of review for a denial of benefits claim despite the enactment of an anti-discretionary statute in Minnesota, which governed the benefit plan policy. Hocheiser v. Liberty Mut. Ins. Co., 2021 U.S. Dist. LEXIS 32154 (D.N.J. Feb. 22, 2021).

In a claim for long-term disability (LTD) benefits, the plaintiff maintained that the de novo standard applied to the court’s review of the denial of benefits. The plaintiff contended that, under Third Circuit precedent, the benefit plan in effect on the date of the benefits determination governs the administrator’s discretionary authority to approve or deny benefits. The plaintiff pointed out that the insurer amended the policy on January 1, 2016, rendering the policy subject to the ban on discretionary clauses.  Further, the administrator made the decision to deny long-term disability benefits in May 2016 and the final determination was rendered in February 2017.

The LTD policy at issue stated that it was delivered in and governed by the laws of the state of Minnesota. On the same date that the insurer last amended the policy (i.e., January 1, 2016), a law went into effect in Minnesota banning any provision in a disability policy purporting to reserve discretion to the insurer to interpret the terms of the contract or provide a standard of review inconsistent with the laws of Minnesota. As a result, the plaintiff reasoned that, since both of the determinations on his benefits claim were made after Minnesota enacted the anti-discretionary statute, the discretionary language in the policy did not apply.

The district court judge disagreed and adopted the magistrate judge’s ruling that the arbitrary and capricious standard applied. The court determined that the plaintiff was incorrect as to the date on which the administrator’s discretionary authority is determined. Specifically, Third Circuit law holds that the controlling policy is the one in effect either: 1) when the employee has vested rights in benefits, or 2) if the employee has no vested rights under the policy, when an ERISA cause of action accrues (i.e., when benefits are denied). The plaintiff’s benefit rights vested on the date of the disability, which occurred in 2013.  Thus, since the rights vested before the enactment of the anti-discretionary statute, it found that the discretionary language in the policy applied.

Significant to the ruling was language in the LTD policy. Specifically, each amendment stated that “the changes will only apply to Disabilities or Partial Disabilities which start on or after the effective date of this change.” (emphasis added). Under that language, although there were various amendments, the policy in effect at the time of the plaintiff’s disability applied.

The takeaway from this case is to make sure to consider pertinent language on Policy amendments to determine if it may impact the application or enforcement of anti-discretionary state statutes. Doing so may help in benefits litigation matters, even where anti-discretionary statutes have been enacted under the governing state law. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.