Seventh Circuit: 2018 Amendments to ERISA Claims Regulations Apply to Disability Claims Terminated After Effective Date of Amendment

Zall v. Standard Ins. Co., No. 22-1096, _F.4th_, 2023 WL 312368 (7th Cir. Jan. 19, 2023) (Before: Hamilton, St. Eve, and Kirsch, Circuit Judges).

In this dispute over the payment of long-term disability benefits to Plaintiff-Appellant Eric Zall, a dentist disabled from work due to chronic neck and arm pain and numbness, the Seventh Circuit decided a significant legal issue of which amended version of ERISA’s claims procedure issued under 29 U.S.C. § 1133 applies to Standard Insurance Company’s internal administrative review of its termination of Zall’s benefits. The court concluded that “the plain language of the 2018 amendments to the regulation shows that the amended version applies, and Standard failed to comply with it.”

Here, Zall first filed his claim for long-term disability (“LTD”) benefits with Standard in 2013. Standard denied Zall’s LTD claim initially, but then approved his claim after Zall appealed. In 2014, Standard suspected that Zall’s disability may be limited to 24 months of payments based on a policy limitation that applies to a disability “caused or contributed to by … carpal tunnel or repetitive motion syndrome” or “diseases or disorders of the cervical, thoracic, or lumbosacral back and its surrounding soft tissue.” An exception to this limitation is a disability “caused or contributed to by … herniated discs with neurological abnormalities that are documented by electromyogram and computerized tomography or magnetic resonance imaging” or “radiculopathies that are documented by electromyogram.” However, Standard did not pursue its investigation of the applicability of this limitation until 2018. After conducting a review, Standard decided that Zall’s claim was subject to the 24-month limit, and it terminated Zall’s LTD benefits at the end of 2019. By that time, the Department of Labor’s (“DOL”) amendments to the claims procedure regulations had taken effect. See 82 Fed. Reg. 56,560-01, 56,560 (Nov. 29, 2017) (setting amendments’ applicability date as April 1, 2018).

Zall appealed the termination of benefits through Standard’s administrative review process. After it received Zall’s appeal, Standard consulted with Dr. Michelle Alpert, who reviewed Zall’s medical file and issued a report dated August 3, 2020. Dr. Alpert disagreed with Zall’s physicians’ readings of his diagnostic reports. On August 20, 2020, Standard wrote to Zall and informed him that his file had been reviewed “by a physician who had not previously reviewed” it and that Standard “require[d] additional time to review” the physician’s “medical review report.” Standard did not enclose a copy of Dr. Albert’s report. Then nine days later, Standard issued its final determination upholding the decision to terminate Dr. Albert’s claim based on the 24-month limit.

Zall filed suit and challenged Standard’s decision on three grounds: (1) Standard had “denied him a full and fair review” by failing to give him a copy of Dr. Alpert’s report and preventing him from responding to the report before Standard finally decided his claim; (2) Standard’s application of the 24-month limit was “not rationally supported by the medical evidence;” and (3) Standard waived its right to terminate his benefits by paying him more than six years after Standard claims his benefits should have ended. The district court rejected all three arguments as follows: (1) The 2018 amendments to the regulations apply only to claims first filed after April 1, 2018 so Standard was not obligated to produce Dr. Albert’s report before it decided Zall’s claim; (2) Standard’s determination was not arbitrary nor capricious because Dr. Alpert’s interpretations of Zall’s 2014 diagnostic reports provided rational support for the denial; and (3) Standard did not waive its ability to review Zall’s claim. Zall filed an appeal to the Seventh Circuit on the first two issues and abandoned the waiver argument.

The Seventh Circuit disagreed with the district court’s reading of the 2018 amendments to the claims procedure regulations. The court explained 29 C.F.R. § 2560.503–1(p)(1)–(4) as follows:

Paragraph (p)(1) establishes a general rule of applicability: “this section shall apply to claims filed under a plan on or after January 1, 2002.” Because Zall filed his original claim in 2013, paragraph (p)(1) encompasses his case, so the new version governs unless an exception applies.

Paragraph (p)(1) identifies three exceptions, which are stated in paragraphs (p)(2), (p)(3), and (p)(4). The (p)(2) exception applies only “to claims filed under a group health plan,” so it does not apply to Zall’s claim for disability insurance benefits. The (p)(3) exception identifies nine provisions—“(b)(7), (g)(1)(vii) and (viii), (j)(4)(ii), (j)(6) and (7), (l)(2), (m)(4)(ii), and (o)”—as applicable only to claims for disability benefits filed after April 1, 2018.

Critically, sub-paragraph (h)(4)(i), which eliminated the “upon request” language and upon which Zall relies to argue that he was not afforded a “full and fair review,” is not among those paragraphs identified in paragraph (p)(3).

Finally, the (p)(4) exception renders five provisions—“(g)(1)(vii), (g)(1)(viii), (h)(4), (j)(6) and (j)(7)”—inapplicable to claims filed between January 18, 2017 and April 1, 2018. While paragraph (h)(4) with its removal of the “upon request” language is among the provisions identified in paragraph (p)(4), the exception does not apply to Zall’s appeal since he filed his claim before this carve-out period began.

The court concluded that by the regulation’s plain text, no exception applies to Zall’s claim, so the 2018 amendments applied to his administrative appeal. The court considered and rejected Standard’s arguments including that: (1) extratextual evidence shows that the 2018 amendments were not meant to apply to claims filed before April 1, 2018; (2) Zall waived the argument about the amended regulation in the district court by failing to raise it during the administrative review process or allege it in the complaint, and (3) applying the 2018 amendments to claims filed as far back as 2002 would make them impermissibly retroactive. The court explained that: (1) the DOL’s summary statement of the amendment does not conflict with the court’s reading of the amendments, and what matters is that when Standard terminated Zall’s benefits, the new claims procedures had already taken effect; (2) Zall received notice of Dr. Alpert’s medical report only 9 days before Standard issued its decision and could not object to Standard’s failure until after that failure became apparent; and the Federal Rules of Civil Procedure do not require a plaintiff to plead legal theories; and (3) retroactivity is not an issue because the amendments to the claims procedures were procedural, with no substantive import.

The court also concluded that Zall was prejudiced by Standard’s failure to give him a copy of Dr. Albert’s report. The court declined to review Standard’s substantive decision at that time. The court reversed summary judgment in favor of Standard and remanded to the district court with instructions to remand Zall’s case to Standard for a full and fair review.