Yesterday, the Third Circuit Court of Appeals issued its decision in Noga v. Fulton Financial Corporation Employee Benefit Plan; Reliance Standard Life Insurance Company, No. 19-3855, __F.4th__, 2021 WL 5540848 (3d Cir. Nov. 26, 2021), a matter involving a denied long-term disability benefit claim.
Plaintiff-Appellee Leo Noga became disabled from his job as a financial advisor due to symptoms related to neurogenic muscular atrophy and diabetic polyneuropathy. Defendant-Appellant Reliance Standard Life Insurance Company (“RSL”), the company that funded Noga’s employer’s long-term disability and life insurance benefits plans, approved and paid Noga disability benefits for over two years. In a two-year period, despite some indication in Noga’s medical records that he experienced some improvement, four different RSL nurses on six separate occasions recertified Noga’s eligibility for benefits. Less than a month after RSL recertified Noga’s benefits, RSL requested that Noga attend an independent medical examination (“IME”) and retained a third-party vendor to set it up with a physiatrist. That doctor claimed that Noga demonstrated a high degree of symptom exaggeration and inappropriate pain behavior, and that he was capable of gainful employment. RSL then terminated Noga’s benefit claim and Noga appealed. He submitted updated medical records where his doctors noted he continued to struggle with walking and balancing and that he suffered from fatigue and decreased feeling in his feet. RSL had another nurse review the claim and that nurse determined that Noga’s medical records supported an ongoing lack of consistent work function at any level. Based on that, the senior benefits analyst overturned the decision to terminate benefits. However, the next day, the same analyst changed course and instead requested two peer reviews from outside medical professionals. Using the same third-party vendor, RSL secured reviews from an endocrinologist and occupational medicine specialist—both concluded that Noga was capable of full-time work. RSL reversed its reinstatement of Noga’s benefits and upheld its initial termination decision.
Noga filed suit under ERISA § 502(a)(1)(B) to reinstate his long-term disability and life insurance benefits. On summary judgment, the district court declined to consider an affidavit submitted by RSL that attempted to explain the decisions around obtaining the two peer reviews. The affidavit was not part of the “administrative record.” The district court determined that RSL’s termination of Noga’s benefits was arbitrary and capricious because it resulted from RSL’s financial conflict of interest and the procedural irregularities in RSL’s termination of benefits. RSL appealed the district court’s decision to exclude the affidavit and its conclusion that the termination of Noga’s benefits was arbitrary and capricious. In affirming the district court, the Third Circuit clarified the “ERISA record rule” and the impact of procedural irregularities when the standard of review is for abuse of discretion.
First, the court held that the district court did not err by excluding RSL’s affidavit. In so doing, the court explained the “ERISA record rule” and the structural-conflict exception. The ERISA record rule is that a court should only consider evidence that is in the administrative record, or claim file, through the fiduciary’s final determination on a claim. The court noted that the ERISA statute does not limit a court to evaluate adverse benefit determinations based solely on the administrative record. But where a plan confers discretionary authority on a fiduciary decision-maker, as the plan does in this case, the court reviews the decision for an abused of discretion under the arbitrary-and-capricious standard. This standard bears on the ERISA record rule because of the federal common law the courts developed for ERISA plans, including the import of administrative-law principles. Where abuse of discretion review applies, a plan elects to have its decision governed by the ERISA record rule. However, an exception to the ERISA record rule is that the record can be supplemented to prove or disprove a structural conflict of interest or its severity. But here, the court found that “[t]he exception to the ERISA record rule for structural conflicts is narrow and does not allow supplementation of the record with information related to the claim or the review process.” The court concluded that the ERISA record rule prevents RSL from supplementing the administrative record with post hoc explanations for its decision.
Second, the court found that the combined effect of RSL’s structural conflict of interest and two significant procedural irregularities resulted in RSL’s decision being an abuse of discretion. RSL has a structural conflict because it decides claims and pays benefits. A court should consider a combination of case-specific structural and procedural factors when determining whether a fiduciary abused its discretion. Under the “combination-of-factors analysis,” procedural irregularities in the administration of a claim gain significance the more closely that they align with financial incentives that create a structural conflict of interest. Here, the court found that RSL’s decision to request the first IME was of unusual timing and impetus since it just certified his disability. Even though RSL points to records showing some improvement, it had these records reviewed previously by nurses who still recertified his disability. Though a fiduciary can seek an IME at appropriate stages of the claims process, “the timing of and professed need for the IME were irregular.” The court found the second procedural anomaly to be RSL’s request for two peer reviews after it decided to overturn the initial decision. The request was unusual in its timing because it was made a day after reinstating benefits, it was unusual in its impetus because the record does not explain this change, and it was unusual in its scope as it sought two additional outside medical professionals. Taken together, the alignment of the procedural irregularities with RSL’s financial incentives demonstrates that RSL abused its discretion because its conflict infected its decision to terminate benefits.
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