In litigation involving an LTD benefits claim denial, the Seventh Circuit held that the substantial compliance doctrine does not apply to regulatory deadlines under the DOL's claims procedure regulations (Fessenden v. Reliance Standard Life Ins. Co., 927 F.3d 998 (7th Cir. June 25, 2019)). As a result, the court concluded that a claims administrator's untimely benefits denial was subject to a de novo standard of review rather than a more deferential review (see Practice Note, ERISA Litigation: Standard of Review and ERISA Litigation Toolkit).

The participant in this case suffered from chronic fatigue and migraine headaches. After he stopped working due to these conditions, the participant sought LTD benefits through his employer's insured group policy. The plan granted discretionary authority to the plan's insurer/claims administrator to determine eligibility for benefits. After the insurer denied the participant's claim, the participant sought review of that decision and submitted additional support for his claim. Under the 2002 version of the DOL's claims procedure regulations (2002 regulations), which governed this dispute, the insurer had 45 days and – under a permitted 45-day extension for special circumstances – a total of 90 days in which to issue a final decision (29 C.F.R. § 2560.503-1(i)(1)(i), (i)(3)(i) (2002); see Practice Note, Claims Procedure Requirements for Disability Claims). However, the insurer failed to issue a decision within the 90-day period.

The participant sued the insurer and plan under ERISA (see ERISA Litigation Toolkit). Eight days after the participant filed suit, the insurer issued its decision denying the claim on internal review. The district court, applying a deferential standard of review, granted summary judgment in the insurer's favor and the participant appealed.

On appeal, the Seventh Circuit addressed whether the substantial compliance doctrine applied to the insurer's failure to satisfy deadlines under the 2002 regulations. If so, the insurer's untimely decision was entitled to deference. If not, the more stringent de novo standard of review applied. (See Practice Note, ERISA Litigation: Standard of Review: Two Applicable Standards of Review in Benefits Disputes and Standard Clause, SPD Language, Firestone Plan Interpretation.)

Under the common law doctrine of substantial compliance, relatively minor violations of the DOL's claims regulations may be excused if a plan administrator substantially complies with the regulations (see Practice Note, ERISA Litigation: Exhaustion of Plan Claims Procedures: Deemed Exhaustion and the DOL Claims Regulations; Substantial Compliance). Invoking this doctrine, the insurer argued that it was only "a little bit late" in issuing its denial. In contrast, the participant cited the Second Circuit's decision in Halo v. Yale Health Plan and urged the court to eliminate the doctrine altogether because it no longer applied after the 2002 regulations became effective. (Regarding the Halo decision, see Practice Notes, ERISA Litigation: Standard of Review: Standard of Review and Noncompliance with the DOL Claims Procedures and ERISA Litigation: Exhaustion of Plan Claims Procedures: Challenges to Substantial Compliance Doctrine; ACA Strict Adherence Standards.)

Siding with the participant, but on narrower grounds, the Seventh Circuit concluded that even if the substantial compliance doctrine remains valid under the 2002 regulations, it does not apply concerning violations of the regulations' deadlines. In reaching this conclusion, the court reasoned that:

The Seventh Circuit acknowledged that the Third, Ninth, and Tenth Circuits have applied the substantial compliance doctrine in cases involving untimely benefit determinations. The court reasoned that these cases were unpersuasive, however, because they relied on precedent that predated the 2002 version of the claims regulations.

As a result, the Seventh Circuit held that because the substantial compliance doctrine does not apply to the claims regulations' regulatory deadlines, the participant's claim should have been reviewed under the non-deferential de novo standard of review. The Seventh Circuit therefore vacated the district court's decision and remanded for further proceedings.

Plan decisionmakers in the Seventh Circuit (Illinois, Indiana, and Wisconsin) will want to take note of this ruling, in which the court takes a stringent view of when noncompliance with the claims regulations' regulatory deadlines results in de novo review of a decisionmaker's benefit denial. Because loss of the more deferential standard of review can make the difference in whether a decisionmaker's denial will be upheld on review, the Seventh Circuit's ruling underscores the need for timely benefit claims decisions.

Notably, enhancements to the DOL's claims regulations under the Affordable Care Act (ACA) impose a "strict compliance" standard under which claimants are deemed to have exhausted a plan's internal claims and appeals procedures if a plan or insurer does not strictly adhere to internal claims and appeals requirements (see Practice Notes, Internal Claims and Appeals Under the ACA: Strict Compliance Rule and Claims Procedure Requirements for Disability Claims: Strict Compliance Requirement (and Exceptions) for Plans Providing Disability Benefits).