Second Circuit: Insurer's Internal Remand Did Not Extend Benefit Determination Deadline

Practical Law Legal Update w-035-8382 (Approx. 4 pages)

Second Circuit: Insurer's Internal Remand Did Not Extend Benefit Determination Deadline

by Practical Law Employee Benefits & Executive Compensation

Insurer Forwarded Appeal to Claims Department for Further Review

After the insurer in this case denied a claimant's request for LTD benefits, the claimant timely filed an administrative appeal of the claim. The plan's claims procedures required the insurer to provide the claimant its final decision within 45 days of the date the claimant appealed the claim. Twelve days after the claimant filed his appeal, the insurer replied in a letter that:

It had completed its review of the appeal and overturned its original decision—but had also forwarded (remanded) the claim to its claim department to determine whether the claimant's disability was supported.
Payment for LTD benefits was not guaranteed because the insurer's claim department still needed to determine whether the claimant was disabled.

More than two months later, the insurer responded that it had denied the claimant's claim on appeal (finding that he did not qualify as disabled). However, on the 46th day after the claimant filed his appeal (and several weeks before the insurer issued its denial on appeal), the claimant sued the insurer in federal district court under ERISA for benefits (see ERISA Litigation Toolkit). The district court dismissed the claimant's lawsuit, reasoning that he had failed to exhaust the plan's administrative remedies because the insurer's review was not yet complete when he filed suit (see Practice Note, ERISA Litigation: Exhaustion of Plan Claims Procedures). The claimant appealed the district court's dismissal of his complaint to the Second Circuit.

Finality Required: Benefit Determination on Appeal Must Decide Benefits Claim

Analyzing the text, structure, and purpose of the DOL's claims regulations, the Second Circuit reversed the district court's judgment and remanded for further proceedings. The Second Circuit framed the issue as whether a benefit determination on review under the DOL claims regulations must finally determine whether a claimant is entitled to benefits. The court held that it does. Because the insurer did not provide its final benefit determination within 45 days of the appeal (or seek an extension), the Second Circuit concluded that the claimant was deemed to have exhausted the plan's administrative remedies.

Text of DOL Claims Regulations

The Second Circuit observed that under the DOL's claims regulations, a plan must notify claimants of its "benefit determination on review" within 45 days, unless special circumstances warrant an extension (29 C.F.R. § 2560.503-1; see Practice Note, Claims Procedure Requirements for Disability Claims). The court acknowledged that the regulations do not define the term "benefit determination." The court added, however, that the regulations' text makes clear that a plan must timely furnish an appealing claimant not just a determination, but a "benefit determination." In other words, the court concluded, the plan had 45 days to provide a decision regarding the claimant's benefits—not merely a decision regarding the appeal itself or some other aspect of the claim. Citing dictionary definitions, the court noted that the term "determination" indicates that a claim must be comprehensively decided and "unmistakably suggests finality."

The court noted that the insurer's own letter to the claimant supported this interpretation. In its letter, the insurer used the phrase "final decision" when describing the appeal process (rather than the more formal "benefit determination" language from the DOL's regulations).

The insurer emphasized that the regulations define "adverse benefit determination" and provide detailed instructions on notices related to such a determination, but do not provide notice requirements for other, non-adverse outcomes. As a result, the insurer argued that it had flexibility to issue a determination that remanded the claim rather than determining the claimant's benefits. Rejecting this argument, the Second Circuit reasoned that the insurer's reading of the phrase disregarded the word "benefit" (that is, a decision that does not determine benefits cannot be a "benefit determination").

Structure and Purpose of DOL Claims Regulations

Additionally, the Second Circuit concluded that the regulations' structure was clearly designed to result in a final benefits determination. Regarding the benefits appeal process, the court noted, the regulations require that:

A plan's determination on appeal must consider all submitted information, regardless of whether the information was submitted or consulted in the initial decision.
A plan decisionmaker may rely on new evidence or rationales to deny a claim if the claimant is provided notice and an opportunity to respond.
The review on appeal must not defer to the initial decision.

In the court's view, this review process was intended to determine benefits conclusively—not to narrowly correct certain errors before remanding the claim elsewhere for further consideration.

The court also noted that the regulations' 45-day time limit would be meaningless if an internal remand counted as a benefit determination on review. Rather than making a benefits determination within 45 days, an administrator could remand and delay a claim indefinitely—thereby frustrating the regulations' purpose.

Practical Impact

This ruling may have significant implications for plan administrators and insurers in the Second Circuit—particularly because there are countless ways in which a plan decisionmaker may fail to strictly adhere to the benefit claims regulations under ERISA. Failure to strictly adhere to the regulations' requirements, the Second Circuit concludes in this case, means a claimant is deemed to have exhausted the plan's administrative remedies and free to bring suit in federal district court under ERISA. As a result, we might expect to see more "day 46" complaints being filed by participants and beneficiaires in the claims context.

Second Circuit: Insurer's Internal Remand Did Not Extend Benefit Determination Deadline | Practical Law