Exhaustion of Administrative Remedies in ERISA: The Potential Death Knell of a Disability, Life or Health Insurance Claim

The Employee Retirement Income Security Act of 1974, or ERISA, establishes protections for most employee benefits offered through employer-sponsored benefit plans. ERISA requires that the plan and claims administrators adhere to certain internal procedures, often referred to as “administrative remedies,” when determining a plan participant’s eligibility for benefits. Typically, these administrative remedies include internal appeals directly to the insurer or claims administrator. Although each individual plan is different, most plans require at least one level of internal appeal, which you would have to “exhaust” before you can file a lawsuit. However, some plans require that an employee exhaust two levels of internal appeals before he or she can file suit.

Whether it is one or two levels of appeal, exhausting administrative remedies is incredibly important to your benefits claim because, if you do not, you may lose your ability to file a lawsuit to recover your benefits. In this article, we discuss the consequences of failing to meet the exhaustion requirement and explain the Ninth Circuit’s application of the exhaustion requirement to “disguised” benefits claims, such as the alleged statutory violation in Diaz v. United Agr. Employee Welfare Ben. Plan & Tr., 50 F.3d 1478 (9th Cir. 1995).

Why Exhaustion?
The text of ERISA does not, itself, require that the plan participant or beneficiary exhaust their internal administrative remedies before filing suit. However, a beneficiary seeking determination of rights or benefits under an ERISA plan must first exhaust administrative remedies, unless doing so is futile. See Amato v. Bernard, 618 F.2d 559 (9th Cir. 1980). The Ninth Circuit has held that the failure to exhaust acts as a bar only if the plan documents expressly mandate exhaustion prior to seeking judicial review. See Spinedex Physical Therapy USA, Inc. v. United Healthcare of Ariz., Inc., 770 F.3d 1282, 1298 (9th Cir. 2014). But, most plans do contain such a requirement.

Simply “Disguising” an ERISA Benefits Claim as a Statutory Violation Won’t Work
Where the claim is not a “repackaged” benefit claim and seeks equitable relief, exhaustion of administrative remedies may not be required. For example, it is well-settled Ninth Circuit precedent that breach of fiduciary duty claims, as opposed to benefits claims, are not subject to the exhaustion doctrine. But, a claimant may not dress a benefit claim as a statutory violation or breach of fiduciary duty where he or she failed to meet the exhaustion requirements. Some have tried, and the courts were not so easily fooled. In Diaz, supra, the Ninth Circuit directly addressed the importance of exhaustion by rejecting a claimant’s attempt to disguise his failure to appeal and “repackaging” a benefit claim as a statutory violation.

In Diaz, plaintiff sought relief for his medical plan’s failure to cover his daughter’s treatment for leukemia, based on an alleged statutory violation of the Consolidated Omnibus Budget Reconciliation Act, or COBRA, amendments to ERISA. Generally, the COBRA amendments to ERISA establish requirements regarding continued coverage for certain employees that experience a qualifying event, which would otherwise result in a termination of coverage. Because of the plaintiff’s seasonal work schedule, he experienced such “qualifying events” on a somewhat regular basis and, as a result, periods of intermittent coverage under the plan that triggered COBRA requirements.

These periods of intermittent coverage left plaintiff and his family without health insurance for the months of August and September 1990. Sadly, in September 1990, plaintiff’s daughter was diagnosed with leukemia and the plan denied her claims based on the policy’s pre-existing condition exclusion. Although the initial denial letters plaintiff received from the plan administrator contained a notice of appeal rights in both English and Spanish, plaintiff did not pursue the internal appeal to the insurer. Instead, he filed a lawsuit.

The District Court found in favor of the insurer because it determined that plaintiff failed to exhaust his administrative remedies, as he did not appeal the insurer’s initial denial as required under the plan. Plaintiff challenged the District Court’s decision, bringing it to the Ninth Circuit on alternative theories that 1) exhaustion principles do not apply to the claims as they are based on statutory violations and 2) even if exhaustion requirements did apply, exceptions for inadequacy and futility prevent his case from being barred.

Generally, the Ninth Circuit rejected both arguments as attempts to disguise an individual benefit claim that simply failed to take part in the internal appeals process. In assessing these arguments, the court found the case distinguishable from others that did successfully allege statutory violations or the futility or inadequacy of administrative review. The court determined plaintiff’s claim for relief based on a statutory violation was not at the heart of the claim. Instead, it was “an individual’s claim for plan benefits under a particularized set of facts,” which is just the type of case that led the courts to establish the exhaustion requirement in the first place.

To the courts, exhaustion of the ERISA-mandated internal remedies is necessary to ensure judicial review remains available in a benefits matter. The courts consider the doctrine “sound policy,” and consistent with the goals and aims of ERISA, as well as the efficient use of judicial resources. The alignment of these various competing policies in favor of exhaustion strengthens it, and if your benefits are important to you, taking an active role in ensuring that you comply with the review mandated under the plan should be, too; a failure to complete the latter may prevent you from pursuing the former, your benefits.

Note: If your ERISA claim has been denied, following the internal review procedures is integral to the success of your claim. It is also important to have experienced disability, health and life insurance attorneys, like those at the McKennon Law Group PC. Fill out our free consultation form today to set a time to discuss your claim with one of our attorneys, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.

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