Fee-Shifting: When are Attorneys' Fees Recoverable in ERISA Cases?

Challenging a wrongfully denied claim for life, health, long-term disability or accidental death and dismemberment benefits can be a very time-consuming endeavor for law firms handling these types of cases. The resources required to fight a sophisticated insurer can quickly become very expensive. Without the ability to collect attorney’s fees, many wrongfully denied insurance claims would go unchallenged, not for lack of merit, but due to a lack of economic viability. Fortunately, the Employee Retirement Income Security Act of 1974, or ERISA, allows for recovery of attorneys’ fees upon a showing of some degree of success on the merits. In other words, a meritorious lawsuit under ERISA will almost certainly result in making the culpable party (usually the insurer who denied the claim) foot the bill. Without this key incentive, insureds and their attorneys would be hard-pressed to pursue a wrongfully denied claim for benefits. Although not the subject of this article, attorney’s fees may also be obtained in non-ERISA state court insurance bad faith cases too.

In this article, we focus on the importance of ERISA’s fee-shifting provisions and some of the contours of that statutory remedy. First, we provide a brief background on attorneys’ fees in our legal system, largely governed by the “American Rule.” Next, we discuss ERISA’s fee-shifting provision as a statutory exception to that rule and as applied by the Ninth Circuit in Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974 (9th Cir. 2001).

The “American Rule”
In the U.S., our legal system largely allocates responsibility for attorneys’ fees in accordance with the American Rule. Unlike the English Rule, its American counterpart assigns each party responsibility for his or her own attorneys’ fees, unless a statute or contract provides otherwise. This responsibility applies even if the other party is at fault. The American Rule contrasts with the English Rule in that the latter awards attorneys’ fees to the winner as an element of damages, i.e., the loser pays. Many believe the English Rule is a fairer approach, although it may unfairly penalize parties for defending or pursuing an action where the legal outcome is uncertain.

ERISA’s Fee-Shifting Provision
ERISA provides a “fee-shifting,” statutory exception to the American Rule. See 29 U.S.C. § 1132(g)(1). More like the English Rule’s loser-pays regime, this provision grants the court discretion to award reasonable attorneys’ fees and costs in an ERISA action. ERISA’s generous fee-shifting provision does not even require that the party prevail to be entitled to attorneys’ fees. As the U.S. Supreme Court declared in Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010), under ERISA, the court may award attorneys’ fees based solely on a showing of some degree of success on the merits.

When Does ERISA’s Fee-Shifting Provision Apply?
As discussed in various other blogs on the subject, employee benefits governed by ERISA typically require at least one mandatory internal appeal to the insurer (if the Policy has such a provision, which they typically do). Thus, if you have a long-term disability policy through your employer, and the governing policy or plan document requires appeal of any denial or termination of benefits, one would have to exhaust that internal appeal before he could file a lawsuit. Failure to do so may prevent the participant from filing a lawsuit in the future.

ERISA’s fee-shifting provision applies only to those fees incurred in preparation of litigation and not typically in the requisite administrative appeals process. However, there are exceptions to this rule. One case that discusses such an exception is Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974 (9th Cir. 2001), in which the Ninth Circuit Court of Appeals approved an award of attorneys’ fees for work that would otherwise be considered part of the administrative process. In Dishman, the court approved plaintiff’s attorneys’ fees because it found that there was nothing to pare off, as the insurer did not make an adequate administrative remedy available to plaintiff.

The plaintiff, Mr. Dishman, struggled with disabling migraines for many years before he could no longer work. Unum accepted Mr. Dishman’s claim; however, after a few years, Unum assigned Mr. Dishman’s claim to its Complex Claim Unit and hired several private investigators. Instead of conducting medical evaluations, Unum’s investigation focused on Mr. Dishman’s potential affiliation with a Colorado company. Based on this information, Unum called Mr. Dishman and cancelled his benefits, later retracting the cancellation, calling it a “suspension.”

The correspondence that followed appear as attempts to engage in the administrative appeals process under ERISA. Mr. Dishman’s attorney corresponded with Unum on his behalf, proposing that Mr. Dishman be examined by a neutral neurologist. Unum declined and requested further information related to Mr. Dishman’s potential employment in Colorado. Mr. Dishman attempted to comply with Unum’s requests for some time, but when Mr. Dishman’s attorney requested a copy of Unum’s claim procedure, his first request was ignored. As to his second request, Unum responded only that it “does not have a Claims Procedure with regard to the suspension or termination of benefits.”

Although this back-and-forth looks akin to an attempted administrative process, the court determined that Unum’s conduct communicated to Mr. Dishman that he had no administrative recourse. Accordingly, the Court upheld the District Court’s exception to the exhaustion requirement because Unum gave Mr. Dishman inadequate notice of the denial and available appeals procedure. Further, the court also largely agreed with the District Court’s award of all Mr. Dishman’s attorneys’ fees (absent interest thereon) because:

[T]here was nothing to pare off […] none of the claimed hours were expended in connection with the exhaustion of administrative procedures, inasmuch as Unum did not make any administrative remedy available to the plaintiff.

In sum, the courts have long-acknowledged the importance of this recovery provision in achieving the fundamental goals of ERISA. It provides a financial incentive for attorneys to represent plan participants, beneficiaries or fiduciaries with wrongfully denied claims for benefits. It also penalizes administrators for claims handling misconduct by forcing them to internalize those costs. Along with other statutory incentives, the threat of looming attorneys’ fees gives real teeth to ERISA’s procedural protections, increasing the cost of failure to comply with these ERISA protections. McKennon Law Group PC has recovered significant attorney’s fees in many of the bad faith and ERISA insurance matters it has handled for our clients. This has allowed our clients in those cases to keep all or most of their disability, life, accidental death and long-term care benefits.

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