On March 1, 2018, the en banc Fifth Circuit Court of Appeals — in Ariana M. v. Humana, an ERISA health benefits case where the plan administrator denied benefits — ruled in favor of our plan participant client, Ariana M., and in doing so, overturned twenty-six years of precedent. This landmark decision brings the Fifth Circuit in line with eight other federal Circuit Courts in applying the de novostandard of review to factual determinations in Employee Retirement Income Security Act (ERISA) denial of benefits cases. Before this decision, the Fifth Circuit Court applied the “abuse of discretion” standard for factual determinations in accordance with Pierre v. Connecticut General Life Insurance Co., 932 F.2d 1552 (5th Cir. 1991).
Unfamiliar with these two standards of review? No need to worry — they’re actually quite simple.
When a court applies the de novo standard of review, it does not defer to the decision of the ERISA benefits plan administrator. It considers the issue as though it were doing so with a “blank slate,”.
When a court applies the abuse of discretion standard of review, it is expected to defer to the decision of the ERISA benefits plan administration, unless the decision is found to be unreasonable.
Under Pierre, the Fifth Circuit’s application of de novo review was unique: it would review legal interpretations by the ERISA plan administrator de novo, but it would only review factual determinations on an abuse of discretion. This is no longer the law. Though the district court in Ariana M. v. Humana determined that the plan administrator did not abuse its discretion in denying benefits to our client, the judgment of the en banc Fifth Circuit Court (which vacated and remanded the case for further proceedings) requires that the plan administrator’s determination now be evaluated de novo on both factual and legal grounds, giving our client an opportunity to have the wrongful denial of her benefits fairly evaluated. So how did we get here?
Application of the Abuse of Discretion Standard Led to Inconsistency
As the only Circuit Court that continued to apply the abuse of discretion standard of review to factual determinations made by an ERISA plan administrator in denial of benefits cases, the Fifth Circuit spent decades in isolation from the developments occurring in the other Circuit Courts. In the ERISA context, this inconsistency was deemed untenable by the en banc Fifth Circuit Court, as it conflicted substantially with the interest of ERISA in promoting uniformity across jurisdictions. Under this regime, where the Fifth Circuit deferred to the Pierre abuse of discretion standard in evaluating ERISA denial of benefits, plan participants were subject to substantially different consequences than if had they resided in the jurisdiction of another Circuit Court.
ERISA Plan Administrators Are Not Necessarily Entitled to Discretion
In Pierre, the court reasoned that an administrator’s factual determinations are inherently discretionary, and thus determined that deference must be given to an ERISA plan administrator’s factual determinations, even when the plan does not include a discretionary clause. The court in Pierre supported application of the abuse of discretion standard in evaluating an ERISA plan administrator’s factual determinations in a denial of benefits case by analogizing it to the deference afforded by courts when reviewing agency decisions.
However, the en banc Fifth Circuit Court wrote that the analogy utilized by the court in Pierre was inapposite. Agencies and trial judges are required to apply an established and well-developed set of procedural protections, and must be impartial, whereas a plan administrator is incentivized to act on behalf of its own interests. Where procedural safeguards are lacking, such as in denial of benefits decisions made by ERISA plan administrators, de novo review is appropriate.
Effect of Texas Anti-Delegation Law
In their en banc opinion, the Fifth Circuit Court decided that section 1701.062 of the Texas Insurance Code, which prohibits insurance policy discretionary clauses (and encompasses any provision that specifies an abuse of discretion standard of review), does not apply to the standard of review for federal courts deciding ERISA denial of benefits cases. This approach arguably goes against the plain text of the Texas statute as well as its legislative history. The Court also left open the possibility, however remote, that the Texas statute might be preempted under ERISA.
However, the Court got around the applicability of Texas law by simply changing the very nature of de novo review.
Efficiency is Not Served by the Abuse of Discretion Standard
In Pierre, the court predicted that de novo review of denial of benefits determinations by plan administrators would be highly burdensome on the court system and deplete ERISA plan funds unjustifiably. More than twenty-six years of experience by the other eight circuit courts applying de novo review has proven otherwise. De novo review does not deplete plan funds or burden the court system to any significant degree, and gridlock in the system can be avoided through summary judgment, when appropriate.
Consequences for Future ERISA Denial of Benefits Cases
The decision of the en banc Fifth Court in the present case will almost certainly cause a shakeup with regard to ERISA denial of benefits claims. Under Pierre, the court deferred to the factual determinations made by the plan administrator, and it was extremely challenging for a plan participant — such as our client, Ariana M. — to demonstrate that the plan administrator had been clearly unreasonable in exercising their discretion.
Under the de novo standard, by contrast, ERISA plan participants in the Fifth Circuit will have their benefits determination assessed as though it were being presented for the very first time. The court will not defer to the decision of the plan administrator. Instead, the court will consider the evidence with fresh eyes.
In light of this shift from a stricter to a broader, more participant-friendly standard, ERISA plan participants in the Fifth Circuit will be in a more advantageous position when having their denial of benefits claim evaluated in court. This approach better serves the purpose of ERISA, which is to protect the interests of employees.