Example of Arbitrary and Capricious LTD Termination

An issue in every federal case that reviews a denied or terminated long-term disability insurance claim is what standard of review the court should apply. Normally, ERISA governs an LTD policy obtained through an employer. ERISA is a complicated federal law that sets standards and procedures for insurers and their administrators when they process LTD claims.

When the policy gives the claims administrator discretion to decide claims, a court reviewing a denial or termination under ERISA must determine whether the denial was arbitrary and capricious. While this sounds like a low standard, often courts do not automatically affirm negative decisions. Courts often find that administrators acted arbitrarily and capriciously. In those cases, the claimants usually either get benefits or have their claims sent back to the administrators for reconsideration.

On September 14, the U.S. Court of Appeals for the 7th Circuit issued a decision in an LTD review finding that the termination of an LTD claim had been arbitrary and capricious. Susan Hennen was a sales specialist who became disabled after a back injury and surgery. She received LTD benefits until she reached a two-year limit on benefits payable for neuromusculoskeletal disorders.

The policy had an exception to termination based upon the two-year benefit limitation when a claimant has a radiculopathy, but the insurer, MetLife, found that Hennen did not have this condition. The court found that the insurer acted arbitrarily when it made this finding because the administrator discounted the four doctors’ opinions that she had a radiculopathy and instead credited the one doctor’s opinion that she did not, but instead recommended additional testing. The insurer terminated Hennen without ordering the recommended testing — another action that the court found arbitrary and capricious.

The 7th Circuit looked at cases within the circuit and explained that the arbitrary-and-capricious standard, while “deferential” is not a “rubber stamp.” The court said that there must not be an “absence of reasoning” for the denial or termination.

The court stated that it would affirm the insurer’s decision so long as at least one of these are true:

• A “reasoned explanation” is possible for the decision considering the evidence.
• The decision has a “reasonable explanation of relevant plan documents.”
• The administrator based the decision on “relevant factors that encompass the important aspects of the problem.”

Interestingly, the court’s opinion equates acting arbitrarily and capriciously with exercising an abuse of discretion. In addition, it noted that another factor to weigh is that the insurer has a conflict of interest since it both decides eligibility as well as becomes liable for the claim payments if it approves the claim. In other words, the LTD insurer has a financial incentive to deny claims.

In this case, the court found that MetLife’s termination of Hennen’s benefit was an “arbitrary abuse of … discretion and a violation of the fiduciary duty it owed Hennen as a plan beneficiary,” sending the claim back to MetLife for reconsideration under the correct standards.