EBIA Weekly Newsletter

Terse Claim Denial Results in Heightened Review by Court

   May 12, 2016

The Second Circuit has addressed whether a plan’s three-word claim denial complied with the DOL’s claims regulations. A health plan participant challenged the plan’s denial of her claim, asserting that the denial letter—which stated simply, “Service not authorized”—did not comply with the claims regulations. (The regulations require, among other things, that a denial notice include the specific reason for the denial, the plan provisions on which the denial is based, and a description of the plan’s review provisions.) The trial court concluded that the plan had “substantially complied” with the claims regulations despite the notice’s lack of detail and upheld the denial using the deferential “arbitrary and capricious” standard of review.

On appeal, the Second Circuit rejected the trial court’s use of the “substantial compliance” doctrine and directed the trial court to reconsider the case using a stricter standard of compliance. Specifically, the Second Circuit held that a plan’s failure to comply with the claims regulations results in the claim being subject to “de novo” review unless the plan has otherwise established procedures in full conformity with the regulations and can show that its failure to comply with the regulations in the processing of the claim was both inadvertent and harmless. Plans meeting this standard are entitled to the more deferential arbitrary and capricious standard of review that generally applies to the plan’s discretionary decisions.

EBIA Comment: The applicable regulations provide that a plan’s procedures must be “consistent with” the requirements, but do not specify the level of compliance necessary to be considered consistent. Like the trial court in this case, many courts have applied a “substantial compliance” standard, under which technical noncompliance with the claims regulations is excused so long as the purposes of the regulations are fulfilled. Here, the Second Circuit rejects that standard as “flatly inconsistent” with the regulations and DOL FAQ guidance interpreting them, but does still allow for some tolerance of inadvertent and harmless deviations in limited circumstances. (Changes to the regulations under health care reform tightened the compliance standard, but those changes were not addressed by the court because the claim predated their effective date.) Plan sponsors should establish and consistently follow claims procedures that conform to the claims regulations to increase the likelihood of favorable, deferential review in the event of litigation. For more information, see EBIA’s ERISA Compliance manual at Section XXXIV.C.3 (“Consequences of Noncompliance for Group Health Claims”) and EBIA’s Self-Insured Health Plans manual at Section XXVI.B.3 (“Consequence of Noncompliance With Group Health Plan Claims Procedures”).

Contributing Editors: EBIA Staff.