Federal Court Does Not Answer Who Can Be Sued for Benefit Denials

The U.S. Court of Appeals for the Seventh Circuit noted but did not answer the question whether an insurer, along with the plan, can be a defendant in a case for a denial of benefits.

Background

Kathleen Schultz stopped working for Aviall Inc. due to her disability. Prudential, her employer-provided disability plan, eventually approved her long-term disability claim. However, Prudential informed Schultz that it would make deductions from her disability benefit for the Social Security payments received by her children as a result of her very same disability. Prudential relied on language in the disability benefit plan. Schultz filed a claim in court against Prudential and the Aviall Plan, alleging the deduction was improper.

Relying on Seventh Circuit precedent, the district court granted Prudential’s motion to dismiss on the grounds that the Aviall Plan, not Prudential, was the proper defendant under federal law. The court held that under the federal law that applies to employer-provided benefits, the Employee Retirement Income Security Act (ERISA), benefit denial claims can in most cases only be brought against the Plan itself. (The exception being when the Plan is not identified or is closely intertwined with the employer.) The court specifically rejected Schultz’s assertions that Prudential was a proper party because the claim involved all policies issued by the insurer where dependent benefits have been offset and Prudential has not contested its status in other similar actions.

AARP’s friend-of-the-court brief argued that the Seventh Circuit’s precedent should be reviewed and reversed because U.S. Supreme Court decisions have required a strict reading of ERISA’s civil enforcement provisions. Because the provision under which a participant sues for a denial of benefits does not specify who may be sued, the court should not read any limitation into that provision. In addition, the brief focused on demographic changes and industry trends since the Seventh Circuit’s initial decision on this issue in 1985. The brief pointed out that individuals are more likely to become disabled at some point during their working life, rather than die.

The appeals court ruled on the facts of this case without addressing the question raised by AARP, though it did note that this issue is an important one.

What’s at Stake
 
We will have to wait for another case in order to find out the 7th Circuit’s decision as to whether it will be willing to provide oversight of insurers who are not only paying out claims, but also making claims determinations. If individuals can more easily access their benefit rights, it will help them maintain a stream of income to protect their standard of living.

Case Status

Schultz v. Aviall was decided by the U.S. Court of Appeals for the 7th Circuit.