If the insurance at issue in a potential case was obtained through an employer, the claims of the insured person or their beneficiary against the insurance company are likely subject to a federal law called the Employee Retirement Security Act of 1974, more commonly known by the acronym of “ERISA.” ERISA is located at Title 29 of the U.S. Code, beginning at section 1001. ERISA does not apply to employees of state and local governments,or employees of religious organizations.
Congress originally enacted ERISA to protect workers's pension benefits, and to standardize the administration of "employee benefits plans." Employer-sponsored life, health and disability insurance plans are considered “employee benefit plans” under ERISA. Unfortunately, certain aspects of ERISA have been seized on by insurers and the courts to severely limit the rights of people whose insurance is affected by ERISA.
ERISA operates to preempt or supersede state laws that "relate to" employee benefit plans. It also provides the exclusive remedy for claims against insurance companies to recover on policies that are covered by ERISA. These two aspects of ERISA, taken together, severely limit the options of an insured person to force an insurer to pay a claim, or to recover damages from the insurer if it unreasonably refuses to pay insurance benefits.
For example, under California law, if an insurance company unreasonably refuses to pay policy benefits the policyholder can sue it for "bad faith." If the policyholder wins the lawsuit, the insurance company has to pay the amount of benefits owed and interest on the amounts wrongfully withheld. In addition, the insurance company can be held liable for the policyholder’s attorney's fees in bringing the suit to recover the benefits; plus, it can be held liable for damages to the policyholder that go beyond the amount of unpaid policy benefits. These can include damages for emotional distress caused by the failure to pay benefits, and punitive damages, which are assessed to punish bad conduct and deter others from engaging in similar misconduct.
ERISA replaces this body of California law with much more restrictive federal law. Under ERISA, if an insurer unreasonably withholds policy benefits, the most that the policyholder can recover would be benefits owed. The court is allowed to award, but is not required to award, attorney’s fees and interest. Damages for emotional distress, punitive damages, and damages for any other losses caused by the insurer are unavailable.
If an ERISA-covered plan is refusing to authorize treatment, a court can issue an injunction ordering the plan to provide covered care. It is therefore imperative in this situation for the plan member to seek legal help immediately, so that injunctive relief can be obtained while treatment is still likely to be effective. Read more about ERISA and HMOs.
A case called Bast v. Prudential Ins. Co, 150 F.3d 1003 (9th Cir. 1998), provide a clear and tragic, but by no means unusual, example of how ERISA unfairly restricts policyholder rights. In Bast the insurer unreasonably failed to authorize a bone marrow transplant for Mrs. Bast, even though it was a covered plan benefit. By the time the insurer reversed its decision and agreed to pay it was too late, and Mrs. Bast died soon after. Her family sued the insurer, and the court held that the only remedy ERISA permitted was payment of the policy benefit that had been withheld -- the cost of the bone marrow transplant. Because Mrs. Bast had died and no transplant would be performed even this remedy was not available. Ultimately, the court held that ERISA provided surviving family members with no remedy whatsoever for the plan’s refusal to provide covered benefits, even if that refusal resulted in the policyholder's death.
Because insurance companies know that their liability for claims subject to ERISA is limited to what they would owe if they paid the claim voluntarily, insurers have little incentive to pay claims. Instead, ERISA creates a strong incentive for insurers to refuse to pay and to force the policyholder to sue. Insurers know that if they lose the lawsuit, they end up paying only what they owe anyway, and perhaps attorney’s fees.
Unfortunately, when the policyholder does sue, ERISA operates to make it more difficult for the policyholder to win. Depending on how the employer's benefit plan is worded, the court reviewing the policyholder's claim may not make an independent review to determine if the plan reached the correct decision about whether to pay the claim. Instead, it will only ask whether the decision was "arbitrary" or entirely indefensible. As long as the court can identify some plausible factual or legal basis to uphold the denial, it will do so, even if it believes the denial was wrong.
Even if the plan is worded in a way that allows the court to review whether or not the decision by the insurer was correct, the court is unlikely to have a trial or to hear the testimony of witnesses. Instead, in almost all ERISA cases, the court simply reviews the administrative record that was before the insurance company, and makes its decision based entirely on what information is in that record.
In some cases it is possible to convince the court to hear additional evidence, but this the rare exception, rather than the rule. In practical terms, this means the policyholder will never get to tell his or her story to the judge. Nor will the judge have an opportunity to hear the people who made the decision for the insurance company testify.
Because ERISA creates these difficult obstacles to recovery, and because ERISA is very complex, few law firms will take on cases subject to ERISA. At the Ehrlich Law Firm, we have litigated ERISA cases at every level — in the U.S. District Court, in the Court of Appeals, and even in the U.S. Supreme Court. Learn more about how we can help you, and Jeffrey I. Ehrlich's significant appellate victories.