"No" Is Not So Automatic Now

The U.S. Supreme court took a big chunk out of the “discretionary” fortress erected by ERISA disability income carriers when it reversed a 4th Circuit Court opinion in Hardt v Reliance Insurance, 2010 WL 2025127 (5/24/10).  In Hardt, the court decided that claimants do not have to be a “prevailing party” to win attorney fees.

The discretionary fortress is built on the discretion ERISA gives plan administrators to determine whether a given plan covers a claim. Since many times the plan administrator is also the insurance carrier which would have to pay the claim, you don’t have to be a genius to figure out which way such discretion leans.

The Hardt decision, in effect, turns the tables on insurers which have been using their ERISA-granted “discretion” for decades to hamstring claimants without fear of penalty to themselves. Now, misuse of their “discretion” can very well lead to insurers paying the claimant’s legal fees, since Hardt holds that the award of fees in such cases is solely in the “discretion” of the trial court.

In the Hardt case, the District Court awarded legal fees to the claimant because she provided compelling evidence that she was totally disabled. Although the District Court did not decide the issue of claimant’s entitlement to benefits, it awarded her a remand order which sent the matter back to the insurance company for a new review. Upon looking at the matter on remand, Reliance reversed its prior denial of benefits and awarded benefits to Hardt.

However, Reliance balked at paying Hardt’s attorney fees, saying that under the American Rule (each litigant pays his or her own attorney), she was not entitled to be paid the fees it cost her to prove her case because she had not “prevailed” in the matter because all she had actually “won” was a remand back to Reliance. The 4th Circuit Court of Appeals agreed and overruled the trial court on the award of legal fees, since, according to the Circuit Court, she had not “prevailed”.

The Supreme Court ruled that the language of 29 U.S.C.1132(g), the ERISA statute which authorizes an exception to the American Rule, gives the trial court discretion to award fees so long as the plaintiff has achieved “some degree of success on the merits”. In this case, the Supreme Court held that by winning a remand at the District Court level, plaintiff had met the “degree of success on the merits” requirement.

Now, hopefully, there will be fewer American Rule free rides for insurance companies who are in the habit of saying “No” to just about every claim they conjure up the flimsiest doubt about, since they think they have nothing to lose. Carriers will have to consider the cost to them if the claimant succeeds in obtaining a removal, even though there is no final judgment by the court.

This ruling by the nation’s top court will give insurers pause before they force claimants to battle through the courts when the insurer well knows that the ERISA policyholder has a good case. All too often this tactic is used by the insurance company in the hope that the claimant will run out of money for lawyers or will just be discouraged by the roadblocks of litigation and go away.

Now that they know they are more likely to be held accountable for the claimant’s attorney fees when their conduct fails to comply with the law, insurers may reconsider this tactic and afford more policyholders the relief they are supposed to get.

The Hardt ruling will help insurance companies understand that “discretion” in ERISA means a measured judgment based upon a full and fair consideration of all of the facts, not a reflex denial just because it saves the company money.