The Ghosts of ERISA: Don't Get Slimed by Substantial Compliance

The ERISA statute does not appear unfair on its face. But, when you read the thousands of cases interpreting the statute, unseen rules are interjected into ERISA which shade that fairness. One such unfairness, which is nowhere to be found in the statute, is the “substantial compliance” rule.

To understand this rule, you have to look at the origins of ERISA. Congress provided ERISA’s bones. It authorized the Department of Labor to establish regulations to put flesh on those bones. Insurance companies argue that compliance with the regulations cost them money, which is true if “compliance with the regulations” means paying claims.

Some insurance companies which violated the regulations argued that they shouldn’t be held accountable as the violation was relatively minor (they had “substantially complied”), and they hadn’t actually violated the ERISA statute itself. Some courts bought it. And that foothold grew. Pretty soon the regulations were diluted, and a new “rule” emerged.

For example, the claim procedure regulation requires a long-term disability plan to permit a participant at least 180 days to challenge a denied claim. Insurers honor that but have turned it into a hard and fast 180-day deadline. If a claimant is one or two days late, the claim is dead. And, courts have upheld that position.

The same regulation also requires an insurer’s decision to be made within 45 days, or in a maximum of 90 days if a matter beyond the control of the insurer develops. So, if a decision is not made within 45 days, and there is nothing beyond the control of the insurance company which prevented the decision, then the participant is entitled to file suit and request review of the claim by a court. Or, so it would seem.

Under the “substantial compliance” rule, if the insurer made a decision within a few weeks of the lawsuit filing, a court may say that is okay. The insurer had “substantially complied” with the regulations and the policy. So, long-term disability participants never know how long they may have to wait. Two weeks after the deadline? A month? Three months? A year? Where is the line?

Fortunately, some courts have recognized the unfairness of this ghost – the unwritten substantial compliance rule. The Seventh Circuit is one of those courts. In Fessenden v. Reliance Standard Life Ins. Co., Mr. Fessenden filed a lawsuit after the time for the insurance company to make a decision on his appeal had passed. The insurance company then made its decision. The insurance company conjured that ghostly “substantial compliance” rule, and the district court bought it. This is particularly offensive given that this company has refused to accept appeals from plan participants submitted past the 180-day deadline and courts have refused to use the substantial compliance rule for those participants.

The Seventh Circuit reversed the district court holding that “…the ‘substantial compliance’ exception does not apply to blown deadlines. An administrator may be able to "substantially comply’ with other procedural requirements, but a deadline is a bright line.” That ghost is busted.

So, what happened to Mr. Fessenden’s case? It was remanded back to the district court with instructions that a de novo standard of review should apply (that’s a ghost for another day). Because no decision had been made by Reliance, the court would decide whether Mr. Fessenden met the definition of disability under the policy with no deference given to the insurer’s decision because it was not timely made.

Based on prior decisions of the Eleventh Circuit under an older version of the claim procedure regulation, I anticipate that the Eleventh Circuit would follow the Seventh Circuit’s reasoning.

There are a number of ghosts that have appeared in ERISA over the years. We know where they hang out, and we’re not afraid of ghosts! And as the Ghostbusters would say, “we’re ready to believe you.” Let us help you or your clients with your ERISA disability claim.