In ERISA cases, abuse of discretion review is “informed by the nature, extent, and effect on the decision-making process of any conflict of interest that may appear in the record.” Abatie, 458 F.3d at 967. Thus, where, as here, a structural conflict exists because the insurance company administrator both funds and administers the Plan, “the court must consider numerous case-specific factors, including the administrator’s conflict of interest, and reach a decision as to whether discretion has been abused by weighing and balancing those factors together.” .

Sterio v. HM Life, 2010 U.S. App. LEXIS 4615 (9th Cir. Cal. Mar. 4, 2010) (unpublished) (citing Montour v. Hartford Life & Acc. Ins. Co., 588 F.3d 623, 630 (9th Cir. 2009)).

This recent Ninth Circuit opinion provides a nice checklist of issues that may turn a structural conflict of interest into a claimant’s victory even in the face of the lenient abuse of discretion standard of review.

The Facts

In this case, Sterio, a former receptionist, claimed she was disabled “primarily due to sciatic pain, restricted mobility and depression following several hip surgeries.” HM Life, was both the insurer and the administrator of the ERISA-governed disability plan.

The Benefit Dispute

Sterio’s benefit claim was denied by the plan, a denial upheld by the district court:

HM Life engaged Broadspire Services to process Sterio’s claim. Broadspire, in turn, hired six independent physicians to review Sterio’s medical records. The reviewing physicians all concluded that Sterio was not disabled. Broadspire initially denied Sterio’s claim and HM Life denied Sterio’s appeal, both concluding that the objective medical evidence did not support her disability claim. The district court conducted a bench trial and concluded that HM Life did not abuse its discretion in light of “conflicting evidence.”

The Appeal

On appeal, the Ninth Circuit reversed. The Court agreed that the abuse of discretion standard of review applied, but disagreed with the district court’s application of the standard.

The critical points are as follows:

# 1  First, the quantity and quality of the medical evidence supports Sterio’s disability claim. HM Life failed to credit this reliable medical evidence which included the following:

  • An EMG test confirmed that Sterio had right sciatic neuropathy after her last hip revision surgery.
  • Two MRI exams revealed excess metal artifacts in Sterio’s pelvis region. Two x-ray exams revealed bone thinning in Sterio’s right foot.
  • Sterio’s records show consistent use of strong pain medication.
  • A Functional Capacity Evaluation (”FCE”) submitted by Sterio’s treating physician reported that Sterio could not sit, stand or walk for more than 1-hour a day.
  • Both of Sterio’s treating physicians concluded that she was permanently disabled, which is consistent with the evaluations of Sterio’s treating neurologist and two orthopedists.

# 2  HM Life failed to distinguish or even acknowledge the SSA’s contrary disability determination despite having knowledge of it, raising the question of whether the denial was the product of a principled and deliberative reasoning process.”

# 3  HM Life failed to conduct an in-person medical evaluation of Sterio. HM Life’s choice to rely on a pure paper review, “raises questions about the thoroughness and accuracy of the benefits determination . . . as it is not clear the Plan presented [the six reviewing doctors] with all of the relevant evidence.”

# 4  HM Life failed to adequately investigate Sterio’s claim and request necessary evidence.

For example:

  • HM Life did not procure the SSA file or ask Sterio to do so.
  • Nor did HM Life request any specific evidence that it, or its reviewing physicians, concluded was necessary to prove up Sterio’s claim.
  • HM Life failed to communicate these specific deficiencies to Sterio or ask her to supplement the record.

# 5   HM Life violated ERISA’s procedures by “tack[ing] on a new reason for denying benefits in [its] final decision, thereby precluding [Sterio] from responding to that rationale for denial at the administrative level.”

In its final decision, HM Life added for the first time that Sterio’s hospitalizations did not entitle her to long term benefits because she was not deemed disabled at the onset of her disability effective date and because mental health coverage ends at 24 months.

HM Life’s last-minute addition of a new reason for denial suggests not only a conflict of interest, but can also be “categorized as a procedural irregularity where, as here, [Sterio was] foreclosed from presenting any response to the new reason.”

These factors, taken together, persuaded the Court that HM Life abused its discretion in denying Sterio benefits.

Note: This case illustrates an application of the recent opinion in Montour v. Hartford Life & Accident Ins. Co., 588 F.3d 623 (9th Cir. Cal. 2009) which in turn applies the seminal Ninth Circuit opinion in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 962 (9th Cir. 2006) (en banc).