As the Seventh Circuit has recognized, the ERISA claimant whose initial application for benefits has been wrongfully denied is entitled to a different remedy than the claimant whose benefits have been terminated. Hackett v. Xerox Corp. Long-Term Disability Income Plan, 315 F.3d 771, 775-76 (7th Cir. 2003). Where an administrator’s initial denial of benefits is premised on a failure to apply plan provisions properly, we remand to the administrator to apply the terms correctly in the first instance.

Pannebecker v. Liberty Life Assur. Co., 2008 U.S. App. LEXIS 19753 (9th Cir. Ariz. Sept. 18, 2008)

Pannebecker provides helpful analysis on the point of what should follow should the circumstances of a benefit denial necessitate “remand” to the plan administrator. 

In Pannebecker, the Ninth Circuit agreed with the district court that the plan administrator was justified in denying disability benefits on the view that the claimant could perform sedentary job duties.  In other words, the plan administrator “won”.  

The Reinstatement of Benefits Issue

The road to victory had a bump or two, however, along the way:

Because Liberty had not offered any specific sedentary position for which Pannebecker was reasonably fitted by the Plan’s stated criteria, i.e., training, education, experience, age, and physical and mental capacity, Liberty “failed to make a reasonable inquiry into the type of skills Plaintiff possesses and whether those skills may be used at another job,” and “failed to properly apply the Plan provisions.” The court remanded for Liberty to determine the types of sedentary positions, if any, for which Pannebecker was reasonably fitted based on the Plan’s criteria.

Thus, by the time the Ninth Circuit reviewed the district court’s decision upholding the plan administrator’s denial benefits, the case had already been before the district court once before.

While affirming the district court’s decision on the disability issue, the Ninth Circuit found fault on the reinstatement of benefits issue:

The district court should have awarded Pannebecker benefits from the time of Liberty’s improper denial in 2000 until the company’s decision of May 3, 2005, to decline to alter its benefits determination.

Seventh Circuit Authority

At this point, the dispute centered on the reinstatement of benefits during the period intervening between improper denial, remand and proper denial under the plan terms.  The Ninth Circuit relied upon a distinction noted by the Seventh Circuit, in holding for the claimant on this issue:

As the Seventh Circuit has recognized, the ERISA claimant whose initial application for benefits has been wrongfully denied is entitled to a different remedy than the claimant whose benefits have been terminated.

citing, Hackett v. Xerox Corp. Long-Term Disability Income Plan, 315 F.3d 771, 775-76 (7th Cir. 2003).

The distinction is between:

#1  a case dealing with a plan administrator’s initial denial of benefits and

#2  a case where the plan administrator terminated benefits to which the administrator had previously determined the claimant was entitled.

Turning to Hackett, the Seventh Circuit opinion, one finds substantial discussion of this issue.  The distinction, according the Seventh Circuit, focuses on what is required in each case to fully remedy the defective procedures given the status quo prior to the denial or termination. 

#  1 Initial Denial Of Benefits

In a case where the plan administrator did not afford adequate procedures in its initial denial of benefits, “the appropriate remedy respecting the status quo and correcting for the defective procedures is to provide the claimant with the procedures that she sought in the first place.” If the claimant prevails on remand before the plan administrator, then the claimant would be entitled to retroactive benefits from the time at which the initial denial occurred. 

The fact that the plan administrator failed to provide the adequate procedures does not mean that the claimant is automatically entitled to benefits–such a holding might provide the claimant “with an economic windfall should she be determined not disabled upon a proper reconsideration.” 

#2   Termination Of Benefits Previously Approved

On the other hand, the Seventh Circuit observed, are cases where the plan administrator terminated benefits under defective procedures.  In these cases the status quo prior to the defective procedure was the continuation of benefits.  Remedying the defective procedures requires a reinstatement of benefits.

The Ninth Circuit View

The Ninth Circuit approved of the Seventh Circuit distinction noted above.  On the other hand, the Court minimized the importance of the procedural aspect of the termination of benefits previously approved (category #2).

The Court stated:

Liberty distinguishes Hackett on the basis that the administrator in Hackett terminated benefits as a result of defective procedures, which is not the case before us. But, whether the administrator abused its discretion because the decision was substantively arbitrary or capricious, or because it failed to comply with required procedures, benefits may still be reinstated if the claimant would have continued receiving benefits absent the administrator’s arbitrary and capricious conduct. As we have noted, in the ERISA world, “no great wall divides procedural from substantive violations.”

The important point, it seems, for purposes of placing a case within the #2 category, is that the benefits were previously approved.

Note:  The Ninth Circuit distinguished a prior opinion, Patterson v. Hughes Aircraft Co., 11 F.3d 948 (9th Cir. 1993), on the basis that the benefits in that case were scheduled to terminate, and thus a concern of a potential windfall:

 is not to the contrary. Patterson was deemed disabled by his plan’s administrator and received benefits for two years, until they were abruptly terminated.  His plan explicitly limited the payment of benefits to only two years if he suffered from a “mental, nervous, or emotional disorder[ ].” So, Patterson’s benefits were scheduled to terminate unless it was established that he did not suffer from  such a disorder. 

Reinstating benefits while remanding for the administrator to determine the nature of his disability could have resulted in a windfall to Patterson if it were later determined that his disability was caused by a mental disorder.

Does This Distinction Make Sense?  Consider the following discussion by Mark DeBofsky of the distinction maintained in Hackett:

Nowhere in the ERISA law is there authority for a remand; certainly, in other civil disputes of a comparable nature, no insurer would seriously argue to the court for the right to a remand. Yet the courts continue to make ridiculous distinctions about the resolution of ERISA benefit cases.

In Hackett v. Xerox Corporation Long-Term Disability Plan,  the court concluded the decision to remand should be based on whether the claim involves an initial determination or if the matter involves a termination of benefits, such as disability insurance payments, which had been ongoing . . .

This ruling may be appropriate in analyzing Social Security disability benefit disputes, but it has no support in the ERISA statutory language. If a decision regarding benefit eligibility is both defective and wrong, there is no reason why a claimant should be denied benefits. The court in Hackett speaks of a potential “windfall” to claimants, but there is no unjust enrichment where the evidence before the court justifies the benefit payment. The court further notes, in cases involving ongoing benefit payments, the employee benefit plan remains free to investigate ongoing eligibility to receive benefits.