ERISA-Third Circuit Holds That The Plan Administrator ‘s Decision To Terminate Disability Benefits Was Arbitrary and Capricious, And Reinstates The Plaintiff’s Benefits Retroactively To The Date Of The Termination

In Miller v. American Airlines, Inc., No. 10-1784 (3rd Cir. 2011), the plaintiff , a former airline pilot, sued his employer (American Airlines), the American Airlines, Inc. Pilot Retirement Benefit Program Fixed Income Plan (the “Plan”) and its plan administrator under ERISA for the wrongful termination of his long-term disability benefits. The Plan is a defined benefit pension plan which is subject to ERISA. The district court granted summary judgment in the defendants’ favor, and the plaintiff appealed.

The plaintiff was awarded long-term disability benefits from the Plan in November 1999, based on his psychosis and anxiety. However, in October 2006, the plan administrator terminated the benefits, on the grounds that it could no longer verify the disability. The plaintiff later brought this suit.

The Court noted that, since the Plan grants discretionary authority to the plan administrator to determine benefit eligibility, the plan administrator’s decision to terminate the benefits must be reviewed under the arbitrary and capricious standard. However, the existence of procedural irregularities by the plan administrator will cause the reviewing court to conclude that the plan administrator’s decision did not meet this standard. The Court found procedural irregularities, since:

–the plan administrator’s decision was not based on substantial evidence, as reports from the plaintiff’s examining doctor evidenced the disability;

–the plan administrator operated under a structural conflict of interest giving it the incentive to deny the plaintiff’s claim : while the Plan is a defined benefit pension plan, every dollar the employer saved by terminating the disability benefits from the Plan decreased the employer’s projected benefit obligation, and thus the amount the employer must ultimately contribute to the Plan-as such, the employer has a gain if the benefits are terminated;

–the plan administrator committed the following procedural errors: (1) it terminated the benefits without receiving new information, (2) it relied on non-existent plan requirements (here, it relied on the absence of an FAA medical certification to terminate the benefits, while the Plan does not require such certification) and (3) it failed to comply with the requirements for claims review in Section 503 of ERISA, as the letter informing the plaintiff of the termination of his benefits: (a) did not adequately set forth any specific reasons for the denial, but was too conclusory , (b) was not written in a manner calculated to be understood by the plaintiff and (c) did not advise the plaintiff how to perfect his claim; and
–the plan administrator did not properly take into account all relevant diagnosis of the plaintiff’s condition, or properly evaluate the plaintiff’s ability to perform his job in view of the relevant diagnosis.

Due to these irregularities, the Court concluded that the plan administrator’s termination of the plaintiff’s long-term disability benefits was arbitrary and capricious. But what is the remedy for the plaintiff? The choices are remand to the plan administrator for a new determination of benefit eligibility, or retroactive reinstatement of the plaintiff’s long-term disability benefits. The Court concluded that, since termination of the benefits was arbitrary and capricious and thus unlawful, retroactive reinstatement (back to the date of the benefit termination) is the appropriate remedy.

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