ERISA-Seventh Circuit Rules That Insurer’s Decision To Stop Disability Benefits-Actually Made By Its Administrator-Is Entitled To Review Under The Arbitrary Or Capricious Standard

In Aschermann v. Aetna Life Insurance Company, No. 12-1230 (7th Cir. 2012)-discussed in yesterday’s blog- the plaintiff, Carol Aschermann (“Aschermann”), was contesting the decision of the insurer to stop her disability benefits. The district court granted summary judgment to the defendants, on the grounds that the insurer’s decision must be upheld, unless it was arbitrary or capricious. One issue was whether-in this case-the insurer was entitled to court review of its decision using the arbitrary or capricious standard (as opposed to de novo review). Here is what happened, and what the Seventh Circuit Court of Appeals (the “Court”) said on this issue.

In this case, the plan at issue (the “Plan”) provides disability benefits, for two years, to a participant who cannot do her job. After that, the question becomes whether the participant can perform any job in the economy as a whole. After paying disability benefits for a number of years, the Plan’s insurer- Lumbermens Mutual Casualty Company (“Lumbermens”)- stopped paying disability benefits to Aschermann based on the “any job” standard in the Plan, on the grounds that she could do sedentary work. The entity that actually made the decision to stop the benefit payments was Aetna Life Insurance Co (“Aetna”), which administered the Plan on Lumbermens’ behalf, and therefore made the decision to stop the disability benefit payments to Aschermann on Lumbermens’ behalf.

In analyzing the issue, the Court said that, when a plan confers discretion to interpret and implement its terms, deferential judicial review is appropriate. Here, the Plan bestows such discretion on its administrator, the AstraZeneca Administration Committee, plus any insurer that underwrites the benefits. The group policy underlying the Plan confers discretion on Lumbermens. Aschermann conceded that deferential review would be appropriate had Lumbermens itself actually made the decision in question. She observes, however, that neither the plan nor the group policy mentions Aetna, which acts as Lumbermens’ agent. The Court found that-under ERISA and the applicable documents- Lumbermens could, and did, delegate the discretionary authority to interpret the Plan to Aetna. Thus, the decision to stop the disability benefit payments-actually made by Aetna on Lumbermens’ behalf-should be reviewed using the arbitrary or capricious standard.

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