Benefit reduction reasonable without proof of appeal to Social Security

An insured under an employer-sponsored long-term disability insurance policy could not recover amounts the plan administrator had reduced based on its estimate of what the insured was eligible to recover from social security because she failed to comply with the policy requirement of pursuing an administrative appeal of her denied claim, a federal district court in Pennsylvania ruled. Although the policy’s “cannot be further appealed” language was found to be ambiguous, under the deferential standard of review, the plan administrator’s interpretation was reasonable.

An individual covered by an employer-sponsored group long-term disability insurance policy issued by Reliance Standard Life Insurance Company had received a $1328.59 per month benefit under the policy for almost one year. Shortly before the first year had passed, Reliance reduced the insured’s benefit by $1236 per month, which was the “Social Security Estimate” determined by Reliance. Pursuant to the terms of the policy, Reliance would estimate the social security benefit that an insured would be eligible to receive and reduce the monthly benefit by that amount.

The insured had applied and been denied benefits from social security, but did not appeal that denial. Reliance requested proof of the insured’s appeal after the insured had requested payment of benefits, explaining that it could not refund the social security estimate until it had received proof that “the claim for social security has been denied at the highest level and cannot be further appealed.” The insured asserted that the social security denial was no longer appealable and, thus, she was entitled to those amounts pursuant to the policy. Reliance disagreed and requested proof of a denial of appeal.

After continuing to communicate over several months, Reliance sent a letter to the insured’s counsel explaining that the policy language requiring appeal of denials—that her denial “cannot be further appealed”—meant that the insured exhaust her administrative remedies by requesting an appeal to the Administrative Law Judge. The insured had read the appeal requirement to mean the expiration of the social security appeal period and not require her “to endlessly pursue a possibly frivolous appeal to the ‘highest level’ in the federal court system.”

Policy language. The policy provided that:

OTHER INCOME BENEFITS: Other Income Benefits are benefits resulting from the same Total Disability for which a Monthly Benefit is payable under this Policy. These Other Income Benefits are:. . .

(6) disability or Retirement Benefits under the United States Social Security Act, the Canadian pension plans, federal or provincial plans, or any similar law for which:

(a) an Insured is eligible to receive because of his/her Total Disability or eligibility for Retirement Benefits;

The policy explained its process of estimating a Social Security “Other Benefit”:

Benefits will be estimated if the benefits:

(1) have not been applied for; or
(2) have not been awarded; and
(3) have been denied and the denial is being appealed.

The Monthly Benefit will be reduced by the estimated amount. If benefits have been estimated, the Monthly Benefit will be adjusted when we receive proof:

(1) of the amount awarded; or
(2) that benefits have been denied and the denial cannot be further appealed.

If we have underpaid the Monthly Benefit for any reason, we will make a lump sum payment. If we have overpaid the Monthly Benefit for any reason, the overpayment must be repaid to us. . .

Ambiguity. The court determined that the undefined “cannot be further appealed” language in the policy was ambiguous because it was subject to two reasonable interpretations, which was demonstrated by the dispute between the parties. The court remarked that the “cannot be further appealed” language could mean: (1) the appeals process has been exhausted; or (2) an appeal is no longer an option because the appeal period had expired.

Reasonableness. The court agreed that, under the deferential standard of review, Reliance’s interpretation of the policy language was consistent with the goals of the benefit plan, did not render any plan language internally inconsistent or meaningless, has been consistent, did not conflict with the Employee Retirement Income Security Act, and was not contrary to the clear language of the plan. Specifically, proof of a final decision vis-à-vis social security benefits provides proof that an offset was with or without justification and provides clarity as to benefits eligibility. Reliance was consistent when it required an appeal even without specifying what level of appeal was necessary. It did not demand that the insured pursue her appeals through the highest levels of the federal court system.

Additionally, the insured was not relieved of her burden to file an appeal based on her interpretation of the policy requirement, particularly in light of the fact that she still had the opportunity to file an appeal after being informed by Reliance that such proof was required. The court remarked that the insured could not claim that Reliance’s conduct was unreasonable when she failed to pursue further review of her social security benefit claim as had been requested. Therefore, Reliance’s motion for summary judgment was granted.

SOURCE: McGlynn v. Reliance Standard Life Insurance Co., No. 3:14-CV-2033, December 17, 2015.

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