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finding that plaintiffwas not excused from exhaustion based on futility where STD and LTD plans defined disability differently and in such a way that a claimant could qualify for benefits under the LTD plan even if she did not qualify for benefits under the STD definition
Summary of this case from Taylor v. Prudential Ins. Co. of Am.Opinion
CIVIL ACTION NO. 06-10845-GAO.
August 15, 2007
MEMORANDUM AND ORDER
Mary-Jo Walsh has brought suit against the Life Insurance Company of North America ("LINA") challenging its denial of her claim for reinstatement of short-term disability ("STD") benefits and seeking the payment of long-term disability ("LTD") benefits. Walsh was a beneficiary in a STD program and an eligible participant in a LTD plan, both administered by LINA. LINA also provided the insurance policy that covered the LTD plan. These benefits were provided by Walsh's employer, Arthur J. Gallagher Co. ("Gallagher"). Gallagher self-insured the STD program from its general assets, using its payroll to disburse payments.
If a disability policy is part of an employee welfare benefit plan, it is governed by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et. seq. Under ERISA, a beneficiary has the right to seek review in this Court of an insurer's decision to deny a claim for benefits. See 29 U.S.C. § 1132(a)(1)(B). LINA concedes that the LTD plan is governed by ERISA, but contends that the STD program is a payroll practice not regulated by ERISA.
LINA has moved for summary judgment on Walsh's claims for both STD and LTD benefits. After oral argument, careful review of the briefs, the administrative record, and the policies themselves, LINA's motion is GRANTED.
A. Summary of Facts
The following facts are not subject to dispute other than as noted:
In October 2004, Walsh filed a claim for STD benefits which was approved by LINA. Gallagher paid STD benefits to Walsh from October 20, 2004 through December 14, 2004 through its payroll, using its general assets. LINA then sent notice to Walsh informing her that as of December 14, 2004, she no longer qualified as disabled under the STD program. On January 19, 2005, LINA sent Walsh a letter informing her that additional medical records forwarded by her physician had been reviewed. The letter stated that under the STD plan she still did not qualify as disabled and the appeal she had filed for reinstatement of benefits was being denied. Walsh did not return to work. On March 28, 2005, Gallagher sent a letter to Walsh informing her that because she had neither certified her disability with LINA nor communicated her intention to return to work her status had been changed from "leave of absence" to "terminated," effective December 14, 2004.
On August 29, 2005 Walsh sent a final appeal of the decision to discontinue STD benefits to LINA, including additional information for its consideration. On January 4, 2006, LINA sent a letter addressed to Walsh affirming its previous decision and denying her appeal. Walsh contends that she never received the letter, and it appears that the letter could well have been sent to an incorrect address.
Walsh never filed a separate claim to receive LTD benefits.
B. The terms of the STD Program and the LTD Policy
The STD program and the LTD Policy are distinct benefits offered by Gallagher to its employees. The cover sheet to the benefit plan summary clearly states, "Because these are separate plans, receipt of STD benefits does not guarantee eligibility for LTD benefits." (Def.'s Statement of Facts Ex. B at 1.)
Moreover, the term "disability" is defined differently in the two plans. The STD program provides that disability "means that because of illness or injury, you cannot perform all the material duties of your regular occupation." (Def.'s Statement of Facts Ex. B at 7.) The LTD plan states "You are considered Disabled if, solely because of Injury or Sickness, you are either: (1) unable to perform all the material duties of your Regular Occupation or a Qualified Alternative; or (2) unable to earn 80% or more of your Indexed Covered Earnings." (Def.'s Statement of Facts Ex. B at 28.)
Under the STD program, payment of benefits begins on the fifth day of disability and are made according to a payment schedule based on an employee's length of service with Gallagher. The schedule provides for a minimum of one and a maximum of thirteen weeks at 100% of basic earnings and an equivalent number of weeks at 50% of basic earnings. (Def.'s Statement of Facts Ex. B at 5.) The claims of the STD plan are administered by a third party, specifically, LINA.
"Basic Earnings means the amount of regular salary or wages paid by your employer. This does not include commissions, bonuses, overtime, incentive pay, or other extra compensation." (Def.'s Statement of Facts Ex. B at 5.)
The LTD plan contains an elimination period provision that requires a benefit recipient to be disabled under the terms of the plan for 180 days before benefits will become payable. (Def.'s Statement of Facts Ex. B at 17.) The plan does not, however, require that a participant wait until she has satisfied the elimination period to file a claim for benefits. In fact, the terms of the plan state that "written notice of a claim, or any notice by any other electronic/telephonic means authorized by us must be given to us within 31 days after a covered loss occurs or begins or as soon as reasonably possible." (Def.'s Statement of Facts Ex. B at 25.) The LTD plan further states that eligibility continues for an employee whose "active service ends because of a disability for which benefits under the policy are or may become payable." (Def.'s Statement of Facts Ex. B at 18.) There is no provision in the LTD plan that requires a benefit recipient to be eligible for, or to have received benefits from, Gallagher's STD program.
There is one provision that links the STD and LTD plans with one another. The STD program's "Coordination with Long-Term Disability" provision states, "When the disability is expected to continue in excess of 180 days, the employee's claim will be transferred from CIGNA's Short-Term Disability (STD) Team to CIGNA's Long-Term Disability (LTD) Team any time after the third month of leave." (Pl.'s Opp'n to Def.'s Mot. for Summ. J. Ex. D at 6.)
C. Requirement Under ERISA to Exhaust Administrative Remedies
Although there is no explicit exhaustion requirement in ERISA, it is well established that before petitioning the courts a claimant must exhaust all administrative remedies. See, e.g.,Madera v. Marsh USA, Inc., 426 F.3d 56, 61 (1st Cir. 2005); Terry v. Bayer Corp., 145 F.3d 28, 40 (1st Cir. 1998); Drinkwater v. Metropolitan Life Ins. Co., 846 F.2d 821, 825-26 (1st Cir. 1988). The First Circuit has held that failing to formally apply for benefits under ERISA can constitute failure to exhaust administrative remedies. Madera, 426 F.3d at 61 (affirming summary judgment because claimant never submitted claim for severance benefits thereby failing to exhaust administrative remedies).
ERISA provides for an appeals process upon denial of a claim for benefits: "In accordance with regulations of the Secretary, every employee benefit plan shall —
(1) provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and
(2) afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim." 29 U.S.C. § 1133.
An exception is made to the exhaustion requirement, however, if the claimant can show that making a formal application for benefits would be futile. Madera, 426 F.3d at 62; Drinkwater, 846 F.2d at 826. Still, it is not enough to make generalized claims of futility usupported by specific facts, and one who wishes to argue futility must demonstrate why resort to the administrative process would have been doomed to failure. See Drinkwater, 846 F.2d at 826.
D. Defendant's Motion for Summary Judgement on Plaintiff's Claim for LTD Benefits
It is undisputed that the plaintiff did not file a separate claim for LTD benefits. LINA therefore asks that summary judgment be granted on Walsh's claim for LTD benefits because of Walsh's failure to exhaust her administrative remedies.
Walsh argues that the claim she filed for STD benefits should be considered a claim for LTD benefits as well, citing the "Coordination with Long-Term Disability" provision of the STD program. However, that coordination provision, by the express terms of the STD plan, is not activated until three months of continued disability have passed. (Pl.'s Opp'n to Def.'s Mot. for Summ. J. Ex. D at 6.) Walsh knew that LINA deemed her no longer disabled after fifty-five days. (Def.'s Statement of Facts ¶ 8.) Although whether she was or was not disabled was a matter of dispute. Knowing of LINA's position on the point, Walsh could not have reasonably relied on this coordination provision to assure her that an LTD claim on her behalf would be in fact "coordinated" by LINA, thereby relieving her of the responsibility to formally present her LTD claim.
Walsh also argues that filing a claim would have been futile, principally because LINA, responsible for making the disability determination under both the STD and LTD plans, had already concluded that she was not disabled. In Madera and Drinkwater, the First Circuit held that a previous adverse decision is not by itself sufficient to sustain an assertion that submission of a new claim or appeal to the same deciding party would inevitably be futile. Madera, 426 F.3d at 62-63; Drinkwater, 846 F.2d at 825-826. That caution is especially appropriate here where the respective plans defined "disability" differently. For example, an employee might be found not to qualify for benefits under the STD definition because she could not show that she was unable to "perform all the material duties of [her] regular occupation," (Def.'s Statement of Facts Ex. B at 7) and yet still qualify for benefits under the LTD plan by showing that she was "unable to earn 80% or more of [her] Indexed Covered Earnings." (Id. at 28.)
Walsh also contends that her receipt of STD benefits was a condition precedent to receiving LTD benefits, so that she could not apply for LTD benefits unless she continued to receive STD benefits. There is no merit to this argument. The LTD policy contains no provision making the receipt of STD benefits a condition of entitlement to LTD benefits, and Walsh suggests no other way by which such a condition might be established. The "coordination" provision of the STD plan does not have that effect, and even if it could be imagined that it did, a provision in the STD plan would not create a condition precedent to benefits under the LTD plan where the latter imposed no such condition.
Walsh also claims that she did not receive a response to her final appeal for STD benefits. It appears that LINA sent this letter to an address for the plaintiff that was different from the one it had used for all other communications with her. It is a reasonable inference that the response letter was never received by Walsh. Walsh has not, however, provided any evidence to suggest that any incorrect mailing was anything other than an administrative error or that her non-receipt of the letter somehow affected her ability to file a claim for LTD benefits. It is important to note that Walsh's final appeal for STD benefits, which the January letter rejected, was mailed on August 29, 2005, more than 300 days after Walsh first began collecting STD payments and more than 100 days after the elimination period of the LTD plan would have expired to allow her to collect any payments she was due under the LTD plan. The LTD plan provides that claims be filed "within 31 days after a covered loss occurs or begins or as soon as reasonably possible." (Def.'s Statement of Facts Ex. B at 25.) Even if LINA could be faulted for the incorrect posting, the error occurred well after the terms of the LTD policy required the plaintiff to file her claim for LTD benefits. LINA's error could not have been a cause of Walsh's failure to make a timely claim for LTD benefits.
Finally, Walsh also claims that because her employment was terminated before the 180 day elimination period imposed by the policy had expired, her ability to submit a claim for LTD benefits was frustrated. However, the LTD plan provides for continued eligibility for benefits that "may become" payable for an employee whose active duty has ended as a result of a covered disability. In other words, the end of active employment is no bar to an application for LTD benefits under the policy.
In sum, other than making a generalized plea of futility, Walsh has not offered any facts that would justify a conclusion that the outcome of an application for LTD under the policy would have been so certainly doomed that her failure to apply for such benefits is excused.
Because Walsh failed to file a claim for LTD benefits, she thus failed to exhaust administrative remedies. The defendant's motion for summary judgment on this LTD claim is GRANTED.
E. Defendant's Motion For Summary Judgment on Plaintiff's Claim for STD Benefits
LINA supports its motion for summary judgment on the plaintiff's claim for STD benefits with two arguments. First, it argues that Gallagher's STD program is a salary continuation plan exempted from ERISA as a "payroll practice." Since ERISA does not apply, LINA argues, the plaintiff's claim arises under state contract law and does not present a federal question over which the Court would have jurisdiction under 28 U.S.C. § 1331. Moreover, diversity jurisdiction would not be appropriate under 28 U.S.C. § 1332 because, as the plaintiff conceded during oral argument, the amount in controversy is below $75,000.00. LINA therefore requests the Court to decline to exercise supplemental jurisdiction over the state law claim pursuant to 28 U.S.C. § 1367(c)(3).
The second argument is that Gallagher, not LINA, was the party contractually responsible for paying STD benefits and thus the proper defendant to Walsh's contract claim.
As to the first argument, according to the regulations promulgated by the Department of Labor ("DOL"), "payroll practices" are not regulated by ERISA. Thus, if the benefit payments to Walsh under the STD plan are considered part of the "normal compensation" of an employee in Walsh's position, then the payments constitute a "payroll practice" exempt from ERISA's oversight.
"Payroll practices. For purposes of title I of the Act and this chapter, the terms `employee welfare benefit plan' and `welfare plan' shall not include — Payment of an employee's normal compensation, out of the employer's general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons (such as pregnancy, a physical examination or psychiatric treatment)." 29 C.F.R. § 2510.3-1(B)(2).
The First Circuit has yet to determine what constitutes "normal compensation" in this context. In deciding this issue, other circuits have deferred to Advisory Opinions by the DOL. See, e.g., Bassiri v. Xerox Corp., 463 F.3d 927 (9th Circuit 2006) (giving deference to DOL Advisory Opinions, allowing the agency to interpret its own statute unless its interpretation is plainly erroneous) (citing Auer v. Robbins, 519 U.S. 452 (1997)); Stern v. Int'l Bus. Machines Corp., 326 F.3d 1367 (11th Circuit 2003) (holding that DOL Advisory Opinions are not binding but carry considerable weight). Three such Advisory Opinions directly relate to the compensation available to Walsh under the STD program and conclude as follows: (1) Compensation of less than 100% of base salary paid out of an employer's general assets can constitute a payroll practice, Dept. of Labor Advisory Opinion 93-27a, 1993 ERISA LEXIS 29 (Oct. 12, 1993); (2) An income replacement plan paid out of employer's general assets but administered by a third party can be considered a payroll practice, Dept. of Labor Advisory Opinion 93-02a, 1993 ERISA LEXIS 2 (Jan. 12, 1993); and (3) An income replacement program paid out of an employer's general assets according to a benefits schedule based on length of service can constitute a payroll practice, Dept. of Labor Advisory Opinion 81-71a, 1981 ERISA LEXIS 18 (Sept. 11, 1981).
Guided by these DOL Advisory Opinions, I conclude that the STD program offered by Gallagher to the plaintiff qualifies as a "payroll practice" not governed by ERISA. The claim is therefore subject to dismissal without prejudice under 28 U.S.C. § 1367(c)(3). However, because the parties have fully argued the merits of the claim, I choose to exercise jurisdiction under 28 U.S.C. § 1367(a) and address the merits.
The STD plan is Gallagher's contractual commitment to its employees. That conclusion is not changed by the fact that Gallagher retains LINA to administer the plan. As noted, the STD payments are made from Gallagher's general assets to its qualifying employees. LINA is not liable for the STD payments that are owed to employees. Accordingly, a claim for benefits brought against LINA lacks merit, and LINA is entitled to summary judgment on that basis. The plaintiff remains free to sue Gallagher for STD benefits alleged to be owed in an appropriate state court.
It is SO ORDERED.