If you are covered by a long term disability policy provided by your employer (so-called “group” policies), your policy is most likely subject to a federal law called the Employee Retirement Income Security Act (“ERISA”). In the event that you become disabled, and your long term disability insurance carrier decides to deny coverage—either at the outset of your disability, or later—you will need to challenge that decision to receive the benefits you were counting on. And, you will have to decide whether to pay an attorney to assist you in persuading your carrier they have made a mistake. This decision will be especially difficult since it may represent an unexpected cost at exactly the same time you are facing a loss of income.
There is good news and bad news. The good news is, if you have to sue your carrier in court, ERISA provides that you may recover your attorney’s fees. However, these awards are not automatic, but the court must agree to make them. The bad news is that before you can sue, you must appeal to your plan administrator (in legal speak, you must “exhaust” your administrative remedies). And, under the so-called “America Rule,” you will not be able to recoup your attorney’s fees for that part of your appeal—even if the carrier’s decision is arbitrary or unfounded, and even if you ultimately prevail in court. The courts reason that allowing pre-litigation attorney’s fee awards might undermine the financial stability of pension plans. (It is not clear, if fee awards are a financial threat to pension plans, why Congress provided for such awards in court actions, even to losing parties.)
The Ninth Circuit is not alone in thinking this way. In fact, every federal circuit that has considered the question (Third, Fourth, Sixth, Eighth and Eleventh) has reached the same conclusion.
This situation means that, on the one hand, plaintiffs who lose their administrative appeal, and go on to lose their lawsuit, may still recover some—though not all—attorney’s fees. Conversely, plaintiffs who ultimately win their judicial review of an administrative decision denying coverage may end up not recovering any attorney’s fees even though they are the prevailing party.
What does this mean for the newly disabled person facing a denial of coverage? It pays to get an attorney involved early, ideally before any adverse coverage decision has been made. Counsel may be in a better position to negotiate directly with the carrier to identify and explain any flaws in the legal or factual reasoning of the carrier before an adverse coverage decision is made. Similarly, if counsel is successful in reversing a coverage decision at the administrative stage, the insured can avoid the prospect of financing a full blown judicial review with no guarantee that any attorney’s fees will ever be recovered.
29 U.S.C. § 1132(g)(1); Cann v. Carpenters Pension Trust Fund for Northern California, 989 F.2d 313, 315 (9th Cir. 1993).
Cann, 989 F.2d at 317.
Id. at 317.