The nine year saga of a denied group health benefit claim has finally played out in Butler v. United Healthcare of Tennessee, a decision of the U.S. Court of Appeals for the Sixth Circuit. During this period, United Healthcare of Tennessee (“United”) initially denied a claim for inpatient substance abuse treatment for alcohol addiction for the covered dependent. Then the parties undertook seven years’ worth of internal claims reviews, trips to the Federal district court, remands to the plan for reconsideration, a decision by the district court requiring United to pay benefits plus interest and $99,000 in statutory penalties for its “arbitrary and capricious” decisions, and finally an appeal of the district court decision to the U.S. Court of Appeals.

The Court of Appeals agreed that United had improperly denied the group health claim, but reversed the lower court’s award of statutory penalties. The statutory penalty was awarded on the basis of United’s failure to play fair under the Department of Labor regulations governing the internal claims appeal process.  However, the statutory penalty of up to $110 per day applies to plan administrators that fail or refuse to respond to participant’s requests for documents and information enumerated in Section 104(b)(4) of ERISA within 30 days. United’s failure to comply with the claims review requirements under a different statutory provision was determined not to be subject to the statutory penalty for violating ERISA Section 104(b)(4).

The Court’s opinion also concludes that the ERISA statutory penalty could not be assessed against United because it applies only to the “plan administrator,” not just any service provider. The Court held that the plan sponsor was the “plan administrator” in the absence of any contrary designation in the plan document. Accordingly, United, as the claims administrator, could not be tagged with the statutory penalty.

This case reflects the real world in that the plan sponsor is almost always the “plan administrator” with ultimate responsibility for plan operations. It follows that plan sponsors, as fiduciaries, could be saddled with liability for the conduct of non-fiduciary plan service providers. Also note that the holding in Butler that statutory penalties do not apply to violations of the DOL’s claims review regulations is not universal, and some courts have ruled otherwise.  So, it is entirely possible that a case like Butler in another jurisdiction could result in the assessment of statutory penalties against the employer in addition to the judgment against the service provider for payment of the contested benefits plus interest.

Recommendations: A typical service agreement for a “claims administrator” vests ultimate authority over claims decisions with the employer as plan administrator. At the same time, most employers hire a TPA or claims administrator so they are not involved in deciding claims. In an insured welfare plan, claims decisions govern the expenditure of insurance company funds, so the employee’s supposed ultimate authority over claims is probably a fiction. However, employers should not have to spend gobs of money in attorneys’ fees to prove that proposition in court. So, first make sure that you hire service providers you can trust. Then, make sure your service agreement with your TPA or claims administrator indemnifies you for any mistakes of the service provider. And, as ever, consider maintaining adequate fiduciary insurance coverage for the employer and employees with administrative or investment responsibilities for your plan. Remember, the ERISA fidelity bond protects the plan, not its fiduciaries, so fiduciaries should never rely on a plan’s fidelity bond.