When you have a health, disability, or life insurance claim, it is important to understand whether it is governed by ERISA (the acronym for the Employee Retirement Income Security Act) or California common law. When a claim comes under ERISA, it preempts (takes the place of) all state laws, including California’s bad faith laws. There are many differences under the law for an ERISA claim versus a claim under California law, including the timing for filing suit and the requirement in an ERISA case that administrative remedies be exhausted.
In general if you received your policy through an employer under a group plan, it will most likely be subject to ERISA. Conversely, where a person obtains an individual policy directly from the insurer, the policy and any claims are governed by California law.
Under ERISA, a claimant whose claim is denied must pursue and “exhaust internal review” procedures under the insurance plan before he or she can file a suit for ERISA benefits. (Heimeshoff v. Hartford Life & Accident Ins. Co. (2013) 134 S.Ct. 604, 610.) This means that the injured claimant must, before he or she can file a lawsuit, pursue any informal process the insurance company or plan administrator has set up.
One problem with this is that exhausting the appeal or review process after an initial denial takes time. It used to be assumed that the time to file suit was tolled (i.e., stopped running) during the time the insurance company or plan administrator was considering a claim or an appeal. This is because the claimant has no right to file a lawsuit during the insurer’s administrative review process. However, the United States Supreme Court’s decision in Heimeshoff holds that the time to file suit runs while the claimant pursues the mandated administrative process.
In Heimeshoff, the insurance plan that was under consideration provided that suit must be brought within three years of after the claimant’s proof of loss is due. The proof of loss due date is necessarily before a claim is denied and administrative remedies are exhausted, as the proof of loss form is part of the claims process. Yet,Heimeshoff holds that a suit limitation is enforceable even though it “starts to runbefore the cause of action accrues . . . as long as the period is reasonable.” (Id.)
This creates a potential trap for claimants who must pursue the appeal process, even while the time to file suit ticks down. It is unclear what is a “reasonable” period after exhaustion until the deadline to file suit expires. Moreover, the rule announced inHeimeshoff creates the potential for gamesmanship, as insurance companies may be tempted to delay the administrative review to reduce the time a claimant has to file ERISA litigation. Indeed, the Supreme Court has acknowledged that “the administrative exhaustion requirement will, in practice,shorten the contractual limitation period.” (Id. at 608.)
Where a limitation period is tied to an event occurring before administrative exhaustion is complete (like the due date for a proof of loss), claimants pursuing benefits under an ERISA insurance plan face uncertainty regarding the deadline to file suit following exhaustion of administrative remedies. The “reasonable” period after exhaustion of the administrative remedies standard set forth in Heimeshoff leaves a lot of room for interpretation. Insureds faced with an ERISA denial under these circumstances should be aware of this issue, and act quickly where appropriate following exhaustion of an appeal or administrative remedies of an insurance claim denial.