"How did things ever get so far? I don't know. It was so unfortunate -- so unnecessary." (Vito Corleone, The Godfather, Part I).

"All my life I kept trying to go up in society. Where everything higher up was legal. But the higher I go, the crookeder it becomes. Where the hell does it end?" (Michael Corleone. The Godfather, Part III).

What Exactly Is ERISA?

ERISA is an acronym for the Employee Retirement Income Security Act of 1974. The body of ERISA law includes the Federal statute 29 USC. 1001, et seq.; the regulations 29 CFR 2560 et seq, and the "common law" (decisional law of the Federal Courts). ERISA was enacted by Congress to address irregularities in certain large pension plans; particularly the Teamsters Pension Fund, which had had a rather colorful history under the stewardship of its President, Jimmy Hoffa - a history that included questionable loans to allegedly mob-controlled Casinos in Las Vegas.

The "Employee Welfare Benefit Plan":

When enacted in 1974, ERISA was not intended to affect group medical or disability insurance in any major way. However, almost inexplicably, a very small part of the ERISA statute made reference to a thing called an "employee welfare benefit plan." Although this term is defined in 29 USC 1002(1), it is not clear whether anybody in 1974 had any idea as to exactly what an "employee welfare benefit plan" was or would be. However, because of this relatively insignificant part of ERISA, (and as the result of Federal judicial decisions over the succeeding two decades) today ERISA controls or impacts upon practically all employee benefits, including employer-sponsored insurance plans.

A Potpourri of Protected Rights:

On its face, ERISA is a truly magnificent law. One of its architects, Senator Jacob Javits, described ERISA as "the greatest development in the life of the American worker since Social Security." The language of ERISA is replete with promises of protection for plan participants and beneficiaries. Reporting and disclosure requirements are imposed upon plan administrators -- and most noble of all -- "fiduciary duties" are imposed upon anyone, who exercises final decision-making authority over plan benefits.

Pick up any ERISA plan booklet, describing medical or disability benefits, and you will find a wonderfully profound and inspiring
"Statement of Rights Under ERISA." There, in black and white, are enumerated the various rights, guaranteed by the Federal law. A careful reading of this "Statement of Rights," may conjure up images in your mind of the "Bill of Rights" to our Constitution. I wish to assure you, however, that if those two documents were in any way similar in effect, we would all be living in gulags. The more you understand about ERISA the more you will come to the realization that things are not quite what they seem.

The Scam of the Century:

Without question, ERISA has become the preeminent scam of this century. While proclaiming to give employees greater rights and protections, ERISA has actually stripped employees of many of their rights, particularly as against insurance companies who underwrite and/or administer health or disability plans. Several factors coalesce to make ERISA the scam that it is:

1. The Pre-emption Clause:

ERISA provides that: "[T]he provisions of . . . this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . ." 29 USC 1144(a). Under ERISA's pre-emption clause, any inconsistent state laws are rendered meaningless. Today, ERISA universally pre-empts almost all state consumer insurance laws, relating to group medical or disability insurance, while at the same time there are no Federal consumer insurance laws. Thus, by structuring practically all employer-sponsored medical and disability insurance plans as "employee welfare benefit plans" under ERISA, the insurance industry has, in a very ingenious way, carved out the single greatest immunity from civil liability ever devised.

2. No Incentive to Treat Claimants Fairly:

In the old days, before "ERISA pre-emption," once an insurance company's liability was reasonably clear, the insurance company was required by various state laws to make a reasonable attempt to settle a claim for a reasonable amount. (See: e.g. "Unfair Claims Settlement Practices Act" California Insurance Code 790.03 et seq.). Furthermore, under the case law of the various states, an insurance company had an obligation to deal in "good faith" with its policyholders. If it didn't, it could be held liable in a state court for punitive damages. The punitive damages exposure for "bad faith" might far exceed the amount of the claim. For that reason alone, most insurance companies were extremely conscientious in processing and paying claims. Although relatively few "bad faith" verdicts were ever rendered, the mere threat of "bad faith" liability had a wonderfully self-policing effect on the entire insurance industry.

ERISA pre-empts most state
"Bad faith" lawsuits (and punitive damages) and there are no punitive damages available under ERISA, no matter how oppressive the insurance company's tactics and no matter how frivolous the insurance company's claim denial. There is no right to a jury trial under ERISA. In most cases, the claimant will be limited to suing the Plan (as opposed to the insurance company) and the most that an aggrieved claimant can usually recover in a lawsuit is the amount of benefits due, interest, costs and a discretionary award of attorney fees. Thus, even if the claimant's case proceeds all the way to judgment, the most that the insurer can lose is the amount that it would have had to pay if it had paid the claim properly in the first place, and perhaps some attorney fees.

This absolutely removes any incentive that an insurance company might otherwise have to treat the claimant fairly. Thanks to ERISA, insurance companies now enjoy total immunity for unfair and deceptive practices. Facing no sanctions for
"bad faith" conduct, many insurers just routinely deny meritorious claims. Since few claimants have the means or the stamina to "go the distance" in fighting their insurance plans, unscrupulous insurance companies are assured of winning the war, under ERISA, even if they lose a battle here and there. No matter how egregious an insurance company's conduct, ERISA provides it with a virtual license to steal.

3. The Perversion of the Legal Concept of "Fiduciary Duty":

As I said, ERISA imposes "fiduciary" responsibilities on anyone who exercises final decision-making authority with regard to plan benefits. An ERISA plan will have a "named fiduciary," pursuant to 29 USC Section 1133(2) and 29 CFR 2560.503-1 (g ), such as a "Plan Administrator." This is usually the Employer, if the plan is "self funded." If the plan is "fully insured," and if the insuring company retains the right to make final decisions regarding the payment of claims, then the insurer is a deemed "fiduciary" under ERISA, pursuant to 29 USC 1002(21)(A) and 29 CFR 2560.503-1(g)(2) .

"Fiduciary duty" is the highest responsibility imposed by our civil law. It is a trust law concept, which requires that the fiduciary place the interests of the "beneficiaries" above that of his own. Under this most basic, fundamental legal concept, there is absolutely no room for any kind of self-interest of the fiduciary, that would conflict with the interests of the "beneficiary." The "beneficiary's" interest are paramount. ERISA, however, has taken this most revered legal concept and turned it into an abomination. In the field of ERISA law, "fiduciary duty" means little and conflicts of interest are expected. ERISA has radically transformed everything we once thought we knew about trust law, insurance law and, consumer rights and remedies.

As indicated above, if an insurance company retains the right to make final decisions regarding benefit payments, then the insurance company is a
"fiduciary" under ERISA. It doesn't take a degree in rocket science to figure out that entrusting any insurance company with "fiduciary" responsibility is like putting the fox in charge of the proverbial hen house. I would very much like to see any corporate charter, which states that an insurance company is established for the purpose of protecting plan participants. Insurance companies are formed for the purpose of making profits for their shareholders.

Although it's been about 20 years, I remember being taught in law school the basic
theory of insurance. "Insurance" was said to be a "pooling of risk." Under this theoretical construct, policyholders pay money into a common fund, to protect themselves from certain identified risks of loss. The money in this theoretical fund, constructively, belongs to the policyholders. The insurance "company" earns a reasonable fee for administering the fund. That's all great in theory, but it is not the way it works in practice. Today, when an insurance company receives premium dollars, it regards that money as its own (although it has done nothing at that point to earn it, except to "sell" the plan). From the moment it receives that premium dollar, the insurance company's goal is to keep as much of it as possible for itself. The less money paid out in claims, the more it keeps. The more it keeps, the greater its bottom-line profit. So, it's pretty basic that the financial interests of an insurance company are completely adverse to the interests of the plan participants. This sets up a classic "conflict of interest" situation.

But, notwithstanding the fact that the ERISA statute imposes
"fiduciary duties" on those who administer a Plan, the way the courts have construed ERISA, nothing prohibits ERISA fiduciaries, from operating under a "conflict of interest." In fact, conflicts of interest are expected and to some extent even condoned. This is the ultimate paradox of ERISA.

For example, the 9th Circuit Court of Appeals has held that even if there is an obvious
"conflict of interest," the burden is on the claimant to produce material, probative evidence, beyond the mere fact of the apparent conflict, tending to show that the fiduciary's self interest caused a breach of the administrator's fiduciary obligations. That is an absurd, expensive and unnecessary burden to place on any claimant. Even if the claimant does meet the burden, the most that such a conflict will result in is an elevated standard of review. That is to say that the court will apply a "less deferential" standard of review, rather than the traditional Deferential Standard of Review. Figure that one out. See: Atwood vs Newmont Gold Co ., Inc., 45 F.3d 1317, 1321 n.1 (9th Cir. 1995).

4. Exhaustion of Administrative Remedies:

If a claim is initially denied, ERISA requires that there be "a full and fair review by the appropriate named fiduciary of the decision denying the claim." 29 USC Section 1133(2) . Therefore, all ERISA plans will have some kind of internal appeal process, by which claim denials are reviewed further upon the request of the claimant. Concomitantly, Federal courts have required (subject to certain exceptions) that claimants exhaust the Plan's internal administrative review process, before filing a lawsuit. It is during this administrative review process that the "administrative record" is assembled. As explained below, this is a trap for the unwary.

5. The Standard of Review / Playing Against a Stacked Deck:

ERISA cases can be difficult to win. Typically, the court will employ a Review which means that the plan "fiduciary's" final decision will be upheld, unless the court finds it to be "arbitrary and capricious." As long as there is "substantial evidence" in the "administrative record" to support that final decision, it can be upheld by the court, even if it is technically wrong. "Substantial evidence" is a nebulous term to say the least. It has been described as "more than a scintilla but less than a preponderance." So, basically, "substantial evidence" may be whatever the Judge thinks it is in any given case. This clearly gives the insurer or plan administrator a tremendous advantage over the claimant in any dispute over benefits.

Furthermore, the scope of the court's review will, in all probability, be limited to the
"administrative record." The court may refuse to consider any evidence that was not before the insurer or administrator at the time the final decision was made to uphold the denial of the claim. Therefore, the content of the "administrative record" is extremely important. If the claimant hopes to have any chance of winning later in court, it is crucial that he assemble a record, during the administrative review stage (prior to filing suit) that is highly favorable to the claim. It is at this administrative review phase, where many ERISA claims are won or lost. Very few claimants, however, have any idea as to how to build an "administrative record" and they are completely outgunned by the more knowledgeable insurance companies or plan administrators.

6. No Attorney Fee Recovery Where It Counts:

Since the court's review will probably be limited to the "administrative record," it is essential that the claimant be represented by competent legal counsel at the administrative review stage of the claim review. Furthermore, for the attorney to do the job correctly, it requires that the attorney expend a substantial amount of time and effort at the administrative review stage creating or augmenting the "administrative record."

Unfortunately, there is no mechanism established under ERISA by which claimants are assured of being represented by counsel at this most vital stage of the claim review process. Incredibly, ERISA does not provide for any award of attorney fees for claimants, who successfully get claim denials reversed at the administrative review stage. The only way to recover attorney fees under ERISA is to first win the case in court and then apply to the court for a discretionary award of fees -- and even then, the claimant can only recover attorney fees incurred during the litigation. Although a claimant is usually required to exhaust all internal administrative appeals before he can file a lawsuit, the attorney fees incurred by the claimant for any legal services rendered at the administrative review phase are not recoverable, even if the claimant wins the litigation. This is true no matter how frivolous or wrongful the insurance company's claim denial was in the first place. Thus, ERISA imposes upon the innocent claimant the burden of not only establishing that the claim denial was wrongful, but also the burden of paying a substantial part of the legal costs in doing so.

Hiring an attorney in an ERISA case is no easy matter either. Few claimants can afford to pay an attorney's hourly rate. Thus, most of these claims must be pursued on a contingency fee basis. But finding an attorney willing to take an ERISA case on a contingency fee basis is a difficult task. The unavailability of punitive damages means that there is no pot of gold at the end of the ERISA rainbow for an attorney to recover. In a typical ERISA claim dispute, the amount in controversy is relatively low in relation to the amount of attorney time required to pursue the case effectively. Thus, attorney fees are frequently rather low. Also, the amount of time that must be devoted to what is document-intensive litigation, coupled with the prospects of delayed payment, low payment or no payment, make such cases "undesirable" to most lawyers. The net result is that many ERISA claimants are unable to even find legal counsel and many ERISA claims are never pursued -- a giant Bonanza for the insurance industry.

If the claimant is fortunate enough to find an attorney willing to take an ERISA case on a contingency fee basis, that may protect the claimant from having to pay money, out of pocket for attorney fees, but it raises another troublesome issue: Many ERISA claims denials are reversed at the administrative review phase -- especially when the claimant is represented by counsel. Since fees are not recoverable at that point, any contingency fee must come directly out of the benefits recovered -- thus, the claimant effectively loses benefits by winning benefits. Although the claimant will no doubt fare better with an attorney than without one, the sad fact is that the claimant gets screwed either way. This is one of the most fundamentally unfair aspects of ERISA. At a minimum, Congress should amend ERISA to allow for an application to the court for an award of attorney fees for a claimant, who prevails at the administrative review stage.

"How Did Things Ever Get So Far"?

How could all this have happened? How could a seemingly innocuous Federal Statute, designed to give employees greater rights, end up doing just the opposite? How could this well-intended act of Congress have turned into our worst national consumer insurance nightmare? Did powerful forces in the insurance industry conspire with or bribe Congress to enact this fraud? The answer is "No." There was no sinister conspiracy. (No one that I know of in the insurance industry would be bright enough to hatch a scheme like this). As far as I can tell, Congress's motives in enacting ERISA were as pure as the driven snow. (Which may lead one to ponder the question: "What if Congress really wanted to screw us?")

ERISA just evolved into the scam that it became. Historical developments, augmented by various court decisions, over a 20 year period, have brought us to where we are today. The self-funded
Multiple Employer Trusts of the late 1970s and early 1980s played a significant role in ERISA development; and the insurance industry most certainly did help the process along. ERISA, as we know it today, is a fraud carried out almost entirely by the insurance industry. But, it is a fraud sanctioned by the Federal Judiciary and allowed by Congress to continue. The insurance lobby in Washington, D.C. no doubt exerts considerable influence to keep things the way they are; and there is no equally powerful or effective consumer lobby to push for ERISA reform legislation. ERISA reform is not exactly a "hot button" issue for most Americans. ERISA claimants are like voices crying in the wilderness. They form no powerful political force. In fact, most of us don't even think about medical or disability benefits, until the time comes when we need them. (Perhaps it should be noted that the last person to take up the cause of health care reform, at the national level, was almost burned at the stake.)


Although the above remarks are decidedly negative, ERISA is not the panacea that many sloppy or unscrupulous insurers or plan administrators think it is; nor does it give an insurance company or administrator carte blanche to do whatever it wants with regard to a particular claim. Many of these cases are winnable and a person whose claim has been denied should seek legal counsel, immediately.

Ó 1997 Michael A. McKuin - ERISA Lawyer