Guest Article

Not Providing Arbitration Notice Beyond SPD Content May Be a Breach of Fiduciary Duty, Court Notes

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Summary: The 9th U.S. Circuit Court of Appeals ruled that a plan administrator may have breached its fiduciary duty by not discussing a plan participant's right to arbitration in an claims appeals denial letter, even though those rights were explained in the plan's summary plan description.

Even though an arbitration clause was described in a summary plan description (SPD), a plan administrator may have breached its fiduciary duty by not further notifying an individual about arbitration requirements when his internal claims decision appeal was denied, the 9th U.S. Circuit Court of Appeals ruled. Essentially, the court determined that as a fiduciary, the plan administrator would meet its duty to solely act in the interest of plan participants and beneficiaries by including a description of arbitration procedures in the appeals denial letter. The case is Chappel v. Laboratory Corp. of America, 2000 U.S. App. LEXIS 28645 (9th Cir., Nov. 14, 2000).

Laboratory Corp. of America sponsored and administered a self-insured health plan that included written claims procedures in its SPD. Those procedures noted that if the plan denied the internal appeal of a disputed claim, final and binding arbitration was an "sole remaining remedy." Arbitration had to be requested within 60 days of receiving the written appeal denial.

James Chappel was a plan beneficiary. His wife had received the SPD with the arbitration information in her employment manual. After his benefit claims were denied, Chappel filed an internal appeal, but after that appeal was denied, he alleged that he was not notified of the arbitration procedures.

After Chappel sued Lab Corp and the plan, Lab Corp. told him about the arbitration clause. Chappel then asked a federal district court if he could add a breach of fiduciary duty claim against the plan administrator for failing to notify him in a timely manner of his arbitration rights. After the district court disallowed the fiduciary breach claim, Chappel appealed.

The 9th Circuit noted that the district court denied Chappel leave to amend solely because it believed that amendment would be futile, which is a proper legal principle. However, the appeals court found that not to be the case. Rather, Chappel's proposed amendment would have allowed him to state a "legally cognizable" fiduciary breach claim against Lab Corp. Therefore, it reversed the lower court's ruling.

In reaching this decision, the court noted that nothing in ERISA specifically governs the administration of arbitration clauses. However, ERISA's internal appeals provisions do provide for "reasonable" procedures, a minimum 60-day limited period to file a request to review a denied claim and written notice of why a claim has been denied and what are plan's internal review procedures.

While this language does not specifically address arbitration, the court stated that it does provide guidance for an ERISA fiduciary seeking to create "reasonable" arbitration procedures. Therefore, a fiduciary's duty to act solely in the interest of plan participants and beneficiaries applies to writing and implementing an arbitration clause, according to the court.

The court noted that a late arbitration request could prevent an individual from using arbitration under the plan's claims procedures. Therefore, if a plan administrator does not notify the individual about arbitration requirements when an internal appeal is denied -- even through an arbitration clause is part of the plan terms -- it cannot claim to be acting solely in participants and beneficiaries' interests, according to the court.

Therefore it held that Lab Corp, as plan administrator, breached its fiduciary duty to Chappel if, as he alleged, it adopted a mandatory arbitration clause with a 60-day time limit and then relied on the SPD in the employment manual as notice of the clause and its terms.

The administrator would have fulfilled its fiduciary duty to Chappel, the court noted, if it had simply sent an appeals denial letter to him that also explained the arbitration clause and its procedures. Accordingly, the court ruled that the district court should allow Chappel to amend his complaint to state a breach of fiduciary duty claim, and remanded the case. The court also noted that if Chappel could prove that Lab Corp's arbitration notice was ineffective and late, he could file an "out-of-time" arbitration demand.

A dissenting judge countered that no fiduciary breach occurred, noting that the SPD is the vehicle for a plan beneficiary to find about internal review procedures. If the SPD is clear, and if an administrator did nothing to prevent reliance upon it, no breach could have occurred. The judge also expressed concern that the ruling:

1. ignores cases holding that when the SPD explains plan rules, ERISA does not additionally impose individualized disclosure requirements;
2. deems SPDs as inadequate, with the result that individuals will have to be "retold" various notice requirements "at what [the courts] deem to be the appropriate time"; and
3. creates a "duty through nothing more than judicial fiat or thaumaturgy."

Furthermore, the judge noted that while it is easy for courts to add "steps to the minutaie" that administrators must perform to avoid litigation:

In the end, however, we are creating an exceedingly complex little dance. The result of a misstep in that dance may be an action against the administrator which will ultimately lead to an attempt to mulct him for his alleged wrongdoing. At the very least, it will tarnish the administrator, his methods and motives, and may well lead to an imposition of liability upon a plan that should be barred due to the beneficiary's own inaction.

Excerpted from the January 2001 supplement to Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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