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Guest Article

Plan Properly Denied Coverage for Work-Related Injuries

Summary: A federal appeals court affirmed a lower court's ruling that a group health plan administrator's denial of coverage for work-related injuries was not arbitrary and capricious because the denial was based on the administrator's interpretation of an unambiguously plan provision that excluded coverage for such injuries.

A group health plan's exclusion of coverage for occupational injuries was unambiguous, a federal appeals court ruled. Therefore, the court affirmed a lower court's ruling that a plan administrator's decision to deny coverage for a plan beneficiary's work-related injuries was not arbitrary and capricious. The case is Mitchell v. Dialysis Clinic Inc., 2001 WL 1006291 (6th Cir., Aug. 24, 2001).

The appeals court also ruled that the doctrine of contra proferentum -- that ambiguities in a plan's terms be construed against the insurer drafting the language -- does not preclude applying an arbitrary and capricious standard of review when the plan gives the administrator authority to construe plan terms.

Danny Mitchell, a self-employed subcontractor, was a dependent under his wife's group health plan, which was self-funded by her employer, Dialysis Clinic Inc. (DCI) Mitchell broke his ankle and foot during a fall at work, and since he did not have workers' compensation insurance, he submitted a claim for his injury to his wife's plan. The plan administrator denied coverage, saying that the plan did not cover medical expenses related to on-the-job injuries, which are covered under Tennessee's Workers' Compensation Act.

The Mitchells then sued DCI, arguing that since he was an independent contractor and had no workers' compensation insurance, he was covered under his wife's plan. DCI argued that the plan administrator's interpretation of the plan's plain language was reasonable. Specifically, the plan provision said:

Non-occupational coverage.

Unless otherwise specified, the accident and health coverage provided under this plan is non-occupational and any reference to "illness" or "injury" in the following benefit sections means only a non-occupational illness or injury.

Non-Occupational Illness is one which does not arise of (or in the course of) any work for pay or profit, nor in any way results from an illness which does. However, if proof is furnished to the Plan administrator that an individual covered under a Workers' Compensation Law (or other law of similar purpose) is not covered for a particular illness under such law, that illness shall be considered "non-occupational" regardless of its cause.

In ruling in DCI's favor, the court noted that there was more than one plausible interpretation of the exclusion. However, under the deferential standard of review, the plan's interpretation was not arbitrary and capricious, especially since the plan language clearly stated that no coverage existed for job-related injuries.

Mitchell appealed to the 6th U.S. Circuit Court of Appeals, arguing that the district court erred by: (1) interpreting the exclusion in a way that was not supported by plan language; (2) failing to construe any ambiguities against the drafters; and (3) failing to take into account DCI's conflict of interest.

The 6th Circuit said that while the lower court reviewed the plan administrator's decision under a de novo standard, it deferred to the administrator's decision. The 6th Circuit also noted that, since the plan administrator had discretionary authority to interpret plan terms, the court had to determine whether the plan administrator's denial was arbitrary and capricious.

The 6th Circuit noted that the administrator's decision is not arbitrary and capricious if it is reasonable. Mitchell then cited several cases in which the 6th Circuit had reduced the deference given to a plan administrator's decision through the use of state contract interpretation rules (where contract ambiguities are construed against the drafter). However, the 6th Circuit noted that Mitchell misread the scope of those decisions, which did not establish an interpretation that would contradict the deference given to a plan administrator's decision. The 6th Circuit also noted that since it was undisputed that Mitchell suffered an occupational injury, deference must be given to the plan administrator's interpretation of the plan's unambiguous language excluding coverage for occupational injuries.

Mitchell then argued that DCI had a conflict of interest. However, the 6th Circuit noted that courts must take any conflicts of interest into account when determining whether a decision was arbitrary and capricious -- but the plan was still entitled to the deferential standard of review. The 6th Circuit then agreed with the lower court that it failed to see how a conflict of interest was created. The 6th Circuit also noted that it would have reached the same conclusion regarding the benefits denial if it had used the de novo standard. Therefore, the 6th Circuit affirmed the lower court's ruling.

The court ruled for the first time on whether the doctrines of contra proferentum and deferential review could co-exist. Under contra proferentum, ambiguities in a plan's provision are construed against the plan that drafted the language. Under the preferential review standard, the interpretation by the plan will be given deference unless it is arbitrary and capricious.

The court said that the claim that the contract should be construed against the drafter -- a state law concept -- was preempted by the fiduciary grant of discretionary authority, a creature of ERISA federal law.

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

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