Third Circuit Finds ERISA Waiver of Premium Claim "Deemed" Exhausted and Affirms Award of Life Insurance Benefits

In?Rizzo v. First Reliance Standard Life Insurance Co., et al., No. 20-1144, 2022 WL 17729430 (3d Cir. Dec. 16, 2022), a dispute over a waiver of premium (“WOP”) claim and the denial of life insurance benefits, the Third Circuit considered whether Plaintiff-Appellee Jody Rizzo exhausted her administrative remedies before filing suit and whether First Reliance Standard Life Insurance Company’s denial of WOP benefits was an abuse of discretion. The court affirmed the district court’s judgment in Rizzo’s favor, finding that the court appropriately awarded Rizzo $188,000 under her deceased husband’s life insurance policy.

Rizzo’s husband, Angelo Rizzo, worked as an Assistant Store Manager at Barnes & Noble before he stopped working on November 7, 2012 following an episode of shortness of breath and dizziness while shoveling snow. In connection with a long-term disability benefit claim administered by First Reliance, Mr. Rizzo’s family doctor completed a form indicating that he would be able to return to “usual work” by April 29, 2013, but with a 50-pound lifting limitation. In March 2013, Mr. Rizzo filed an application for WOP benefits under his life insurance policy which was also administered by First Reliance. If approved, he would be able to continue his life insurance coverage without paying monthly premiums.

To receive WOP benefits, First Reliance had to find that Mr. Rizzo was completely unable to engage in any type of work for wage or profit for which he was suited by education, training, or experience. Mr. Rizzo submitted a Physician’s Statement from his family doctor which identified Mr. Rizzo’s diagnoses as including coronary artery disease, hypertension, peripheral vascular disease, and diabetes. With respect to physical restrictions, his doctor wrote, “disabled.” As part of First Reliance’s determination process, a vocational expert has to complete a Residual Employability Analysis to determine a claimant’s residual work capacity. This cannot be completed until the vocational expert has all applicable information. However, the “Medical Information” section of the Employability Analysis only included a single line of text from a nurse’s May 2013 opinion that Mr. Rizzo had “sedentary restrictions and limitations.” In that opinion, the nurse recommended an update be made in October 2013, but that never occurred. Earlier, a case manager sent a Physical Capacities Questionnaire to Mr. Rizzo’s cardiologist but was told to wait for an answer because Mr. Rizzo would be seeing the cardiologist in September. Despite the gaps, the vocational expert completed the Employability Analysis on September 3. Afterwards, Mr. Rizzo’s cardiologist did submit the Physical Capacities Questionnaire and stated that Mr. Rizzo was not on disability for cardiac reasons and declined to complete the assessment. The vocational expert authorized the case manager to place the vocational file on hold for 60 days so that a medical determination could be made about Mr. Rizzo’s physical capacities. However, on October 9, 2013, more than 200 days after Mr. Rizzo submitted his WOP claim, First Reliance sent him a denial letter stating that they found him capable of sedentary work and that he could submit a form to convert his group policy to an individual policy. The letter advised him that he could request a review by submitting an appeal within 180 days of receipt of the letter. Mr. Rizzo died before the expiration of the 180 days.

In March 2014, Rizzo called First Reliance in connection with her husband’s death and informed them that she did not receive the WOP denial letter and that if they had, they would have converted the policy since they have a baby, and this was their only life insurance for him. In July 2016, Rizzo attempted to appeal the decision, but First Reliance denied it based on untimeliness. She then filed a lawsuit against First Reliance asserting five counts under New Jersey law and two ERISA claims. First Reliance moved to dismiss all claims, including the ERISA benefit claim under 29 U.S.C. § 1132(a)(1)(B) for failure to exhaust administrative remedies. The district court dismissed all but the ERISA benefit claim, finding that Rizzo exhausted administrative remedies and the suit was allowed to proceed. On the parties cross-motions for summary judgment, the district court concluded that Rizzo was not required to exhaust administrative remedies because the claim should be deemed exhausted based on First Reliance’s untimely denial of the claim. The district court also concluded that First Reliance’s denial was arbitrary and capricious because it turned a blind eye to information that could have been made available to it before its denial. The district court awarded Rizzo the $188,000 in life insurance benefits as well as pre- and post-judgment interest.

On appeal, the Third Circuit affirmed the decision of the district court. On the exhaustion issue, the court explained that because First Reliance failed to follow the procedures outlined in 29 C.F.R. § 2650.503-1(f)(3) (2002), that is, make a decision within 45 days of receipt of the claim with at most two 30-day extensions, Rizzo is deemed to have exhausted the administrative remedies available under the plan and entitled to file suit under 29 U.S.C. § 1132(a). The court rejected First Reliance’s argument that Rizzo was required to file a lawsuit before the claim decision was eventually made, even though it was made late. The regulation is clear that if the administrator does not follow claims procedures consistent with the requirements, a claimant?shall?be deemed to have exhausted the administrative remedies and?shall?be entitled to pursue any available remedies. The court also rejected First Reliance’s argument that the untimely denial was merely “technical noncompliance.” This argument is contrary to the text and purpose of the regulation and the denial was grossly noncompliant. For these reasons, the court deemed the exhaustion requirement satisfied.

The Third Circuit also found First Reliance’s denial of the WOP claim to be arbitrary and capricious. Even assuming First Reliance’s decision was substantively reasonable because there was some evidence that Mr. Rizzo could perform sedentary work, the decision was not procedurally reasonable. Neither the denial letter nor the records clearly state which of Mr. Rizzo’s medical conditions were evaluated or how efforts were made to give weight to certain pieces of information. The claims examiner appeared to only rely on a short excerpt from the nurse’s May 2013 opinion. The decision was late and “inexplicably rushed out the door” with no indication that it was based on anything but a stale medical opinion from a nurse or non-response from a non-treating cardiologist. This does not suggest a reasoned decision-making process.

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