Lauth v. Prudential Insur.Co. of America, 2006 U.S.Dist.LEXIS 31673 (N.D.Ill. 5/5/2006)(Issue: Administrative Appeal).  This was one of our cases.  The plaintiff, a dentist, alleged he became disabled in August 2003 on account of degenerative disease of both the cervical and lumbar spine and other medical conditions.  In June 2003, though, Lauth was informed his position was going to be eliminated.  Prudential denied Lauth’s claim for benefits, and after an initial appeal was unsuccessful, he filed suit rather than a second appeal. 

In an earlier decision issued in this case, Lauth v.  Prudential Insur.Co. of America, 2005 U.S.Dist.LEXIS 17628 (N.D.Ill. 7/1/2005)(September 2005), the court found a de novo standard of review applied in granting a motion to compel discovery.  Despite Prudential’s request that the court revisit that ruling, the court chose to reaffirm its earlier determination as to the standard of review.  The court was unpersuaded by Prudential’s argument that a summary plan description compelled a deferential standard of review, finding that caselaw in the Seventh Circuit has established that the SPD cannot create a deferential standard of review when the plan is silent, particularly in this case where the SPD explicitly stated that it is not part of the group insurance certificate. 

Most of the decision focused on Prudential’s sole defense: that Dr. Lauth failed to exhaust administrative remedies prior to bringing suit.  Although the court ruled the issue was not waived due to a failure to plead exhaustion as an affirmative defense, the court nonetheless rejected the defense as lacking merit “because the Plan documents do not require participants to file administrative appeals.” *9.  The plan itself is completely silent on the topic of appeals, and although the SPD advises of three levels of appeal, “it does so in permissive language.” *9.  Therefore, following Gallegos v. Mount Sinai Medical Center, 210 F.3d 803 (7th Cir. 2000), permissive language in plan gives the claimant the option of choosing to sue or appeal so long as the claimant reasonably relies on the permissiveness of the appeal language.  In Gallegos, the court held that the claimant was unable to establish reasonable reliance and her claim was dismissed.  This case was different, though, and the court explained:

We interpret the SPD and denial notices according to the "plain meaning [of their language] as understood by an average person." Gallegos, 210 F.3d at 810 (citing 29 U.S.C. §  1022(a) ("The summary plan description . . . shall be written in a manner calculated to be understood by the average plan participant.")). The SPD and denial notices use only permissive language when discussing the first and second appeals. (See Def.'s Exs. at AR000152, SPD at 50 (saying, "you . . . may appeal your denied claim" and "you . . . may make a second appeal"); AR000004 (saying, "you may again appeal this decision" and "if you elect to [file a second appeal] "); AR000010 ("you have a right to appeal this decision" and "if you elect to [file a first appeal]" and "you may seek a second appeal").) None of those documents says that the first two appeals are mandatory or clearly explains that any participant who fails to complete them cannot file an ERISA suit. Instead, they say that failure to file a third appeal will not preclude a participant from filing suit,  statements that -- at best -- obliquely imply that exhaustion of the first two appeals is a prerequisite to suit. (See id. at AR000154, SPD at 52 ("If you elect to initiate a lawsuit without submitting to a third level of appeal, the plan waives any right to assert that you failed to exhaust administrative remedies."); AR000004 (After completion of the first two levels of appeal, you may also file a lawsuit under the Employee Retirement Income Security Act. . . . Your decision on whether to file a third appeal will not affect your rights to sue under ERISA."); AR000010 (same).) It is unlikely that an average plan participant could ferret out the asserted exhaustion requirement from these documents. Accordingly, the Court finds that the misleading representation element of estoppel is met. *15-*16.

The court also found the detrimental reliance requirement was also met.  The court found that Lauth’s conduct “demonstrates that he would have filed a second appeal, in lieu of this suit, if he had known he was required to do so.” *16-*17.  At best, the plan documents “contained misleading statements about the exhaustion requirement and [Lauth] relied on those statements to his detriment.” *17.

Alternatively, the court explained that even if the elements of estoppel had not been established, the court would have exercised its discretion to excuse Lauth’s failure to exhaust under the following rationale:

The exhaustion requirement, as noted above, "is not intended to place a meaningless procedural hurdle in front of plaintiffs who desire to bring claims for violations of their rights under ERISA in federal court. . . . Rather, the requirement is aimed at encouraging claimants to pursue private remedies and develop a proper administrative record before entering federal court." Gallegos, 210 F.3d at 809. In this case, a second appeal would be a meaningless hurdle. *18-*19.

The court was also unimpressed by Prudential’s claim that Lauth was no longer covered at the time he alleges his disability commenced.  The court found the first appeal completely fleshed out the issues relating to Lauth’s coverage at the time his disability began, and “a second appeal would not have fleshed out the record or served any other meaningful purpose.” *19.  To require a second appeal “would be elevating form over substance.” *19.  The court also read the policy to show that Lauth remained covered for a month after his termination.  Nonetheless, the court refused to award benefits, finding the record did not adequately identify Lauth’s duties or show his incapacity to perform such duties.

Discussion:      According to Lauder v. UNUM Life Insur. Co., 284 F.3d 375 (2d Cir. 2002)(March 2002), where the court rejected the insurer’s claim that plaintiff was no longer covered by the policy at the time her disability commenced, the Second Circuit ruled the insurer forfeited its right to contest the plaintiff’s disability, holding, “First UNUM knew of Lauder's claim of disability, chose not to investigate it, and chose not to challenge it. It therefore waived its right to rely on lack of disability as a defense to Lauder's claim.” 284 F.3d at 382. Consequently, Lauder ordered the disability insurer to pay all benefits due.  We believe the same ruling should have applied here as well and should have compelled the court to order benefit payment.