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Bad faith litigation represents a costly and constant financial burden on health plans. An aggressive plaintiff’s bar increasingly exploits liberal discovery rules in state and federal courts seeking a smoking gun. Health plans frequently settle these actions in order to avoid the potential for an enormous – nuclear – award of punitive and emotional distress damages. Identifying and proactively addressing trending issues in ERISA litigation may prevent those trends from spreading to bad faith actions involving non-ERISA plans.
ERISA litigation is a highly active area of law, with thousands of cases filed every year by members seeking to recover benefits under employer-sponsored health plans. In contrast to non-ERISA actions, ERISA cases involve limited discovery, limited damages and bench trials. Consequently, ERISA disputes are fast-moving and involve risks limited to the value of benefits, costs of litigation and, potentially, plaintiff’s attorney’s fees. ERISA matters also frequently result in opinions that, when awarding benefits, can outline courts’ views on the sufficiency of a plan’s claims handling practices and its communications with members.
Most directly, because nearly all states have adopted some form of an Unfair Claims Settlement Practices Act, which generally lists various forms of conduct by a plan that may constitute unfair claims practices – such as misrepresenting policy terms, failing to conduct a reasonable investigation or not attempting to settle claims in good faith – ERISA decisions provide easy guideposts to plaintiffs’ attorneys when probing for deficiencies in a plan’s claims handling practices. As a result, ERISA litigation provides a testing ground for both health plans and plaintiffs to argue over the interpretation and application of contract provisions, clinical care guidelines and claims handling practices.
With this in mind, several recent trends in ERISA litigation may impact bad faith litigation. In particular, federal courts have increasingly scrutinized the content of denial letters. In 2023, the Tenth Circuit Court of Appeals ruled against a health plan, finding that the plan failed to engage in a “meaningful dialogue” with the member because the plan’s denial letter did not inform the member of the rationale for the denial or address the specific points raised by the treating provider. (See related articles “Developments in ERISA health benefit litigation” by Tom Hardy and Jason Fontenot; and “Denial letters likely to remain under fire in 2025” by Rebecca Hanson.)
- Trends in recent ERISA decisions spotlight conduct that can subject plans to bad faith litigation
- New ERISA rulings hold that health plans breach their duties by sending denial letters that lack specific references to medical records, detailed explanations and particularized evaluations of the member’s needs and by ignoring materials sent by providers during claims appeals
- By evaluating and addressing potential deficiencies now, health plans may be able to buttress their defenses to bad faith actions