An employer's inclusion of a one-year limit on worker lawsuits over disability benefit denials in its summary plan description (SPD) was reasonable, a federal appeals court ruled. The 9th U.S. Circuit of Appeals also chose not to apply the California regulation requiring that insurers explicitly inform covered individuals about statutes of limitations.

There was no need to bring in the California rules because ERISA already contains -- and the plan followed -- broad and detailed disclosure rules to protect plan beneficiaries, the court decided in Scharff v. Raytheon, 2009 WL 2871229 (9th Cir., Sept. 9, 2009).

The Facts of the Case

Donna Scharff was a Raytheon employee whose claim with the company's self-funded short term disability (STD) plan, was denied. After internal appeals, the plan issued a final decision upholding the denial.

The final letter told Scharff to consult the SPD for information on challenging the denial in court. The SPD contained a one-year contractual statute of limitations.

Scharff sued Raytheon Co.'s STD and long-term disability plan 20 days after the limit had passed. The plan moved to dismiss, arguing that her complaint was untimely.

Scharff alleged that her late filing should be excused because the the plan should have displayed the deadline more noticeably in the SPD and put the deadline in the chapter marked "Administrative" rather than in the "Disability" chapter.

The district court sided with the plan on the grounds that her complaint was untimely. It declined to enforce the state rule that an insurer must disclose time limits. ERISA preempted that rule, and the California disclosure rule had not been incorporated into federal common law.

The court also declined to apply the reasonable expectations doctrine to find that the limitations period was not displayed conspicuously enough, holding that the doctrine did not extend to self-funded plans.

Under the reasonable expectations common-law doctrine, even when an insurance policy clearly does not cover a claim, in some cases a court could find the insurer should still cover it based on the insured party's expectations at the time of contracting.

The Appeals Decision

The appeals court, led by Circuit Judge Susan Graber, admitted it had used the reasonable expectations doctrine in two cases in the 1990s. But that was not enough for the court to allow that the state rule was incorporated into federal common law.

ERISA, which governed the Raytheon plan, requires that coverage exclusions must not be obscured or given less prominence in SPDs.

The circuit concluded that a reasonable participant applying for disability benefits could be expected to have found the court filing deadline in the Raytheon SPD: It was displayed prominently enough.

The court then declined to add California's "duty to inform" rules' to ERISA's existing standards pertaining to transparency of plan exclusions.

That regulation requires insurers to explicitly inform covered individuals about statutes of limitations. The regulation is meant for insurance policies, and ERISA preempts state insurance regulation of self-funded plans.

The court held that ERISA's disclosure standards are broad and detailed enough, and do not need to be supplemented. Furthermore, inclusion of state rules into ERISA would create a patchwork of varying standards.

For more information on summary plan descriptions, see Thompson Publishing Group's Employer's Guide to Self-Insuring Health Benefits.