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A recent Seventh Circuit decision serves as a valuable reminder of the importance of including "safe harbor" language in plan documents in order to avoid unnecessary litigation over benefits decisions and the related standard of review. In Diaz v. Prudential Insurance Co. of America, the Seventh Circuit held that even though the plan at issue included some language regarding employer discretion related to benefits decisions, it simply did not go far enough. In order to largely insulate a plan administrator's decision from judicial scrutiny, a plan must contain proper language conferring discretion on the plan administrator. In its decision, the Seventh Circuit once again endorsed the following language: "Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them." Only this language, or other language which clearly signals discretion on the part of the plan administrator, will suffice. If sufficient language is present, a Seventh Circuit court will uphold a reasonable plan administrator decision, even if the court would decide the question differently if it did not give deference to the plan administrator's decision.

At issue in Diaz was a plan administrator's decision to deny the plaintiff, Hugo Diaz, long-term disability benefits. Mr. Diaz worked for two years as a computer programmer before complaining of persistent back pain. He was subsequently diagnosed with degenerative disc disease and eventually underwent surgery. Following surgery, Mr. Diaz continued to report varying levels of pain. Mr. Diaz decided that he was unable to return to work and on July 22, 2002 filed for long-term disability benefits. Prudential, the plan's insurer, denied the claim based on its conclusion that Diaz's reported inability to perform his job (which it considered a sedentary one) was not consistent with the medical evidence. Mr. Diaz appealed the rejection of benefits numerous times, but his claim was consistently denied.

Two sections of the plan were vital in determining whether the plan administrator's decision to deny benefits was entitled to judicial deference. The first section at issue was titled "How does Prudential Define Disability?" and stated "[y]ou are disabled when Prudential determines that: you are unable to perform the material and substantial duties of your regular occupation due to your sickness or injury and you have 20% or more loss in your indexed monthly earnings due to sickness or injury." The second section, titled "Long Term Disability Coverage-Claim Information," stated "[w]e may request that you send proof of continuing disability, satisfactory to Prudential, indicating that you are under the regular care of a doctor." The district court concluded that, taken together, the two sections signaled to the employee that Prudential had discretion to determine eligibility for benefits.

Two earlier decisions by the Seventh Circuit appeared to support the district court's conclusion. In Donato v. Metropolitan Life Insurance Co. and Bali v. Blue Cross & Blue Shield Ass'n, the court held that language including a phrase stating that disability payments would be paid upon evidence "satisfactory to us [the plan administrator]" was adequate to signal discretion by a plan administrator to deny benefits. In addition, decisions from several other Circuits also noted that plan language noting that the proof must be "satisfactory" to the plan administrator was sufficient language to signal discretion.

In Diaz, however, the Seventh Circuit clarified that in order to provide discretion, plan language must communicate the idea that the administrator "not only has broad-ranging authority to assess compliance with pre-existing criteria, but also has the power to interpret the rules, to implement the rules, and even to change them entirely." The court further stated that no single phrase, such as "satisfactory to us" is sufficient to convey that the administrator has been given complete discretion. In order to attain judicial deference, plan language must give the participant notice that the plan administrator has discretion to determine benefit eligibility. The safe-harbor language quoted above, adapted as necessary to the facts and circumstances at hand, will suffice for this purpose.

Establishing a favorable standard of review is an effective tool that a plan administrator should use to provide a measure of protection to its decisions. You should contact a member of the Schiff Hardin Employee Benefits and Executive Compensation Group for assistance in ensuring that plan administrator decisions will be entitled to the maximum deference possible.