Spencer Fane LLP Logo

New Litigation Rules Will Affect Claims Processing

Changes to the federal rules governing civil litigation will affect the way that benefit claims and appeals are processed. While third-party claims administrators will be most directly affected, plan sponsors and their human resources staff should also be aware of the new rules. Failure to abide by them could make it more difficult to succeed if claim decisions are challenged in court.

The changes to the Federal Rules of Civil Procedure, which went into effect on December 1, 2006, relate to the manner in which electronically stored information (“ESI”) is treated in federal court litigation. The new rules generally permit greater access to ESI by adverse parties in the early stages of a lawsuit (called “discovery”). ESI includes e-mails, spreadsheets, word processing documents, databases, voicemail, instant messages, and data stored on hard drives.

At the beginning of each federal lawsuit, parties and their counsel must now address the scope of their ESI, its location, the format in which it is stored, how long it is stored, and – most importantly – whether it is reasonably accessible. When parties learn about pending or threatened litigation, they must promptly suspend any automatic document destruction procedures and preserve all relevant ESI.

Although the new rules were probably not drafted with litigation over employee benefits in mind, they will nevertheless affect how entities that process benefit claims and appeals operate. In order to put themselves in the best position to prevail if a claim decision is challenged in court, these entities will need to evaluate now how they will preserve and produce their ESI if and when litigation ensues. Similarly, plan sponsors who maintain electronic records – such as personnel files – that relate to a participant’s eligibility for benefits or the amount of those benefits may be affected by the new discovery rules, and should plan accordingly.

Why should claims administrators and plan sponsors worry about these rules if only a small minority of claim decisions are ever litigated? For two reasons: First, a substantial portion of the data that will support a claim denial is likely to be maintained electronically. This data could include the participant’s employment record (evidencing hours worked, contributions made, etc.), which could affect the participant’s eligibility for a benefit (e.g., his or her vested status) and the amount of that benefit; internal spreadsheets or computer programs through which benefit amounts are calculated; correspondence with consulting or treating physicians concerning the participant’s claim; and plan documents, procedures, and SPDs. Thus, any litigation over a claim denial is almost certain to involve substantial ESI discovery.

Second, one of the principal protections added by the new rules may not be available if the claims administrator and plan sponsor fail to take early, pre-litigation steps to preserve relevant ESI. Parties are generally required to implement document retention policies whenever litigation is filed, threatened, or “reasonably anticipated.” Although there is no clear standard concerning when litigation should be reasonably anticipated, in the context of benefit claims that point could come when the claims administrator or plan sponsor informs the claimant that his or her appeal has been denied, and that he or she has a right to bring suit under ERISA.

The amendments to the Federal Rules of Civil Procedure create a new safe harbor provision to protect litigants in the event that they accidentally lose ESI, but only if the litigants have implemented good-faith measures to preserve relevant information. Evidence of such good-faith measures includes steps the litigant took to suspend routine document destruction activities when litigation was reasonably anticipated. This kind of “litigation hold” includes informing key personnel of the need to retain potentially relevant ESI. Parties that comply with this safe harbor may not be subjected to court sanctions for failing to produce ESI that is lost. Taking prompt, affirmative measures to ensure that relevant ESI is preserved is the first step in making this safe harbor available.

In view of these rule changes, third-party claims administrators and plan sponsors that administer claims and appeals should evaluate how ESI is maintained, and how they will respond in the event it is subpoenaed. They also should develop litigation hold procedures that can be quickly implemented in the event a lawsuit is threatened or filed. Taking these steps now could prevent headaches and reduce legal fees later.