Tennessee Disability and Life Insurance Blog
Nearly all employee benefit plans are governed by the Employee Retirement Income Security Act of 1974, or ERISA. ERISA is a federal law. As a result, claimants who sue their plans for a denial of disability benefits usually will have to try their cases in federal courts.
More importantly, in an ERISA case, a claimant must show the court that a denial of disability benefits was not merely incorrect, but “arbitrary and capricious.” That’s a difficult standard. In an ERISA case, it’s not enough for claimants to show that the plan’s decision to deny them benefits was incorrect; they must also show that the decision had no factual basis.
Despite the broad scope of ERISA, it expressly exempts from its provisions any “governmental plan.” What that means for a government employee, or anyone else covered under the exception, is that he or she can bring a lawsuit challenging a denial of disability benefits without having to contend with ERISA’s strict standards and procedural requirements. Usually, that will be an advantage to the claimant bringing the disability lawsuit.
Further, in Tennessee, a claimant exempted from ERISA by the governmental exception can raise state law claims against the disability insurer or plan administrator including a bad faith failure to pay claim. Under Tennessee’s bad faith failure to pay law, a claimant could be awarded up to 25 percent of his or her claim as a bad faith penalty. In contrast, claimants cannot avail themselves of state law remedies in a standard ERISA action.
As you might expect, under ERISA, a governmental plan includes any plan established by the federal government or by any state government. However, the definition of a governmental plan does not stop there. ERISA also extends the definition of a governmental plan to include any plan established by a political subdivision or any agency or instrumentality of the government, state or federal.
In most cases, it’s fairly easy to determine if you have a governmental plan. However, because ERISA does not provide any definition of the terms “political subdivision” or “instrumentality of government,” there are some gray areas as to when an employer’s disability plan meets the governmental exception. What’s important to remember, for claimants and practitioners alike, is that private entities may still be considered an “instrumentality of government,” particularly if they contract with a municipal organization or body.