erisa-bad-faith-insurance-what-it-means-and-what-you-can-do">ERISA Bad Faith Insurance: What It Means and What You Can Do

"Insurance bad faith" — when an insurer unreasonably denies or delays paying a valid claim — is a cause of action available against individual and group health insurers under state law in most states. But if your health or disability insurance is governed by ERISA, the legal landscape changes dramatically. ERISA largely preempts state bad faith remedies, limiting what you can recover even when an insurer acts egregiously. Understanding the interplay between ERISA and bad faith law is essential if you are in a dispute with your employer plan.

What Is Insurance Bad Faith?

Under state law, insurance bad faith occurs when an insurer:

• Denies a claim without a reasonable basis
• Fails to investigate a claim promptly and thoroughly
• Uses biased reviewers to justify denials
• Delays payment unreasonably
• Misrepresents policy terms
• Fails to communicate clearly with the claimant

In state bad faith cases, plaintiffs can typically recover:

• The benefits owed
• Consequential damages (medical expenses paid out of pocket, financial harm from denial)
• Emotional distress damages
• Attorney's fees
• Punitive damages (in egregious cases — often the largest component of damages)

ERISA's Preemption of State Bad Faith Claims

ERISA § 514(a) preempts state laws that "relate to" employee benefit plans. This means that if your health or disability coverage is through an ERISA-governed employer plan, you generally cannot bring state law bad faith claims against the insurer or plan administrator.

The U.S. Supreme Court's decision in Pilot Life Insurance Co. v. Dedeaux (1987) held that ERISA preempts state bad faith insurance claims for ERISA plans. This remains the controlling rule in federal law, though states have sought workarounds with limited success.

The practical consequence: under ERISA, your damages are typically limited to:

• The benefits wrongfully denied (plus interest in some courts)
• Attorney's fees at the court's discretion (ERISA § 502(g))
• Equitable relief under ERISA § 502(a)(3) — clarifying rights, injunctions

No punitive damages. No consequential damages. No emotional distress damages — unless a court finds equitable relief under § 502(a)(3) extends further in your specific circumstances.

ERISA Standards for Evaluating Insurer Conduct

While state bad faith law does not apply, courts do scrutinize insurer conduct in ERISA cases — particularly in determining the standard of review and in awarding attorney's fees.

Conflict of Interest

The U.S. Supreme Court in MetLife v. Glenn (2008) held that a structural conflict of interest exists when the same entity both evaluates and pays claims (as with most group LTD policies). Courts must weigh this conflict when reviewing the insurer's decision. The more evidence of bias or biased administration, the more skeptically courts may view the insurer's determination.

Procedural Violations as Evidence of Bias

Courts assess whether the plan followed proper ERISA procedures. Evidence of insurer misconduct that courts consider includes:

• Selective use of evidence: The insurer ignored or discounted favorable evidence (treating physician records) while crediting its own hired reviewers
• Paper reviews: Denial by a physician who never examined the claimant, when the insurer had the option to arrange an examination
• Reversal of prior approvals: Terminating benefits that had been paid for years without new medical evidence of improvement
• Inconsistent application: Applying criteria inconsistently across claimants
• Violation of ERISA procedures: Failing to meet deadlines, provide required notices, or supply the claim file

The "Arbitrary and Capricious" Standard

Under the abuse of discretion / arbitrary and capricious standard, courts uphold plan decisions unless they are "not supported by substantial evidence" or made in violation of plan terms or applicable law. Documented insurer misconduct — even if it doesn't support punitive damages — can shift how courts weigh evidence and whether to award attorney's fees.

Attorney's Fees in ERISA Cases

ERISA § 502(g) authorizes courts to award attorney's fees "in its discretion" to either party. Courts consider five factors (the "Chambless factors"):

1. Degree of the opposing party's culpability or bad faith
2. Ability of the opposing party to satisfy an attorney's fee award
3. Whether an attorney's fee award would deter other persons from acting under similar circumstances
4. Whether the party requesting fees sought to benefit all participants in the plan (or only herself)
5. The relative merits of the parties' positions

Egregious insurer conduct — like failing to investigate, using biased reviewers, or ignoring clear evidence — increases the likelihood a court will award attorney's fees, which can be substantial.

Plans Not Governed by ERISA

If your plan is not governed by ERISA — for example, you purchased individual insurance, your employer is a government or church, or you are in a non-ERISA group arrangement — state bad faith law fully applies. This is a significant advantage:

• You can sue in state court
• Punitive damages may be available
• Consequential damages (financial harm from the denial) are recoverable
• Emotional distress damages may be available

Practical Strategies for ERISA Plan Disputes

Even without bad faith damages, you can maximize your position in an ERISA dispute by:

1. Documenting every procedural violation: If the insurer misses deadlines, fails to provide required notices, or violates ERISA's procedural rules, document this meticulously.
2. Building a complete record: Submit every piece of favorable evidence during the internal appeal.
3. Requesting your claim file: Review it for evidence of biased or incomplete review.
4. Consulting an ERISA attorney: Many work on contingency for benefit denial cases, absorbing the risk of litigation.
5. Filing a DOL complaint: EBSA can investigate systematic insurer misconduct that affects all plan participants.

Fight Back With ClaimBack

Even within ERISA's limited remedies framework, a well-pursued appeal and, if necessary, litigation can recover denied benefits and attorney's fees. ClaimBack helps you build a complete, compelling appeal record that maximizes your options at every stage.

Start your appeal with ClaimBack

Related Reading

• How to Write an Insurance Appeal Letter
• Internal vs. External Insurance Appeals Explained
• Common Reasons Insurance Claims Are Denied