Case Analysis: Scanlon v. Life Ins. Co. of N. Am.

Just over one year ago, the United States Court of Appeals for the Seventh Circuit issued a precedential decision that has a direct impact on disability cases subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). The case, Scanlon v. Life Ins. Co. of N. Am., 81 F.4th 672 (7th Cir. 2023), involved an individual seeking long-term disability (“LTD”) benefits under his employer, McKesson Corporation’s, group disability policy which was underwritten, insured, and administered by the Life Insurance Company of North America (“LINA”). Scanlon became unable to continue working as a systems analyst due to the combination of chronic spinal pain and sleep disorders.

In order to receive LTD benefits, Scanlon needed to demonstrate that he met his policy’s definition of disability, which it defined as an inability, solely because of injury or sickness, to perform the material duties of his regular occupation and to earn 80% or more of his indexed earnings from working in his regular occupation. LINA took the position that he did not satisfy that definition, and therefore denied Scanlon’s application for LTD benefits. LINA subsequently upheld that decision on Scanlon’s internal appeal submitted under 29 C.F.R. § 2560.503-1(h). Scanlon therefore filed suit in the Northern District of Illinois pursuant to ERISA § 502(a)(1)(B) (29 U.S.C. § 1132(a)(1)(B), seeking payment of benefits.

Under ERISA, there are two standards of review under which entitlement to benefits can be decided: the arbitrary and capricious standard (a.k.a. deferential review) and the de novo standard. Scanlon’s case was decided under the latter, meaning that the district court could weigh evidence and resolve factual disputes, including whether Scanlon met his disability policy’s terms for coverage.. See Fontaine v. Metro. Life Ins. Co., 800 F.3d 883 (7th Cir. 2015); Krolnik v. Prudential Ins. Co. of Am., 570 F.3d 841, 843 (7th Cir. 2009) (stating that under the de novo standard, the court “takes evidence (if there is a dispute about a material fact) and makes an independent decision about how the language of the contract applies to those facts”) (referencing Firestone Tire & Runner Co. v. Bruch, 489 U.S. 101 (1989)).

Scanlon submitted numerous pieces of evidence for the district court’s independent review that supported his position, including: the results of a functional capacity evaluation (“FCE”), a residual functional capacity evaluation (“RFC”) completed by one of his treating physicians, and medical treatment records from his treating doctors and the Department of Veterans Affairs (“VA”). On the other hand, LINA relied upon evidence it generated during the claims process, namely several medical and psychiatric reports concluding that Scanlon was capable of performing the duties of his occupation.

Both parties filed motions for a ”trial on the papers” pursuant to Federal Rule of Civil Procedure 52. See Fontaine, 800 F.3d at 885. The district court, indicating its application of the de novo standard, found in LINA’s favor. The district court stated that Scanlon failed to demonstrate by a preponderance of the evidence that his orthopedic pain and sleep disorders prevented him from performing the material duties of his regular occupation.

To support that conclusion, the district court relied upon the reports LINA cited as justification to deny Scanlon’s LTD claim. The district court also took the position that Scanlon’s own evidence failed to support his entitlement to disability benefits. More specifically, the court found that the FCE results and restrictions outlined in the RFC evidenced Scanlon’s ability to work for approximately 6.5 hours per day, which represented approximately 80% of a full day’s work. The court equated that perceived ability to mean that Scanlon could earn 80% or more of his indexed earnings, in turn demonstrating that he was precluded from receiving LTD benefits under his policy’s terms. The district court also called attention to the fact that none of Scanlon’s treating doctors “flatly stated” that Scanlon could not perform his occupation.

Scanlon appealed the district court’s decision to the Seventh Circuit Court of Appeals, arguing that the district court’s decision must be reversed based on several grounds. He asserted that the district court erred by inappropriately weighing the medical evidence, failing to address the nature and material duties of Scanlon’s occupation, and erroneously deferring to the medical conclusions rendered by LINA’s file-reviewing physicians.

The Seventh Circuit weighed Scanlon’s appeal utilizing the “clear error” standard, because the district court decided the case pursuant to Fed. R. Civ. P. 52(a)(6). Under this standard, the appellate court reviews the district court’s findings of fact and application of law, and it must affirm the district court’s decision if its findings are plausible in light of the entire record. Marantz v. Permanente Med. Grp., Inc. Long Term Disability Plan, 687 F.3d 320 (7th Cir. 2012); Dorris v. Unum Life Ins. Co. of Am., 949 F.3d 297 (7th Cir. 2020).

Following oral argument, the Seventh Circuit ultimately found that the district court’s decision was clearly erroneous for a number of reasons. Per the Seventh Circuit, “the district court clearly erred when it failed to consider Scanlon’s inability to sit at his desk for eight hours a day as required by his occupation and his inability to perform the cognitive requirements of his job during regular work hours. The district court also erred in its treatment of certain medical records.” Scanlon, 81 F.4th at 675. The Court added that the district court did not appropriately consider and weigh the medical evidence and did not address the nature and material duties of Scanlon’s job. Id. at 676.

The Seventh Circuit explained that the district court did not appropriately weigh the evidence pertaining to Scanlon’s physical capabilities, most notably the results of the FCE. Per the Seventh Circuit, the district court inappropriately interpreted those results, which contained evidence of physical limitations due to chronic pain. Id. at 677. The district court specifically neglected to consider Scanlon’s inability to sit for extended periods in light of his inability to sit for more than 15 minutes at once. Id. at 677-78. The Seventh Circuit enumerated that an analysis of the full-time sitting requirements of Scanlon’s occupation spoke to the heart of whether Scanlon was entitled to LTD benefits. Id. at 678. In light of the FCE results, the Court concluded that Scanlon was incapable of working on a full-time basis. Id. (citing McFarland v. Gen. Am. Life Ins. Co., 149 F.3d 583, 588 (7th Cir. 1998) (finding that disability can be established if the claimant proves he cannot perform a task for a long enough period to perform his job)).

In addition, the Seventh Circuit pointed out that the district court failed to explain its finding that Scanlon could earn 80% or more of his pre-disability income (as required by the policy). The district court erroneously equated the FCE finding that Scanlon could work 6.5 hours per day to mean that he would earn 80% or more of his earnings. Id. at 676.

The district court also inadequately considered Scanlon’s chronic sleep disorder symptoms in conjunction with the physical and cognitive demands of his occupation. Id. at 680. In fact, the district court neglected to address Scanlon’s inability to perform the numerous intensive cognitive tasks of his occupation – it only considered the physical demands of the occupation. Id. at 677.

The Seventh Circuit concluded its opinion by summarizing that:

Scanlon’s pain and chronic sleep disorders affect his daily life. The district court committed clear error when it failed to consider Scanlon’s ability to sit at his desk for eight hours a day and to perform the cognitive requirements of his job during regular work hours. The district court also erred when it found that Scanlon’s pain was relieved and his pain reports were unreliable, and when it judged the reliability of the functional capacity evaluation based on whether Scanlon’s treating providers had ‘flatly’ found Scanlon to be disabled.

Id. at 681. Consequently, it vacated the district court’s opinion and remanded the matter for further proceedings.

Scanlon has a significant and direct impact on ERISA disability cases filed within the Seventh Circuit moving forward. First, the Court made clear that disability insurers and district courts within the Seventh Circuit must adequately consider FCEs within the context of contemporaneous medical evidence, such as treating physician opinions and treatment records. This is consistent with existing Seventh Circuit case law, which states that FCEs provide “exactly the kind of detailed and specific information” required to show “objective support showing functional limitations amounting to total disability.” Holmstrom v. Metro. Life Ins. Co., 615 F.3d 758, 770 (7th Cir. 2010). See also Hall v. Berryhill, 906 F.3d 640 (7th Cir. 2018); Love v. Nat’l City Corp. Welfare Benefits Plan, 574 F.3d 392 (7th Cir. 2009); Majeski v. Metro. Life Ins. Co., 590 F.3d 478 (7th Cir. 2009); Leger v. Tribune Co. Long Term Disability Benefit Plan, 557 F.3d 823 (7th Cir. 2009).

The Seventh Circuit similarly addressed the district court’s questioning of the FCE’s reliability, in part, because none of Scanlon’s treating medical providers “flatly” stated that he could not perform his regular occupation. The Court pointed out that “we have never required the treating physicians to ‘flatly’ state the claimant’s disability to find a functional capacity evaluation reliable.” Scanlon 81 F.4th at 679. Instead, “[t]he correct question to ask is ‘whether the results are consistent or conflicting with other medical examinations.” Id. (citing Marantz, 687 F.3d at 332).

In addition, district courts within the Seventh Circuit will need to thoroughly address loss of earnings provisions within the definition of disability. In other words, if a claimant must demonstrate that they can no longer earn a certain percentage of their pre-disability income, then courts must elaborate why the claimant does or does not meet that requirement.

District courts must also meaningfully consider an occupation’s cognitive demands when weighing a claimant’s inability to perform their occupation as it is normally performed, not just the physical demands.

Finally, the Seventh Circuit dispelled LINA’s argument that Scanlon’s occupation could be performed without sitting for prolonged periods or at all. LINA, relying on the Seventh Circuit’s prior decision in Cheney v. Standard Ins. Co., 831 F.3d 445 (7th Cir. 2016), argued that the inability to perform one task does not always equate to total disability. The Seventh Circuit disagreed, stating that LINA failed to explain how Scanlon could perform his job while standing for most of the day in light of the occupation’s classification as sedentary, which by nature requires sitting for significant periods of time. Scanlon, 81 F.4th at 678-79. Moreover, the evidence of record made clear that Scanlon’s occupation required extended sitting at a computer; and chronic pain prevented him from both sitting and standing for lengthy amounts of time. Id. at 679. Therefore, the Seventh Circuit’s clarification regarding Cheney demands that disability insurers that attempt to argue a claimant’s occupation can be performed at a differing level than the norm must provide evidence supporting same.