Supreme Court Limits Deference for ERISA Claims Denials by Fiduciaries with Conflicts of Interest
Since the landmark decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), courts have struggled with the issue of the level of deference to accord to a fiduciary's claims denial decision when that fiduciary is operating under a conflict of interest. The Circuit Courts have differed not only on the methodology to be employed in weighing the effect of such conflicts, but also on the extent to which conflicts exist at all. The Supreme Court has once again entered this field in its decision in Metropolitan Life Ins. Co. v. Glenn, (No. 06-923, June 19, 2008), adopting a broad view of those situations involving a conflict of interest, and requiring courts to take such conflicts into account on a case-by-case, situation specific basis. While technically preserving the deferential standard originally set forth in Firestone, the Court's decision in Glenn will likely subject fiduciary claims decisions to greater judicial scrutiny under ERISA.
In Glenn, the Court addressed a situation in which Metropolitan, acting as both plan administrator and insurer of a disability plan maintained by Sears, Roebuck & Company, processed a claim for disability benefits by a Sears employee with a heart condition. Metropolitan initially approved short term disability benefits for the employee on the basis of opinions from a number of doctors that the employee was incapable of performing any kind of work. The disability plan provided for an offset of benefits if a participant also received Social Security disability payments, and Metropolitan specifically encouraged the employee to file an application under the Social Security disability insurance program. The Social Security Administration granted her application, finding her totally unable to work, and Metropolitan thereupon deducted the amount of her Social Security payments from the short term disability payments she received from the plan. At the end of the employee's short term disability coverage period, Metropolitan re-examined her status to determine her eligibility for long-term disability payments. Despite both the findings of a majority of physicians and the decision of the Social Security Administration, Metropolitan concluded that the employee was able to perform other jobs, and therefore was not entitled to long-term disability benefits. Evidence produced in the District Court indicated that, in denying this claim, Metropolitan ignored medical opinions contrary to its conclusion and failed to provide complete information of the employee's medical status to its internal medical experts.
Despite the shortcomings of Metropolitan's claims appeal process, the District Court upheld the claims denial. In doing so, it relied on the Supreme Court's conclusion in the Firestone decision that courts must defer to claims decisions by fiduciaries possessing interpretive discretion over plan terms unless such decisions are found to be arbitrary and capricious. On appeal, the Sixth Circuit reversed, relying in part on another portion of the Firestone decision stating that the presence of a conflict of interest is a factor a court can consider in determining whether to defer to a fiduciary's claims decision. The Sixth Circuit found that Metropolitan, as both administrator and insurer, operated under such a conflict, that Metropolitan's decision was not as a result entitled to deference, and that in any event, Metropolitan had abused its discretion in denying the employee's claim.
Writing on behalf of himself and Justices Stevens, Souter, Ginsburg and Alito, Justice Breyer confirmed that under the Firestone decision, courts should continue to be guided by trust law in determining the appropriate standard of review for reviewing denials of benefits. Under the Restatement of Trusts, according to Justice Breyer, a benefit plan that is operated under a conflict of interest requires that "that conflict must be weighed as a 'factor in determining whether there is an abuse of discretion." Glenn at 5 (quoting Firestone, at 115). What Firestone left unclear, however, was when such a conflict arises and the manner in which courts must take such conflicts into account.
The decision in Glenn is very clear on the issue of when a conflict arises – it occurs whenever the claims decision maker has an interest at odds with the interest of plan participants and beneficiaries. All nine justices agreed that an insurance company that both administers and insures a plan operates under such a conflict. Seven of the justices concluded that an employer that both administers and self-funds a plan also operates under such a conflict (with Justices Scalia and Thomas stating that this issue did not need to be decided based on the facts of the case).
Less clear from the decision is how courts should take the presence of a conflict into account. Essentially, the majority adopted a totality of the circumstances test to be used in reviewing denial of benefits. In giving weight to the conflict of interest factor, a reviewing court should take into account the circumstances particular to each case. Thus, courts should give more weight to the conflict of interest when the circumstances demonstrate that the conflict affected the decision to deny benefits, and give less weight to the conflict if "the administrator has taken active steps to reduce potential bias and to promote accuracy." Glenn at 11. The majority noted, for example, that the effect of a conflict (although not the existence of the conflict itself) could be reduced if an insurance company could show that it has adopted structures or practices to wall off the claims processing function from those portions of its operations concerned with finances. In the majority's view, this case-by-case approach was completely consistent with trust law, and would not result in diminishing the deferential standard originally announced in the Firestone decision. Applying this new standard to the facts in Glenn, the Court found that that Sixth Circuit correctly took the conflict of interest into account, along with other factors, in determining that the insurance company abused its discretion in denying benefits to the employee.
The concurring and dissenting opinions issued by the remaining Justices highlight some of the difficulties that the majority's approach may cause. Justice Kennedy agreed with the review framework presented in the majority's opinion but recognized that the majority had established a new standard of review. He therefore dissented from the judgment, arguing that the case should be remanded so that Metropolitan would have the opportunity to demonstrate, for example, that it had adopted the types of "walling off" structures mentioned in the majority opinion. Justice Scalia, dissenting along with Justice Thomas, stated that, under the law of trusts supposedly relied upon by the majority, a conflict of interest would be relevant only for determining if the administrator abused his discretion by acting with an improper motive. Because the majority's approach does not require such an inquiry, all decisions made by administrators playing a dual role would subject to review without full deference. Chief Justice Roberts, concurring in the judgment (because he believed that Metropolitan had acted arbitrarily regardless of the standard of review), also agreed that, under trust law, there must be some evidence that the conflict played a role in the claims denial before subjecting the claims denial to a less deferential standard of review.
In issuing its decision in Glenn, the Court has continued its 2008 pattern of eliminating or limiting the protections previously afforded to plan fiduciaries under the court's prior ERISA decisions. Earlier this year, the Court re-evaluated previous holdings and opened the door for individual suits for damages against plan fiduciaries. See LaRue v. DeWolff Boberg & Associates, Inc. (No. 06-856, February 20, 2008). In Glenn, the Court (through same five justice majority that had issued the main opinion in LaRue) conducted a similar re-evaluation in the claims denial area. In our view, the net effect of the Glenn decision will be to subject more fiduciary claims decisions to a greater frequency of judicial review and a higher level of judicial scrutiny. It is clear that all of the Circuits will have to reassess the approaches they have adopted in the claims review area after Firestone. Further, because the types of conflicts identified by the majority decision occur as a structural matter in the case of almost every plan, there may also be a premium placed on identifying and implementing the types of conflicts walls described by the Court. In any case, by adopting an expansive view of practices constituting a conflict of interest, and requiring courts to consider the effect of such conflicts on a case-by-case basis, we believe that the Court has effectively reduced the extent to which courts will defer to fiduciary claims decisions going forward.
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