United States: Ninth Circuit Charts Unique, Complex Course Involving Plan Administrator With A "Structural Conflict Of Interest"

In Abatie v. Alta Health & Life Ins. Co., __F.3d__ (9th Cir. 2006), 2006 U.S.App. LEXIS 20829, the Ninth Circuit, in an en banc decision, charted a complex, unique course. The court addressed the commonplace situation where a plan administrator, such as an insurance company, has an inherent conflict of interest because it acts as both the administrator deciding claims reviews and the funding source for benefits. The court called this a "structural conflict of interest." The court held that, if the plan vests the administrator with discretionary authority, the abuse of discretion review applies, tempered by skepticism commensurate with the conflict of interest. The participant need not present material, probative evidence showing that the administrator’s self-interest caused a breach of fiduciary obligations. The Ninth Circuit no longer places that burden on the participant. Instead, the judge must review the administrator’s decision for abuse of discretion in light of the nature, extent, and effect on the decision-making process of any conflict of interest that may appear the record. This will require a careful, case-by-case balancing.

In essence, the Ninth Circuit is requiring a trial within a trial, with the burden on the plan administrator to prove the structural conflict did not affect its decision. The judge must consider all of the facts and circumstances in determining how much or how little to credit the administrator’s reasons for denying benefits. The level of skepticism given the administrator’s decision may be low if the conflict is unaccompanied, for example, by any evidence of malice, self-dealing, or a parsimonious claims-granting history. A judge may weigh a conflict more heavily if, for example, the administrator provides inconsistent reasons for denial; fails adequately to investigate a claim or asks the participant for unnecessary evidence; fails to credit a participant’s reliable evidence; or has repeatedly denied benefits to deserving participants by interpreting plan terms incorrectly, or by making decisions against the weight of evidence in the record. The judge should make "something akin to a credibility determination" about the administrator’s reason for denying coverage under a particular plan and a particular set of medical or other records. __ F.3d at __.

The Ninth Circuit explained that the plan administrator, facing closer scrutiny, may find it advisable to bring forth affirmative evidence that any conflict did not influence its decision-making process. For example, the administrator might demonstrate that it used truly independent medical examiners or a neutral, independent review process; its employees do not have incentives to deny claims; it has interpreted the plan consistently among participants; or it has minimized any potential financial gain through the structure of its business (through a retroactive payment system, for example). Further, the judge may, in the exercise of discretion, consider evidence outside the administrative record in deciding how much weight to give a conflict of interest. The judge’s decision on the merits, however, must rest on the administrative record. The court described its new, "comprehensive approach" to conflicts of interest as being "substantially similar to that adopted by several other circuits, but with a conscious rejection of their ‘sliding scale’ metaphor." It stated: "… in any given case, all the facts and circumstances must be considered and nothing ‘slides," so we find the metaphor unnecessary and potentially confusing." Id. at ___.

The Ninth Circuit also addressed the application of the abuse of discretion review when the plan administrator has not fully complied with ERISA’s procedural requirements for claims handling. __ F.3d at __. In the case before it, the administrator placed last-minute reliance on a new ground for denial of benefits. That tactic afforded the participant no opportunity to rebut evidence in advance of the administrator’s final decision. Different concerns arise in such a situation, the court wrote. In the rare class of cases where the administrator engages in wholesale and flagrant violations of ERISA's procedural requirements, the judge should review the administrator’s decision to deny benefits de novo. A procedural irregularity in processing a benefit claim, however, does not usually trigger a de novo review. The judge should weigh a procedural irregularity, similar to a conflict of interest, when deciding whether the claim denial was an abuse of discretion. The judge also may have to consider evidence outside the administrative record. For example, where the administrator has not conducted a full and fair review of a denial of benefits, the judge should permit the participant to introduce additional evidence in the court proceeding. The participant does not have to go through the administrative appeal procedure again. The judge may, in essence, recreate what the administrative record would have been had the procedure been correct, and then make the decision on the merits based on the new, expanded record. Id. at ___.

The article will appear in the September 2006 edition of Matthew Bender's Labor and Employment Bulletin and in the Fall Update for Employee Benefits Guide.

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