Sometimes an overview of developing case law can reveal commercial risks that may not be apparent from the individual cases themselves. Life and health insurers may find such risks in the case law concerning fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).
The U.S. Courts of Appeals, for example, have been deferential to insurers that both fund employee welfare plans regulated by ERISA and assume responsibility as fiduciaries in determining whether claims against such plans are valid. Where the courts of appeals have considered what standard of review the district courts should apply when asked to consider a decision to deny benefits made by an insurer in this circumstance, they have held that a deferential standard should be applied, even where they see a conflict of interest between the insurer’s self-interest and its duty to the plan beneficiary.1
This standard of review differs sharply from the standard applied when an insurer defends its decision to deny an insured’s claim under an insurance contract issued outside the context of an ERISA-regulated plan. When an insured’s challenge presents an issue of contract interpretation, the courts outside the ERISA context resolve the benefit of the doubt in favor of the insured, while in the ERISA context they resolve the benefit of the doubt in favor of the insurer.2
Encouraged by this favorable standard of review, some insurers readily accept the responsibility of a fiduciary in connection with ERISA plans, assert that they play a fiduciary role, and even concede that they have a conflict of interest in their decisions with respect to benefit claims.3 A broad view of ERISA case law suggests, however, that insurers may face significant economic risks if they assume fiduciary responsibilities in making claims determinations for plans that they fund, without taking adequate precautions to avoid prohibited conflicts of interest.
These risks are highlighted by the observation of the Second Circuit that ERISA "protects beneficiaries by prohibiting transactions tainted by a conflict of interest," declaring that fiduciaries must either avoid such transactions with the ERISA plan or cease serving in their capacity as fiduciaries, "no matter how sincerely they may believe that such transactions will benefit the plan."4 This strict interpretation of ERISA has been matched by equally strict decisions enforcing ERISA’s provisions prohibiting fiduciary transactions that involve conflicts of interest.5
The economic risks posed by potential conflicts of interest are exacerbated by a line of federal cases holding that, where a fiduciary receives plan assets in connection with a transaction that violates ERISA’s conflicts provisions, the fiduciary must disgorge any assets that the fiduciary retains after it has paid plan benefits.6 Without some modification, this case law could have a confiscatory impact on an insurer that is found to have violated ERISA’s conflicts provisions and has received premiums paid with plan assets. Such assets may include amounts that an employer has withheld from a participant’s wages for contribution to the plan.7
The seriousness of the litigation risk posed by ERISA’s conflicts provisions depends greatly on an insurer’s specific relationship with an ERISA-regulated plan. Moreover, ERISA appears to offer several ways in which the required protection of beneficiary interests can be achieved. Litigation risks may be moderated or avoided by means that have varying potential benefits and costs, ranging from the designation of employees who are willing and able to serve as plan fiduciaries, to the avoidance of any actual or perceived fiduciary responsibility altogether. Before appropriate steps can be taken to moderate the economic risks posed by ERISA’s fiduciary requirements, however, it is necessary to identify the risks.
One commentator has wryly characterized the oft-repeated description of ERISA as a "comprehensive and reticulated statute" as "a fancy way of pointing out that the Act’s provisions and their related regulations are lengthy and confusing."8 Disagreements among the appeals courts also have contributed to uncertainties about the proper application of the statute.9 Resulting uncertainties in turn may have contributed to an apathy among those who could be charged with violating fiduciary duties under ERISA. One consultant has observed that a surprising number of persons "do not realize they are, in fact, fiduciaries. Even more surprising are those who understand they are fiduciaries but treat their responsibilities cavalierly."10
While the case law concerning ERISA fiduciary duties is still being developed in significant ways, it has become possible to summarize the case law bearing on the potential liabilities of insurers that provide services to ERISAregulated plans. Foley has published such a summary, entitled A Short Guide for Insurers to ERISA Fiduciary Status. This guide is designed to provide a bird’s-eye view of the field for insurers, and it may serve as a useful tool for an insurer to identify activities that carry heightened risks of liability. To obtain a copy of the guide, or to obtain additional information about the specific risks discussed above, you are invited to contact the author, Wm. Carlisle Herbert at wherbert@foley.com or 312.832.4551.
Footnotes
1 See, e.g., Fought v. Unum Life Insurance Co. of America, 379 F.3d 997, 1006 (10th Cir. 2004); Pinto v. Reliance Standard Life Insurance Co., 214 F.3d 377 (3d Cir. 2000).
2 Compare, e.g., Aschenbrenner v. United States Fidelity & Guaranty Co., 292 U.S. 80, 85 (1934) (where the contract language "is reasonably open to two constructions, that more favorable to the insured will be adopted") and Brown v. Blue Cross and Blue Shield of Alabama, Inc., 898 F.2d 1556, 1566-67 (11th Cir. 1990) ("a wrong bu apparently reasonable interpretation" will be upheld if the insurer of an ERISA plan "justifies the interpretation on the grounds of its benefit to the class of all participants and beneficiaries").
3 See, e.g., Fought, 379 F.3d at 1007 (conceding conflict of interest); Winkler v. Metropolitan Life Insurance Co., 340 F. Supp. 2d 411 (S.D.N.Y. 2004) (asserting fiduciary status to obtain favorable standard of review).
4 Lowen v. Tower Assets Management, Inc., 829 F.2d 1209, 1213 (2d Cir. 1987).
5 See, e.g., ERISA Section 406(b)(2), 29 U.S.C. § 1106(b)(2); Leigh v. Engle, 727 F.2d 113, 132(7th Cir. 1984) (fiduciaries were prohibited from making investments of plan assets that yielded an "extraordinary return" to the plan where the investments also benefited investors with whom the fiduciaries had close ties); Arakelian v. National Western Life Insurance Co., 680 F. Supp. 400, 406-07 (D.D.C. 1987) (insurer violated ERISA when it caused plan to invest in contracts issued by the insurer, because the insurer and plan beneficiaries had conflicting interests under the contracts).
6 Patelco Credit Union v. Sahni, 262 F.3d 897 (9th Cir. 2001), following the decisions of several district courts.
7 29 C.F.R. § 2510.3-102(a)&(c).
8 Willis J. Goldsmith, "Recent Developments in Cash Balance Plan Litigation," Benefits Law Journal, Vol. 14, No. 1, p. 129 (Spring 2001).
9 See, e.g., Pinto, 214 F.3d at 384-387 (reviewing varying standards adopted by courts of appeals for reviewing claims determinations of an insurer that both administers and pays benefits under an ERISA plan).
10 Elizabeth A. Rutherford, "Fiduciary Liability 101: Do You Pass?" Employee Relations Law Journal, Vol. 24, No. 3, p. 134 (Winter 1998).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
