Originally published July 1, 2008
In Metropolitan Life Insurance Company v. Glenn (click here for the opinion), issued on June 19, 2008, the United States Supreme Court ruled that when a ERISA fiduciary responsible for determining in its discretion eligibility for benefits under an employer plan is also the party financially responsible for paying claims under that plan, a structural conflict of interest exists that must be taken into consideration by courts when reviewing benefit denials.
In reaching its decision, the Court looked back to the principles of judicial review it had set forth in Firestone Tire v. Bruch in 1989. In Firestone, the Court concluded that:
- The appropriate standard of review for ERISA benefit
denials should be guided by principles of trust law;
- Under those principles, courts should apply de
novo review to a benefit denial unless the plan provides
to the contrary;
- Where the plan provides to the contrary by granting a
fiduciary discretionary authority to determine benefit
eligibility, a more deferential abuse of discretion standard
should be applied; but
- A conflict of interest on the part of a fiduciary with
discretionary authority must be weighed in determining
whether there was an abuse of discretion.
Since that decision, lower federal courts followed a range of approaches to judicial review when a conflict of interest was present.
In Glenn, an employee was diagnosed with a severe heart condition. MetLife, the insurance company administering the plan on behalf of the employer, determined that she qualified for short term benefits. MetLife also suggested that the employee apply for federal Social Security disability benefits (an offset to benefits under the employer's long term disability plan), for which she subsequently applied and qualified. The employee then applied for benefits under the employer's LTD plan. MetLife denied her claim for the extended benefit because it found that she was "capable of performing full time sedentary work." The employee appealed her claim, but the appeal was also denied. The employee subsequently brought suit in federal district court under section 502 of ERISA, seeking judicial review of MetLife's denial of benefits. The District Court denied her relief.
The U.S. Court of Appeals for the Sixth Circuit overturned the decision of the District Court and found that MetLife had improperly denied benefits to the employee. The Sixth Circuit based its holding on a variety of factors such as the structural conflict of interest and certain fact findings specific to the particular decision made, including that the insurer did not take account of the Social Security disability determination, emphasized certain medical reports and deemphasized others, and did not provide all relevant evidence to its independent medical experts.
The Supreme Court upheld the Sixth Circuit's opinion. The Court reiterated that where a plan administrator both evaluates claims for benefits and pays approved claims, there exists an inherent conflict of interest. The Court found that this structural conflict of interest was permissible under ERISA but should be considered as a factor in reviewing the decision-making of the conflicted party. MetLife argued that this conflict does not necessarily exist where an insurance company, as opposed to the employer, is the plan administrator, due to marketplace incentives on an insurer to provide accurate claims processing. Among these incentives is the ability to pass on to employers the costs of paying out claims, therefore not necessarily paying claims "out of pocket." The Court found that the conflict is still a factor because the employer's conflict might extend to its selection of an insurance company, where it might be more interested in hiring an insurance company with lower rates as opposed to accurate claims processing. The Court also noted that ERISA itself imposes higher than marketplace standards on insurers.
The Court emphasized that the deferential abuse of discretion standard of review for denial of claims under Firestone remains in place, rather than de novo review, but stated that courts must look at the severity or significance of the conflict in individual cases. The conflict would thus be weighed as a factor, among many, that judges should take into account in determining whether there is an abuse of discretion by the plan administrator. The Court listed examples of other potential factors, such as "a history of biased claims administration." The Court also noted that the conflict of interest would be less important, perhaps to "the vanishing point," where an administrator has taken steps to ensure accurate and fair claims administration, such as "walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision-making irrespective of whom the inaccuracy benefits."
The Court was forthright that its approach "does not consist of a detailed set of instructions." Indeed, in their separate opinions, Chief Justice Roberts and Justice Scalia colorfully characterized the majority's approach as, respectively, a "kitchen-sink approach" or a "gestalt reasonableness standard" under which all the facts and circumstances are "chucked into a brown paper bag and shaken up to determine the answer." Given the thousands of benefit determinations made daily by dual-hatted benefit administrators, this approach does not bode well for the lower courts, for plan sponsors, and perhaps ultimately for plan participants and beneficiaries (other than otherwise unsuccessful claimants who prevail post-Glenn).
- The circuits had previously applied a range of approaches
to this issue – that such a conflict of
interest:
- Was generally irrelevant on judicial review, or
- Was a relevant factor to be weighed under the abuse of
discretion standard, perhaps with the degree of deference
accorded the fiduciary sliding with the seriousness of the
conflict, or
- Shifted the burden of proof to the fiduciary to
establish that its decision was reasonable, or
- Changed the standard on judicial review from abuse of
discretion to de novo.
- In the choice it made between the usual jurisprudential
poles of certainty and accuracy, the Court has no doubt
touched off further litigation, the cost of which may well
erode the plan resources available to provide benefits to
participants and beneficiaries. While courts had generally
been following the precepts of Firestone in
evaluating claims of bias in ERISA benefit litigation,
Glenn raises or reopens a number of questions.
- The majority opinion ratified the analytic approach taken
by the Sixth Circuit in Glenn, but may provoke
reconsideration of a number of issues otherwise settled in
the lower courts.
- For example, the lower courts had regularly concluded
that a structural conflict does not arise in the case of
funded retirement and other plans, where benefit
determinations generally do not affect the financial
results of either the plan sponsor or any third-party
benefits administrator. Those courts may be asked to
reconsider their conclusions in light of Glenn. In
particular, the Court's dictum that a conflict
exists where the employer both "funds the
plan and evaluates the claims" may spark further
litigation of that point, including in circuits that had
concluded to the contrary.
- Similarly, the Court's opinion may make
relevant the materiality of each individual claim to the
economic condition of the conflicted fiduciary.
- As a relevant factor in overturning the benefits
denial, both the Sixth Circuit and the Court pointed to
MetLife's failure to take account of the Social
Security Administration's finding of disability. In
2003, however, the Court held that benefit decisions need
not accord with the SSA's disability determination.
Black & Decker Disability Plan v. Nord, 538
U.S. 822 (2003). The interrelationship between
Glenn and Nord will no doubt be
contested.
- The Glenn Court rejected the explicit demand
for a de novo standard of review or for a shift in
the burden of proof or other "special procedural or
evidentiary rules" in the event of a structural
conflict. It remains to be seen, however, "just how
deferential the review can be when the judicial eye is
peeled for conflict of interest"1 as
instructed in Glenn, even in those circuits that
had taken such a conflict into account among the other
relevant facts and circumstances under the abuse of
discretion standard.
- It seems predictable that disappointed claimants will be
encouraged:
- To continue to argue for discovery of a "history
of biased claims administration" or of potential
conflicts on the part of the fiduciary, notwithstanding
existing authority limiting discovery, and
- Perhaps even to test the extent to which the
dual-hatted status of the fiduciary alone might be decisive
on judicial review.
It may be a challenge for the lower courts to apply Glenn in a manner that appropriately balances the conservation of judicial and plan resources in the overall context of the federalization of claims litigation.
- Accordingly, plan sponsors and administrators are well
advised to consider whether existing structures and processes
intended to insulate benefit determinations from the
hypothetical effects of structural conflicts might be
strengthened.
- Benefit determinations are necessarily made by either
employees of the plan sponsor (often sitting as a benefit
claims committee) or a third party engaged by the plan
sponsor. The Glenn opinion does not reject either
approach.
- Where the plan sponsor is the plan administrator,
Glenn encourages at least the formation of a
benefits claim committee to which the authority to make
benefit determinations on a discretionary basis is
delegated. (Fiduciary insurance for and employer
indemnification of the committee members would ordinarily
seem appropriate.) The Court's opinion directly or
indirectly suggests that officers and employees responsible
for the firm's finances should not be members of
the committee – indeed, that committee members be
"walled off" from the finance area –
and that the performance evaluations of committee members
not be influenced by the effect of their decisions on the
firm's finances. As an extension of that
suggestion, it may be sensible that employees or
consultants charged with improving cost efficiencies in
benefit plans also not be involved in individual benefit
determinations.
- After Glenn, plan sponsors may well reconsider
whether, simply for the appearance of impartiality in the
event of litigation, a third-party administrator is the
preferable approach, particularly for self-funded plans.
The selection of and arrangement with a third-party claims
administrator should not be driven by or provide an
incentive for denial of claims, however.
- The Court's suggestion of creating
"management checks that penalize inaccurate
decision-making irrespective of whom the inaccuracy
benefits" seems right in principle but of doubtful
pragmatic utility, given the discretionary nature of the
decisions made.
- The quality of the information gathering and
deliberative processes for benefit determinations might be
productively reviewed, and periodically monitored, in light
of Glenn.
- Glenn will also encourage written benefit
determinations that:
- Reflect a reasoned and principled decision-making
process,
- Appropriately exclude, if not affirmatively disclaim,
any consideration of the economic effect of the
determination on the conflicted party, and
- Perhaps routinely recite the structures and processes
adopted to insulate the claims determination from the
influence of such conflicts, in the event of any future
review of the claim.
Footnote
1 Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 384 n.15 (2002).
© 2008 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.