United States: Supreme Court Addresses Conflicts Of Interest In ERISA Benefit Claims

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:
  
  

• 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.
  
  

• It seems predictable that disappointed claimants will be encouraged:
  
  

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.
  
  

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.