South Carolina Lawyer
SC Lawyer, January 2009, #1.
When Benefit Administrators Have Conflicts of Interest Supreme Court Weighs in on the Proper Standard of Review
South Carolina LawyerJanuary 2009When Benefit Administrators Have Conflicts of Interest Supreme Court Weighs in on the Proper Standard of Review"So standards of review do matter, for in every context they keep judges within the limits of their role and preserve other decision-makers' functions against judicial intrusion. But deference has a particular significance in the context of ERISA."-Judge Wilkinson, Evans v. Eaton Corp. Long Term Disability Plan, 514 F.3d 315, 318 (4th Cir. S.C. 2008).
Though often described as a comprehensive and reticulated statutory scheme, the Employee Retirement Income Security Act of 1974 (ERISA) suffers from significant gaps in its application to employee benefits administration. One of the more important omissions can be found in the absence of a specified standard of review for courts to apply when evaluating benefit claims denials.
Thus, though ERISA authorizes an employee to file suit in federal court to recover benefits due under the terms of a benefit plan, see, 29 U.S.C. §1132(a)(1)(B), the statute fails to set forth the standard for federal district courts to apply when evaluating claims under the statute. To fill this void, the federal courts have endeavored to develop a standard of review that shows proper regard for the statutory purpose of protecting benefit entitlements while at the same giving appropriate deference to benefit decisions by plan fiduciaries.
This article will set forth the basic paradigm for judicial review of benefit denials as developed in the Fourth Circuit and explore changes in that paradigm implicated by the recent Supreme Court decision in Metro. Life Ins. Co. v. Glenn, S. Ct. 2343 (2008). Particular attention will be given to the potential effect the decision may have in augmenting the list of factors articulated by the Fourth Circuit as appropriate in evaluating benefit decisions for an abuse of discretion.
The basic standard of review dichotomy
Until its recent decision in Metro. Life Ins. Co. v. Glenn, 128 S. Ct. 2343 (2008), the U.S. Supreme Court had only once provided guidance on what standard of review should apply in judicial review of employee benefit claim denials under ERISA. In that earlier decision, the Supreme Court held that a district court should apply a de novo standard of review unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. See Firestone Tire & Rubber Co. v. Bruch, 109 S. Ct. 948 (1989).
In a sense, therefore, the question of the applicable standard of review to be applied by district courts when reviewing an ERISA plan's denial of benefits appeared reducible to a simple dichotomy. Following Firestone, if the plan conferred discretion upon the fiduciary, then the district would review the benefit decision for an abuse of discretion - if not, the review would be de novo.
Things were not to be so simple. In the years following Bruch, the circuit courts divided on how to implement an important, but enigmatic, proviso in the opinion relating to conflicts of interest. In the words of the Court:
if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a "facto[r] in determining whether there is an abuse of discretion." Bruch, 109 S. Ct. 948, at 957 (citing, Restatement (Second) of Trusts § 187, Comment d (1959). The Court left this issue open for resolution by the federal judiciary.
A practical example
To bring the issue into practical terms, consider the situation presented where an employer provides a group disability benefit through an insurance policy issued by a disability insurance carrier. Assume that the terms of the policy designate the carrier as the claims administrator and confers discretion upon the carrier as such to interpret the terms of the plan. Thus, under the terms of its policy, the carrier both determines whether to pay claims and funds the claims that it pays. (Similar instances can arise under other forms of ERISA benefits plans where a claims administrator of an ERISA plan also funds the plan benefits.)
If a plan participant's claim for disability benefits is denied, does the carrier operate under a conflict of interest? Should this matter, and if so, what should be the effect upon judicial review of the decision? The Glenn decision addresses these issues...