Alert June 24, 2008

U.S. Supreme Court Holds That an Insurer which Both Decides Eligibility for ERISA Benefits and Is Responsible for Paying Eligible Claims Has a Structural Conflict of Interest which Should Be Determined on a Case-by-Case Basis

The U.S. Supreme Court (the “Supreme Court”) affirmed by a 6-3 margin an appellate court decision to set aside an insurer’s denial of disability benefits.  Justice Breyer’s majority opinion – joined by Justices Stevens, Souter, Ginsburg, and Alito – addressed the appropriate level of judicial review of an insurer’s decision to deny disability benefits where the insurer determined eligibility for benefits and, as is common today, also was the entity responsible for paying valid claims.  The Breyer majority was joined in its reasoning (but not holding) by Justice Kennedy, and in its holding (but not reasoning) by Chief Justice Roberts.  The Supreme Court held that lower courts should continue to review denials of ERISA benefits under an abuse of discretion standard where an insurer is granted discretionary authority by a plan document, but that the existence of an insurer’s conflict of interest should be weighed as a factor indicative of abuse on a case-by-case basis, even in the absence of any evidence that the conflict actually influenced the specific decision to deny benefits.

The facts of the case are as follows:  respondent was diagnosed with a heart condition, severe dilated cardiomyopathy, that caused shortness of breath and fatigue.  The disability insurer, who was granted discretion under the applicable plan documents to determine eligibility and who was responsible for the payment of appropriate benefits, granted respondent’s initial claim for the plan’s standard 24 month benefit allowance.  The insurer directed the respondent to a law firm to assist her with obtaining Social Security benefits; she was ultimately granted permanent Social Security disability benefits.  The insurer then denied a subsequent application by the respondent for additional plan benefits, finding that respondent failed to meet the heightened standards for such benefits because she was “capable of performing full-time sedentary work.”  Respondent sought review by a district court, but was denied relief.  She appealed, and the Sixth Circuit Court of Appeals set aside the insurer’s denial of benefits, finding that the insurer abused its discretion based, in part, on its conflict of interest in both determining whether benefits are payable and then being liable to pay eligible benefits.  The appellate court also determined that the decision should be set aside for reasons unrelated to the purported conflict, such as the insurer’s alleged failure (i) to properly take into account the contrary finding by the Social Security Administration and other physicians, (ii) to consider additional evidence of the impact of stress as an aggravating factor on respondent’s condition, and (iii) to provide all treating physician reports to its own experts.

In affirming the decision of the appellate court, the Supreme Court’s majority opinion followed its earlier decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).  It agreed that the proper standard of review of the insurer’s denial was whether the insurer abused its discretion.  It held that under the specific circumstances of the case, the insurer had abused its discretion.  The majority opined on an issue left open in Firestone, namely, the proper approach a district court should take where an insurer with discretion over eligibility is also responsible for payment of eligible awards. 

The majority first found that such an insurer is conflicted under ordinary principles of trust law, which it held to be encompassed in this regard in ERISA’s articulation of fiduciary standards.  The majority then set out to describe how that conflict should be taken into account by reviewing courts.  It stated that the conflict should be one of several factors weighed by the district court on a case-by-case basis, with the conflict being afforded more or less importance based on the particular facts of the case.  Justice Breyer stated that the conflict should have more importance where circumstances indicate that its existence affected the benefits decision making process, such as where an insurer has “a history of biased claims administration.”  Alternatively, the majority opinion explained that the conflict “should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by 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 majority was clear that it was not issuing “a detailed set of instructions” for the district courts. 

In a separate opinion, Justice Kennedy agreed with the majority’s standard, but disagreed in the result, finding that the matter should be remanded to the court below for further proceedings to reconsider the insurer’s decision in light of the newly articulated framework.  In contrast, the majority held that the ultimate decision of the court below was consistent with the majority’s standard, even if the appellate court did not apply the specific review contemplated, which thus obviated the need for further proceedings. 

Chief Justice Roberts concurred in the judgment of affirmance based on his view that the insurer’s denial of benefits was properly set aside as a result of those factors identified by the Sixth Circuit other than the conflict issue.  The Chief Justice did not join the majority’s framework for evaluating an insurer’s purported conflict.  He criticized the approach as “imprecise,” “overbroad,” and “indeterminate.”  He argued that “certainty and predictability are important criteria under ERISA” and that the type of conflict that will now be subject to a case-by-case determination is “a common feature of ERISA plans.”  In the Chief Justice’s view, a reviewing court should only hold that a conflict of interest supports a finding of abuse of discretion where “the conflict actually motivated or influenced the claims decisions.” 

Justice Scalia dissented, joined by Justice Thomas.  The dissenters would have held that “a fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision.”  (Emphasis added.)  Justice Scalia noted that any other standard would depart from the common law of trusts, and also lead to a scenario where an insurer operating under a structural conflict could have its discretion overturned for the same decisions that would not be called into question by an administrator without a similar perceived conflict.  Unlike Chief Justice Roberts, however, Justice Scalia would have reversed the decision below with respect to the grounds unrelated to the conflict issue.

All nine justices agreed that the abuse of discretion standard controls even where a plan fiduciary is alleged to have a conflict of interest in eligibility determinations.  However, the majority opinion acknowledges that the weight to be given such conflict on any specific eligibility determination will be decided case-by-case.  This may lead to inconsistent standards in the short run as district courts wrestle with specific fact patterns.  Additionally, insurers and other plan administrators with dual responsibility for determining eligibility and paying claims will now have occasion to consider whether their practices fit within the newly articulated framework should their decision to deny benefits be challenged in court.  (Metropolitan Life Insurance Co. v. Glenn, No. 06-923 (S. Ct. June 19, 2008).)

Earlier this session, the Supreme Court addressed a separate question under ERISA relating to the ability of participants of defined contrissution plans to sue for losses to their individual accounts .  Goodwin Procter’s client Alert on the prior decision can be found here.  http://www.goodwinprocter.com/~/media/C876A66A22DA409E8767F11C548645EA.ashx.  Goodwin Procter litigators have been at the forefront of these and other cutting edge ERISA cases.  The slides and audio of a general overview of trends in ERISA litigation as presented by Goodwin Procter’s practitioners in February 2008 is available here.