August 04, 2008

In Metropolitan Life Insurance Company v. Glenn, issued on June 19, 2008, the U.S. 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 6th Circuit overturned the decision of the district court and found that MetLife had improperly denied benefits to the employee. The 6th 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 6th 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 6th 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 6th 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.

¹ Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 384 n.15 (2002).