Claim Decisions Must Be Reasonable and Accurate

Claim Decisions Must Be Reasonable and Accurate

Chicago Daily Law Bulletin
June 1, 2009

by MARK D. DEBOFSKY

The 1st U.S. Circuit Court of Appeals has issued a major ruling on how courts are to assess employee benefit claim decisions made within the context of ERISA. In Denmark v. Liberty Life Assur.Co. of Boston, 2009 U.S.App.LEXIS 9825 (May 6), the court revisited an earlier ruling in a disability benefits claim involving fibromyalgia (Denmark v. Liberty Life Assur. Co., 481 F.3d 16 (1st Cir. 2007)), which was reheard following the Supreme Court's issuance of Metro.Life Ins.Co. v. Glenn, 128 S.Ct. 2343 (2008).

The court began its discussion by stating, "The focal point of this appeal has become the standard of judicial review." The court traced the development of that issue in ERISA litigation since Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S. Ct. 948, 103 L. Ed. 2d 80 (1989), which filled the statutory void that existed due to Congress' failure to specify an ERISA standard of review. Invoking trust law principles, Firestone allowed for a deferential review in situations where the applicable ERISA-governed plan vests discretion in the plan administrator, but specified, as a default, the de novostandard in cases where the plan lacks discretion-vesting language. Firestone also ended its discussion by noting in dictum, "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'" (quoting Restatement (Second) of Trusts § 187 cmt. d (1959)). As the 1st Circuit then pointed out, "For the next eighteen years, courts struggled both with this dictum and with how to handle structural conflicts of interest in ERISA cases."

Some courts took the position that the structural conflict was a factor only if there was an actual conflict that influenced the claim determination, while other courts deemed the mere existence of a structural conflict sufficient to shift the burden to the plan administrator to justify that its actions were not the result of a conflict. Many circuits, including the 1st Circuit inDoyle v. Paul Revere Life Insurance Co., 144 F.3d 181 (1st Cir. 1998), applied the Firestone dictum to imply the application of a heightened standard, giving less deference to a conflicted administrator where the degree of deference would be diminished, and that the deference would be lowered to the extent proof was adduced showing that an actual conflict affected the determination. The circuit also applied a "reasonableness" standard in such cases, upholding the claim determination unless it found it to have been unreasonable. Subsequently, in Pari-Fasano v. ITT Hartford Life & Accident Insurance Co., 230 F.3d 415 (1st Cir. 2000), the First Circuit concluded the terms "abuse of discretion," "arbitrary and capricious," and "reasonableness" were functionally equivalent in the ERISA context. That ruling also remarked, "the possible existence of a conflict of interest would necessarily affect the court's determination of what was reasonable conduct by the insurer under the circumstances."

All of this was called into question by Glenn. In that ruling, the Supreme Court first required lower courts to "take cognizance of structural conflicts in ERISA cases; that is, that a conflict exists whenever a plan administrator, whether an employer or an insurer, is in the position of both adjudicating claims and paying awarded benefits" (citing Glenn, 128 S. Ct. at 2348-50). The Supreme Court also rejected a "market forces rationale"; i.e., an argument that large corporations would not be affected financially by the structural conflict in individual benefit claims. Glenn then turned to how the structural conflict is to be weighed. While adhering to an abuse of discretion standard of review, the Supreme Court rejected a burden shifting rule, but did hold that "when judges review the lawfulness of benefits denials, they will often take account of several different considerations of which a conflict of interest is one." 128 S.Ct. at 2351. The Court "likened this multi-factor approach to that used in the administrative law context." Explaining its understanding of the Supreme Court's ruling, the 1st Circuit found the combination of factors approach "give[s] a structural conflict some weight but, in the absence of aggravating circumstances (say, evidence of arbitrariness or of actual bias), do not treat it as a dispositive influence."

Applying Glenn, the 1st Circuit explained that the Supreme Court ruling affects two aspects of its prior circuit jurisprudence. First, the court noted that it could not disregard a structural conflict altogether based on a market forces analysis. Second, the court pointed out where there is evidence that a conflict has, in fact, infected a benefit denial, that circumstance could justify a finding of abuse of discretion.

The court then turned to the case before it which it deemed "hair's-breadth close." Thus, because of the change in law, the court chose to remand the matter to the district court to "allow full consideration of how heavily this conflict should weigh in the balance." The court did, however, point out that "courts are duty-bound to inquire into what steps a plan administrator has taken to insulate the decision making process against the potentially pernicious effects of structural conflicts. Hence, in order to assess that issue, the court touched on the issue of discovery. While expressing reluctance to allow full blown discovery because ERISA cases are generally decided based on the record compiled by the plan administrator, good reason to allow discovery may be found when a party makes a colorable claim of bias and discovery could "shed new light on the motivation behind the plan administrator's decision." Thus, while finding that Glennintimates the availability of discovery, the court directed that "such discovery must be allowed sparingly and, if allowed at all, must be narrowly tailored so as to leave the substantive record essentially undisturbed." The court further anticipated that in future cases, plan administrators would include in the records documentation showing the steps taken to avoid the effect of a structural conflict, leaving discovery available "only to the extent that there are gaps in the administrative record." Such discovery would be "limited to the clarification of ambiguities or to ensuring that the documented procedures have been followed in a particular instance." However, in this instance, because there was no such documentation in the record, the court suggested that on remand the district court might allow limited discovery to "flesh out the record."

A concurring opinion by Judge Kermit V. Lipez expressed concern about the court's discussion of discovery since the issue arose at oral argument and had not been briefed. Thus, Judge Lipez characterized the discovery discussion as a "resort to dicta" that was "ill-advised" because it constituted a "[g]eneralization without context." Because the degree of discovery is necessarily case-dependent, the concurrence expressed a desire that such issues be first fleshed out by the district courts, and stated:

"The district court here, and our district courts generally, are fully capable of sorting through, in the first instance, the complicated discovery issues raised by Glenn, and they should not feel bound by the hostile attitude towards discovery that is improvidently reflected in dicta in the majority opinion. Those dicta are not binding on the district courts or future panels of this court."

This is a difficult case to analyze because it is hard to draw guidance from this ruling which, while paying lip-service to trust law, blurs the distinction between trust law and administrative law. An interesting new law review article probes the meaning of the Glenn ruling and offers guidance beyond the Denmark decision, pointing out "the Glenn opinion can be best understood as embracing a more active role for the judiciary in evaluating the administrative record." Harmon, "The Debate Over Deference In The Erisa Setting - Judicial Review Of Decisions By Conflicted Fiduciaries," 54 S.D.Law Rev. 1, 17 (2009). One of the key points often overlooked by courts analyzing ERISA cases is the meaning of the "abuse of discretion" standard of view. In Firestone, the Supreme Court found "no support for the adoption of the arbitrary and capricious standard insofar as [29 U.S.C.] § 1132(a)(1)(B) is concerned." 489 U.S. at 110. The arbitrary and capricious standard is an administrative law standard (See, Childress and Davis, Federal Standards of Review § 15.07 (3d ed. 1999)), yet it has been interpreted in ERISA cases as having no different meaning than the abuse of discretion standard of review. Moreover, the federal courts have described the ERISA arbitrary and capricious standard as more deferential than how it has been explained by the Supreme Court, which is arguably carried over in this decision as well.

Even if the terminology can be used interchangeably, the Supreme Court has repeatedly cited to the trust law abuse of discretion standard (Restatement (Second) of Trusts § 187, Comment d), and also, in Glenn, utilized citations to administrative law to signal that the applicable standard is not as deferential as courts have previously found. The Supreme Court pointed to Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971), and Universal Camera Corp. v. NLRB, 340 U.S. 474 (1951), as guideposts. Overton Park ruled that despite a "presumption of regularity" to which an underlying administrative decision is entitled, the court should nonetheless conduct a "substantial inquiry" and a "thorough, probing, in-depth review." And Universal Camera called on courts reviewing agency decisions to eschew an approach of merely essaying the record to determine whether the claim determination has any rational support. Instead, courts are to ascertain whether the benefit denial is based on "adequate proof" in the record; and judges are to "assume more responsibility for the reasonableness and fairness" of claim determinations. Thus, Harmon notes, "One may reasonably infer that Glenn suggests that ERISA judicial review can be based upon the same searching analysis as described in Universal Camera." By doing so, courts can both achieve significant judicial economy yet recognize the significance and importance of employee benefits. Glenn emphasized the importance of accurate claims processing, and imposed "higher-than-marketplace quality standards" in order to assure that those deserving of benefits receive them. When that standard is held up against the ERISA claim record, fairer results follow. Reasonable is not enough; the claim decision must also be accurate to pass muster.