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LABOR & EMPLOYMENT LAW — 12/23/08

Dual role of evaluating, paying benefits claims gives rise to conflict of interest

A plan administrator that both evaluates and pays benefits claims operates under a conflict of interest in making discretionary benefit determinations, the U.S. Supreme Court has ruled in a 6-3 decision. The conflict does not change the standard of review of a benefits denial from deferential to de novo, but the conflict should be weighed as a factor in determining whether there was an abuse of discretion, the Court held. Accordingly, the Court affirmed the decision of the Sixth Circuit Court of Appeals, which set aside an administrator's denial of benefits (Metropolitan Life Insurance Co v Glenn, USSCt, No 06-923, June 19, 2008).

Background. Metropolitan Life Insurance Company (MetLife) serves as both an administrator and the insurer of Sears, Roebuck & Company's long-term disability insurance plan, an ERISA-governed employee benefit plan. The plan grants MetLife, as administrator, discretionary authority to determine whether an employee's claim for benefits is valid. At the same time, the plan provides that MetLife, as insurer, will itself pay valid benefit claims.

Wanda Glenn, a Sears employee, was diagnosed with a heart condition and applied for plan disability benefits in June 2000. MetLife concluded that she met the plan's standard for an initial 24 months of benefits. MetLife also directed Glenn to a law firm that would assist her in applying for federal Social Security disability benefits. MetLife would be entitled to receive some of those benefits as an offset to the more generous plan benefits. In April 2002, the Social Security Administration awarded Glenn permanent disability payments retroactive to April 2000. After the 24 months of Sears benefits, MetLife denied Glenn extended benefits because she failed to meet a stricter standard required for such benefits.

Lower court proceedings. After exhausting her administrative remedies, Glenn brought a federal lawsuit, seeking judicial review of MetLife's denial of benefits. The district court denied relief, and Glenn appealed to the Court of Appeals for the Sixth Circuit, which reviewed the administrative record under a deferential standard because the plan granted MetLife discretionary authority to determine benefits. It treated the conflict of interest created by MetLife's dual role as evaluator and payor of benefits as a relevant factor. The Sixth Circuit set aside MetLife's denial of benefits in light of a combination of several circumstances.

Conflict exists. The Court first reviewed the four principles of review set forth in Firestone Tire & Rubber Co v Bruch, 489 US 101, noting that the case at hand focused directly upon the application and meaning of the fourth principle, which states that 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 factor in determining whether there is an abuse of discretion."

The Court found that the fact that a plan administrator both evaluates claims for benefits and pays benefits claims creates the kind of "conflict of interest" to which Firestone's fourth principle refers. The Court noted this conclusion is clear where it is the employer itself that both funds the plan and evaluates the claim, but a conflict also exists where, as in this case, the plan administrator is an insurance company.

The Court stated three reasons for this conclusion: (1) the employer's own conflict may extend to its selection of an insurance company to administer its plan; (2) ERISA imposes higher-than-marketplace quality standards on insurers; and (3) a legal rule that treats insurance company administrators and employers alike in respect to the existence of a conflict can nonetheless take account of different circumstances by treating the "circumstances as diminishing the conflict's significance or severity in individual cases."

Weighing the conflict. The Court also found that judicial review of a discretionary decision should employ a "combination-of-factors" method of review where the "conflict of interest" factor is weighed together with other case-specific factors. "In such instances, any one factor will act as a tiebreaker when the other factors are closely balanced, the degree of closeness necessary depending upon the tie-breaking factor's inherent or case-specific importance," the Court wrote. A conflict of interest should prove more important where there is a higher likelihood that it affected the benefits decision, such as where an insurance company administrator has a history of biased claims administration. The conflict would prove less important, the court explained, "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 . . . ."

The Court also noted that Firestone's language does not imply a change in the standard of review from deferential to de novo. The Court also declined to overturn Firestone by adopting a rule that could bring about near universal de novo review of ERISA plan claim denials. Further, the Court said it was not necessary for courts to create special, burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly on the evaluator/payor conflict.

Sixth Circuit's review. The Court found nothing improper about the way the Sixth Circuit conducted its review. The lower court gave the conflict some weight, but focused more heavily on other factors, the Court said. Accordingly, the Court affirmed the lower court's decision.

Concurrences. Chief Justice Roberts concurred in part and concurred in the judgment. He disagreed with the majority regarding how these evaluator/payor conflicts should matter. He wrote that he would "consider the conflict of interest on review only where there is evidence that the benefits denial was motivated or affected by the administrator's conflict." He said that no such evidence was presented in this case.

In addition, Justice Kennedy concurred in part, but dissented from the order affirming the judgment. He agreed with the majority's discussion of the framework for the standard of review in ERISA cases. He indicated, though, that the case should have been remanded so that the Court of Appeals could apply the standards the Court just explained to these facts.

Dissent. Justice Scalia dissented and Justice Thomas joined his dissent. Justice Scalia wrote that the existence of a conflict is to be governed by the law of trusts. "Under that law, a fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision," he wrote (emphasis in original). He concluded that there was no evidence of that in this case.

For more information on this and other topics, consult CCH Employment Practices Guide or CCH Labor Relations.

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