TPA Did Not Function As An ERISA Fiduciary, Leaving it Open to State Law Breach of Contract Claims
From The Bench By John H. Eggertsen, Esq. and Michael Friedman, Esq.
As health care costs continue to rise, and employers become more vigilant about policing benefit costs, it is perhaps inevitable that lawsuits by employers against their plan’s TPA are likely to increase. A recent such case, W.E. Aubuchon Company, inc. v. BeneFirst, LLC, 2009 WL 3272491 (D. Mass.), illustrates this trend.
In its Complaint, Aubuchon alleged that BeneFirst committed claim processing errors that cost the Aubuchon Plan millions of dollars. These alleged errors were of the three kinds; (1) erroneous reporting of anticipated stop-loss reimbursements (i.e., BeneFirst had told Aubuchon that it would receive a stop-loss reimbursement of approximately $478,000, which proved to be a gross overstatement), (2) procedural and financial errors in claims processing, and (3) failure to maintain claims records.
Aubuchon sued for breach on contract under state law and for breach of fiduciary duty under ERISA, though the parties agreed that these claims were mutually exclusive – i.e., Aubuchon could bring either state law breach of contract claims, or its ERISA breach of fiduciary duty claims, but not both.
BeneFirst moved for summary judgment contending that the state law claims were preempted under ERISA and that it was not an ERISA fiduciary, and so was not liable for any breach. As the Court summarized BeneFirst’s Motion, BeneFirst contended that “plaintiffs’ claims fall into a no-man’s land between ERISA and state law, and that plaintiff’s can bring no claim of any nature against it for any malfeasance of any kind (emphasis in original).” When a court characterizes your claims in this fashion, it usually does not bode well.
The Court first looked at the administrative services agreement (the “ASA”) between the parties and found that Aubuchon had the “final authority and responsibility for the Benefit Plan and its operations,” while BeneFirst was to (1) “pay plan benefits in its usual and customary manner,” and (2) maintain “for the duration of this Agreement and for two years thereafter, adequate records of all transactions between Plan Sponsor [Aubuchon], the Plan Administrator [BeneFirst] and the plan participants.” The ASA also contained performance standards that BeneFirst was to meet, including a claim financial accuracy mark of 98%, a claims payment accuracy rate of 95%, and a claims coding accuracy rate of 95%. The ASA also authorized BeneFirst to pay itself commissions from certain stop-loss premiums it collected on behalf of the Plan before turning over the net amounts to Aubuchon. All in all, there was nothing unusual about the ASA.
The SPD identified Aubuchon as the Plan Administrator, and “named fiduciary” under ERISA, and identified BeneFirst as the “Contract Administrator.” The SPD also noted that the Plan was “self-administered by the Employer” and the Employer “has delegated claims administration and other day-to-day functions for all benefits except prescription drugs to the following Claims Administrators. . . .BeneFirst, LLC.” As part of its claims processing procedures, if a BeneFirst claims examiner determined that a claim should be paid, but the computer system had denied the claim, the examiner could have the computer system overridden to allow the claim to be paid.
In analyzing whether Aubuchon’s claims were preempted, the Court noted that certain kinds of claims against TPAs – i.e., those brought by participants or beneficiaries seeking to recover benefits – were generally found to be preempted, but that claims on behalf of plans against TPAs for breach on contract or professional malpractice have generally not been preempted. While noting that the First circuit had never confronted this issue directly, the Court followed what it perceived to be the “majority rule,” and held that Aubuchon’s state law contract claims were not preempted.
“The ASA is a business contract, entered into voluntarily and entered at arm’s length by Aubuchon and BeneFirst. Aubuchon is attempting to enforce the terms of that contract; the state ‘law’ invoked by Aubuchon is simply the common law of contracts. In this context, state law has neither ‘a connection with’ nor a‘reference to’ ERISA, and enforcement of the contract does not implicate any of the concerns of ERISA preemption . . . . BeneFirst’s position, in substance, is that an ERISA plan and a third-party administrator can never enter into a binding contract, and accordingly the contract is not and never was enforceable. If BeneFirst is correct, one wonders why BeneFirst bothered to prepare and sign the contract in the first place. Such a construction of ERISA would not simply leave a gap in the enforcement scheme; it would leave a gigantic chasm. There’s no reason to believe that congress intended such an irrational result.”
Having found Aubuchon’s claims to be viable under state law, the Court then proceeded to determine whether BeneFirst was an ERISA fiduciary. If so, Aubuchon would not be able to bring these claims under state law, but would be limited to its remedies under ERISA. The Court recognized that one can be an ERISA fiduciary in two circumstances – (1) one can be a fiduciary named as such in the plan documents, and (2) one can function as fiduciary with respect to certain activities one undertakes with respect to a benefit plan.
As to BeneFirst’s status as a “named fiduciary,” Aubuchon noted that it is the named fiduciary in the SPD and is named as the Plan administrator, and the SPD also says that the term Plan Administrator also includes any persons to whom the Plan Administrator delegates all or part of its authority. Since the SPD expressly states that Aubuchon delegated to BeneFirst claims administration responsibilities, this makes BeneFirst a Plan Administrator as well, and thus, a name fiduciary. BeneFirst countered that the SPD never uses the term “named fiduciary” in reference to BeneFirst, and this failure was not an oversight. The Court found each of these arguments somewhat persuasive (though the Court may have been too kind to Aubuchon’s “six degrees of separation” method for finding BeneFirst to be a named fiduciary), and, thus, concluded that the SPD is ambiguous about BeneFirst’s named fiduciary status. BeneFirst’s motion for Summary judgment, therefore, was denied as to its status as a named fiduciary.
BeneFirst fared somewhat better as to its status as a functional fiduciary. Again, summarizing the case law, the court found that the “strong weight of authority” suggests that where a TPA merely processes claims, but the final authority remains with the plan sponsor, the TPA does not function as a fiduciary, despite the fact that in making initial claim determinations it exercises discretionary authority and judgment over the plan’s management and operations. The Court here relies heavily on the language of the ASA that Aubuchon retain “the final authority and responsibility for the Benefit Plan and its operations,” but never quoted any passage from either the ASA or the SPD that indicated Aubuchon was the final authority as to claims appeals. Nothing was mentioned as to how many claims, if any, had been referred to Aubuchon, or that all paid claims would likely never have been referred to the employer.
Finally, the Court assessed whether BeneFirst exercised any authority or control over plan assets, noting – incorrectly we might add – that “not all exercise of authority or control over plan assets will suffice; some level of discretion appears to be required.” The Court recognized that BeneFirst exercised control over plan assets by (1) paying valid claims, (2) accepting and retaining COBRA premium payments, and (3) reclaiming overpayments to providers. While noting that some courts have held that mere check writing authority functionally renders a TPA an ERISA fiduciary, the Court rejected this result as inconsistent with the notion that a TPA does not become a fiduciary merely because it processes claims. If processing claims does not make a TPA a fiduciary, why should paying them do so? BeneFirst’s Motion for Summary judgment on this issue was granted.
So where does this decision leave matters? The Court noted that Aubuchon could drop its fiduciary duty claims and proceed on its state law breach of contract claims, or it could seek to try the case on both claims “with a phased trial or appropriately crafted special interrogatories to the jury. This of course, assumes that the ERISA claims would be tried to a jury, not an obvious proposition.
Ignoring for the moment Aubuchon’s dilemma as posed by the Court, what, if any, are the lessons of this case for TPAs and employers? First, courts persist in not classifying TPAs as among the “ERISA parties” whose involvement with benefit plan claims Congress intended to be preempted by ERISA. Second, claims against TPAs by employers are likely to not be deemed preempted under ERISA, therefore, subjecting the TPA to state law breach of contract claims, a de novo standard of review, and traditional contract damages. Third, TPAs should be sure that if they are not to be named ad fiduciaries for purposes of claims administration, the SPD should clearly and unequivocally say so. While it seemed to us a bit of a stretch for the Court to find an ambiguity on the language here, one can never guess how the courts will read the plan documents. Therefore, if the TPA wants to be named as the claims fiduciary, the plan documents should expressly say so. If it does not, that should be made equally clear. We might also note that while TPAs have traditionally shied away from being named an ERISA fiduciary, to the extent that it could avoid state law breach on contract claims that potentially allow for greater damage awards, it might be worth re-thinking that point of view. Finally, the Court here was somewhat cavalier in its reading of the statute and prior cases. Other courts could very well have reached the opposite conclusion, especially granted BeneFirst’s practice, noted by the Court but never factored into its analysis, that its claim examiners routinely overrode the computer system’s determination to deny a claim in order to meet the claim examiner’s judgment that the claim was payable.
II. Failure to Provide Necessary Documents Defeats Insurer’s Exhaustion Defense Against Plaintiff’s Challenge of Benefit Denial
As we have noticed before, even under deferential standards of review, courts seem to be more willing to scrutinize the procedural conduct of claims administrators when assessing the viability of benefit claims under ERISA. In Barbara Brown v. J.B. Hunt Transport Services and Prudential Insurance Company of America, 586 F.3d 1079 (8th Cir. 2009), the Court confronted a typical situation in its review of a denial of LTD benefits. But what at first appeared to be a very straight forward result was not sustained when the appeals court chose to look beneath the surface and assess the substance, nit just the form, of the participant’s challenge.
Barbara Brown, a truck driver, had injured her knee and qualified for LTD benefits insured by Prudential because she was unable to perform the duties of her regular occupation. Under the Prudential policy, after a year, to continue being considered disabled, the individual would have to be prevented by his/her injury from “performing the duties of any gainful occupation for which you are reasonably fitted by education, training or experience.” Prudential cut off Brown’s LTD benefits because one of its vocational rehabilitation specialists determined that Brown was employable in four alternative occupations – a semiconductor bonder, a surveillance system monitor, a food checker and an assembler.
Brown called Prudential and said she wanted to appeal, and was told she would have to explain in writing why she disagreed with Prudential’s decision. She never did that, but in June of 2007, through her attorney, she did request copies of all benefit plans in which she had enrolled, a complete copy of the Administrative Record, copies of all internal guidelines and administrative precedents on which Prudential had relied, and the names and addresses of all individuals who had reviewed her personal health information.
Hunt, Brown’s employer, sent her copies of all the summary plan descriptions and benefit booklets she had requested. Prudential sent her nothing. Prudential contended that Brown’s deadline for filing an appeal expired in November of 2007, yet in response to further requests by her attorney, Prudential mailed Brown the Administrative record on March 21, 2008. The District Court dismissed the case because Brown had never filed an appeal. Brown appealed this determination on the grounds that to do so would have been futile, stressing that Prudential’s failure to timely provide her with the documents she requested would have forced “an appeal in the blind.”
At first, Brown’s effort to avoid ERISA’s exhaustion requirement would seem to have failed as the Court found that the futility exception is a narrow one, requiring the participant to show that it is certain her claim would be denied on appeal, not just that an appeal would result in a different decision. The Court, however, avoided this result by finding that Brown had mis-labeled the basis for her challenge. The Court found that Brown’s contention that Prudential’s failure to timely provide her with the documents she requested was in substance, not an allegation that her appeal would be futile, but rather an allegation that Prudential had denied her the opportunity for a “full and fair review” of her claims, as required by ERISA.
Because of Prudential’s failure, the Court found that Brown did not know the identity of persons, including the medical and vocational experts Prudential had relied on, did not have access to Prudential’s methodologies or reports, and had no opportunity to challenge Prudential’s “bald assertions” of her residual functional capacity. In short, the Court emphasized that Brown had to do much more than simply file a written notice of appeal. In effect, she was “required to mount a detailed challenge to Prudential’s decision at the moment she appealed. Yet Prudential deprived Brown of meaningful information necessary to do so.” As a remedy, the Court ordered Prudential to provide Brown with the materials she had requested, and allow her to file a late appeal of her claim denial.
While the result here might not have been wholly predictable, it is consistent with judges’ increasing inclination to carefully review the claim adjudication process, even under a deferential standard of review. The Court’s willingness here to ignore the label Brown gave to her challenge and to assess the substance of Prudential’s actions may have been triggered by Prudential’s attempt to stonewall her information requests until the very last moment. The lesson to be drawn, however, is that claims administrators need to be careful not only about providing the information ERISA requires, but also their obligation to carefully explain the basis for their determinations in light of the evidence presented by both the participant and those whose input the administrator itself solicited. Deferential standard of review or not, courts seem to be exercising greater scrutiny of benefit claim denials, and claims administrators should not ignore this trend in the litigation environment.
Comments