To Pay or Not to Pay? Administrator Conflict of Interest and Judicial Standard of Review
By Ron E. Peck, Esq.
On April 30th, we posted a discussion of the ongoing Supreme Court case, MetLife (Metropolitan Life Insurance Company), et al. v. Wanda Glenn, 128 S.Ct. 1117. To review, in that case the Court is questioning whether a deferential standard of review - the standard ordinarily applied by Courts reviewing ERISA administrator decisions when the Plan reserves discretionary authority - should be replaced by a more searching analysis when the administrator financially benefits from denials.
This seems to be a new hot topic in ERISA jurisprudence. For a time, the debate was over Federal Preemption of State Law. Next came whether ERISA Plans could enforce their terms over State regulations. Sereboff v. Mid Atlantic Medical Services., 126 S. Ct. 1869, (U.S. 2006) and its progeny answered those questions, and (for the most part) Plaintiff’s attorneys have moved on. Now, they are attacking plan administrator benefit determinations on the grounds that they are not “neutral” decision makers. While a neutral fiduciary may be due deference from reviewing courts, many administrators are accused of having a financial interest in denial of claims, and are thus due no such deference. As a result of this conflict of interest, their decisions should be judicially reviewed by weighing evidence for and against the decision equally (as compared to a deferential review where any evidence supporting the decision is enough, even if the majority of the evidence weighs against the decision).
If this more stringent standard of review is implemented, there will be two immediate effects. First, plan participants (and their lawyers) will be encouraged to raise more appeals and bring more denials to the Courts for review. Second, Judges will be re-evaluating so many plan denials and second guessing such an abundance of administrator decisions that the administrator will lose any sense of authority.
All hope is not lost, however, as some Circuit Courts have recently heard similar arguments and found in favor of the administrators. In Williams v. The Interpublic Severance Pay Plan, 2008 U.S. App. LEXIS 9231 (7th Cir. 2008), for example, the Seventh Circuit affirmed the administrator’s decision to deny certain benefits, despite the participant accusing the administrator of operating under a conflict of interest, and denying benefits strictly for self serving purposes. The Court compared the administrator to a Judge deciding a tax law case. Even though the Judge’s salary is paid by tax dollars, the Judge will not necessarily decide in such a way so as to only increase taxes.
So, while an administrator’s decision may still be due some deference, the key is neutrality. If the administrator cannot show that they remain objective, they are no longer like the Judge in the tax law case described above.
In the case of Alexander v. Hartford Life and Acc. Ins. Co., Slip Copy, 2008 WL 906786 (N.D.Tex.) (April 03, 2008), the Court espoused a policy that while discovery in an ERISA case (where the participant seeks review of a benefits denial) the evidence considered is usually restricted to the administrative record. An exception is made where the participant alleges that the plan administrator operates under a conflict of interest. Once the conflict is identified, discovery outside the administrative record is permitted to demonstrate the extent of the conflict. Id.; see also Kergosien v. Ocean Energy, Inc., 390 F.3d 346, 356 (5th Cir.2004).
Plan Administrators need to be prepared for conflict of interest accusations before the accusations are made. That means ensuring that decision makers do not benefit financially from denials, their purpose is demonstrably the stringent application of the plan terms, and firewalls are raised to separate the plan sponsor from the administrative decision makers.