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Litigation

: Northwest Business Litigation Blog

US Supreme Court addresses conflicts of interest in ERISA plans

By John Walch

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ERISA provides that an individual denied benefits under an employer benefit plan may challenge the denial in federal court. Last week, the US Supreme Court addressed the standards for review when the entity that administers the plan -- usually an employer or insurance company -- both decides eligibility for benefits and pays the benefits out of its own pocket.

The Court has earlier signalled that federal courts must give considerable deference to a plan administrator's decision. In the 1989 Firestone case, the Court held that, if the plan document gives the fiduciary discretionary authority, courts reviewing a denial should focus on the fairness of the claim denial process and not on whether the outcome was correct. The reviewing court must defer to the fiduciary's decision, reversing it only if there was no evidence upon which to base the decision.

The Firestone opinion raised, but did not resolve, the issue of how a plan administrator's conflict of interest factors into the reviewing court's decision. For example, if a self-insured employer denies a claim, thereby increasing its profits, should the reviewing court automatically conduct a more searching review, or is the plaintiff first required to prove that the conflict affected the fiduciary's decision? In the 20 years since Firestone, Circuit Courts have developed various strategies for determining what to do when a fiduciary has a conflict.

Last week in Metropolitan Insurance Co. v. Glenn, the Supreme Court said there is no one-size-fits-all rule for reviewing a decision by a fiduciary having a conflict of interest: "a reviewing court should consider that conflict as a factor in determining whether the plan administrator has abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case."

This directive from the Court fails to show what a plan fiduciary can do to avoid a conflict, or how either the plan or participant should prove the presence or absence of one. Plan fiduciaries may be protected by taking procedural actions, such as isolating claims administrators from management or employer influence, to prevent any possible conflict from tainting the claim review process, according to the Court. But the Court refused to create a bright-line test for reviewing claims decisions even when such protections are in place.

Full post as published by Northwest Business Litigation Blog on June 23, 2008 (boomark / email).

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