Supreme Court Provides Further Guidance on Judicial Review of Benefit Claim Denials

Over 20 years ago, in Firestone Tire & Rubber Co. v. Bruch, the U.S. Supreme Court held that when the governing plan documents give a plan administrator discretion to interpret the plan and determine eligibility for benefits, the administrator's decision is entitled to deference, and a reviewing court should only set aside that decision if the administrator abused its discretion. The Supreme Court also noted that, where the administrator is operating under a conflict of interest, that conflict is one factor that should be taken into account in determining whether the administrator abused its discretion.

Last month, in a case closely watched by those who sponsor and administer ERISA plans, the Supreme Court provided additional guidance regarding what constitutes a conflict of interest and how courts should weigh such conflicts. The Supreme Court 's decision potentially affects benefit claims under all types of retirement and welfare plans subject to ERISA.

Administrators Often Have A Conflict of Interest

In Metropolitan Life Ins. Co. v. Glenn, an employer sponsored a long-term disability plan that was insured through MetLife. As insurer, MetLife was both the claims administrator and the ultimate payor of benefits. The Supreme Court had no trouble holding that MetLife was operating under a conflict of interest—it saved money as a result of each claim it denied. The Supreme Court also noted that the same conflict exists when an employer administers its own self-funded ERISA plan.

Significance Of Conflict Depends On Totality Of Circumstances

The more difficult issue was how that conflict should be weighed by a court reviewing a claim denial. The majority declined to adopt a "one-size-fits-all" rule. Instead, the majority held that the conflict of interest was but one factor among many a judge should consider when determining whether the plan administrator abused its discretion in denying a benefit claim. The Supreme Court held that the significance of the conflict depends on the facts and circumstances of each particular case.

The Supreme Court noted that a conflict of interest will be more important when the circumstances suggest a higher likelihood the conflict influenced the benefits determination. On the other hand, a conflict of interest will be less important—even "to the vanishing point"—if the administrator "has taken active steps to reduce potential bias and to promote accuracy." The Supreme Court suggested, for example, a clear separation of those responsible for claims administration from those responsible for the financial performance of the organization, or the use of management checks to penalize inaccurate decision-making irrespective of who benefits from the error.

MetLife appears to be both good news and bad news for ERISA plan administrators. It is good news because it reaffirms Firestone and holds that a conflict of interest does not deprive a plan administrator of the abuse-of-discretion review standard. It is bad news, however, because the breadth of the "totality-of-the-circumstances" test seems to give a reviewing court greater latitude to second-guess the decision of the plan administrator.

What Should Employers Do In Response To MetLife?

What should an employer that self-funds and self-administers an ERISA plan do in response to MetLife? One obvious response is to follow the Supreme Court's suggestions for reducing potential bias.

Creating a Separate Claims Staff May Not Be Practical, But Steps Can Be Taken To Minimize the Conflict.

The Supreme Court 's first suggestion—that a clear line be drawn between those who decide claims and those responsible for the financial performance of the employer—may make sense for large insured plans, where a separate group can be created whose sole responsibility is deciding claims. This suggestion is less practical, however, for employers with smaller self-insured plans that do not generate a large enough claims volume to justify a separate claims staff. In such cases, executives within the organization have typically been given the additional responsibility of deciding claims. One could argue that all executives have a conflict of interest because they have at least some concern regarding financial performance of the employer.

Does MetLife mean that all executives should be removed from claims committees? Probably not. The reason executives were given this responsibility in the first place was because they are responsible people who understand the workings of the plan and how it fits into the overall structure of the organization. Excluding such individuals from deciding claims—based on vague concerns about impact on the standard of review if one of the claims eventually makes it to litigation—may not be prudent or practical.

Instead, employers can attempt to minimize significance of any conflict of interest by adopting or revising a committee charter or claims handling guidelines clearly stating, among other things, that employees who make claims decisions are required to act independently of the corporation and are obligated to decide the claim based on its merits—not on what is best for the corporation. The employer should also make sure that employees responsible for claims administration understand this crucial distinction and can, if need be, testify that they followed it in a particular case.

Regular Audits And Penalties May Not Be Practical for Smaller Plans

The Supreme Court's second suggestion in MetLife for minimizing effect of the conflict was for the administrator to implement systems to encourage accurate claims processing, such as regular audits, with penalties imposed on those persons who are inaccurate (even if the error benefited the company). Once again, this suggestion seems more tailored to the context of a large insured plan, where there is a dedicated claims staff deciding thousands of claims each year. Such an undertaking may not make sense for a smaller plan deciding only a handful of claims each year.

Will MetLife Lead To The Outsourcing Of Claims Administration?

Some commentators have suggested that another way of dealing with conflict of interest is to outsource claims administration to a third-party administrator (TPA). Since the TPA is not paying the benefits out of its own pocket, it arguably does not have a conflict of interest (although plaintiffs can still argue that a conflict exists on the basis that the TPA is beholden to the employer that pays its fees).

The decision to outsource claims administration is complicated, and typically involves consideration of a number of factors, including cost, type of plan, number of claims each year, and level of involvement required of company employees in providing data to the TPA. While there may be other good reasons to outsource to a TPA, it seems unlikely that vague concerns about the standard of review raised by the MetLife decision, standing alone, would justify such a switch.

Watch The Caselaw For Future Developments

There will undoubtedly be a flurry of litigation on the conflict of interest issue as courts attempt to apply the Supreme Court's guidance in MetLife. Future cases will likely suggest additional steps that can be taken to increase the chance that a claims decision will be upheld by a reviewing court.