Friday, March 30, 2007

First Circuit Address Structural Conflicts of Interest in ERISA Denial of Benefits Claims

Scales Of course, ERISA is full of vexing areas of law, preemption and the scope of civil enforcement under Section 502(a)(3) to name just two.  But right up there at the top of the list is the appropriate standard of review when a court reviews a plan administrator's decision to deny an individual's claim for benefits under the plan AND the plan is operating under a structural conflict of interest. 

A structural conflict of interest exists when the plan administrator has to pay the claim out of its own assets.  Courts are all over the place on the proper standard, ranging from saying there should be no change to the normal arbitrary and capricious standard at all to adopting a sliding scale approach under which the degree of the review becomes more intensive as the conflict involved becomes more severe.

So now the First Circuit in Denmark v. Liberty Life Assurance, 05-2877 (1st Cir. Mar. 28, 2007), has weighed in again and although maintaining their normal arbitrary and capricious review in a 2-1 decision (with three different opinions), two of judges agree that there needs to be en banc review of the issue.

Here is part of Ross Runkel's nice summary of the case in his Employment Law Memo:

Two judges agreed with the trial court that the denial of benefits was not arbitrary and capricious. One of them, however, opined that “our circuit should reexamine in an en banc proceeding the standard of review that applies when an insurer both reviews and pays disability claims, resulting in a structural conflict of interest.” The third judge concluded that the denial of benefits was arbitrary and capricious, and agreed that the 1st Circuit should reexamine the standard of review in such “structural conflict” cases.

The 1st Circuit’s current view is that “[t]he fact that … the plan administrator [ ] will have to pay [the] claim out of its own assets does not change [the arbitrary and capricious] standard of review.” The 1st Circuit has justified this approach on the grounds that “the market presents competing incentives to the insurer that substantially minimize the apparent conflict.” The court observed, however, that “other circuits have rejected the market forces rationale and specifically recognized a conflict of interest when the insurer of an ERISA plan also serves as plan administrator, although there is no consistent approach in accordingly adjusting the standard of review.”

Stephen Rosenberg at the Boston ERISA Law Blog has thoroughly analyzed this issue in the past and on this case comments that:

[T]he third judge['s] opinion emphasized his belief, much like mine, that the Circuit’s current approach is time proven and battle tested, and should not be overturned lightly; he also points out that, given the split among the circuits over this issue, it would make sense not to change course on this issue unless and until the Supreme Court resolves the split.

All I can say is that I'm happy that most people agrees that en banc review is required because further clarification is definitely needed and I don't think this issue should have to await Supreme Court review given the importance of this legal question to many plan participants and beneficiaries.

Update:  Stephen Rosenberg just posted a helpful summary of where all the circuit courts stand on the structural conflicts of interest issue.


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» CA1: Panel split on ERISA administrator deference from Appellate Law
Denmark v. Liberty Life, No. 05-2877 is a big ERISA case. This case looks really big and complicated, but it comes down to one issue, which splits the panels, and the panel admits (and describes) the circuit split. The majority [Read More]

Tracked on Mar 30, 2007 9:30:36 AM

» Still More on Structural Conflicts of Interest from Boston ERISA Law Blog
Day 3 of my discussion of the First Circuits recent ruling concerning structural conflicts of interest and their impact on claims for benefits under ERISA: Workplace Prof blog has his take, and quotes from others, here, and one of my... [Read More]

Tracked on Apr 2, 2007 8:25:07 AM


I am curious if the standard of review would have been heightened in this case if the plan was self insured?
Don Levit,CLU,ChFC

Posted by: Don Levit | Apr 2, 2007 9:45:57 AM


I don't believe the standard of review of denial of benefit claims under Section 502(a)(1)(B) depends on whether those claims are filed under an insured plan or self-insured plan.

Structural conflicts exist both when the employer funds and administers the plan itself, but also where the employer pays an independent insurance company to fund, interpret, and administer a plan. If a structural conflict exists in either of these situations, a majority of courts apply a heightened standard of review.

Some believe that federal courts are actually more likely to infer a conflict of interest based on the insured plan situation because the insurance company has the economic incentive to deny plan claims and increase it own profits.

Posted by: Paul M. Secunda | Apr 2, 2007 11:00:29 AM

I agree with you that the insurance company may be viewed in a less positive light than the employer.
However, the profits of the insurer are impacted by only one client group in the present case.
If the plan was self insured, the cash flow of the employer itself would be impacted by approving a "border line" claim.
From a simple dollars in, dollars out, objective analysis, the insurer may be able to "afford" being more objective.
And, without the state to regulate the self-insured plan, who is going to represent the claimant, the DOL?
Don Levit

Posted by: Don Levit | Apr 2, 2007 12:15:36 PM

I have a question regarding structural conflict of interest. Here is the seneriro: Self funded plan, employer is the plan administrator. Employer enters into an ASO agreement with third party. Third party makes all initial decisions regarding benfits. If denial of benefits is appealed, employer makes the call. Does that arrangement create a structural conflict of interest?

Posted by: William Bishop | Mar 11, 2008 9:20:55 AM

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