Friday, March 30, 2007
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.