Guest Article

(From the April 21, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Benefit Decisions by "Conflicted" ERISA Plan Administrators -- U.S Supreme Court to Decide the Standard of Judicial Review that Applies

Scheduled for hearing on April 23, 2008, the U.S. Supreme Court is expected to address in a pending case whether an inherent "conflict of interest" exists for an ERISA plan administrator who both makes benefit decisions and pays claims -- and, if conflicted, the standard of review which will apply in judicial review of those benefit decisions. ________ v. Glenn, No. 06-923 (cert. granted 01/18/08).

Issues with a Very Common Plan Set-Up

The case before the Supreme Court raises issues with a very standard administrative set-up, in which the plan's insurer is also the entity which decides benefit claims. In this case, the employee was denied a continuation of disability benefits because the insurer determined she was no longer disabled. The employee contends that, because of its dual role, the insurer has an inherent conflict of interest:

Brief for Respondent, page 12.

The employee argues that a less deferential "arbitrary and capricious" standard of review should apply when a court reviews a benefit decision made by a dual-role insurer. Relying heavily on trust law, the employee contends that "especially careful scrutiny" should be given to such decisions.

Brief for Respondent, page 43-44.

Facts Giving Rise to the Matter

The employee worked for her employer for 14 years -- from 1986 into 2000 -- at which time she took a medical leave of absence. She has not since returned to work. As a sales manager for a department store, she was required to work 40 to 50 hours per week. She was responsible for supervising 20-30 other employees, ensuring that the department was stocked with merchandise, satisfying the needs of customers, and identifying and solving various problems as they arose.

The day after she began her medical leave, her physician issued a letter stating that she was diagnosed with "severer dilated cardiomyopathy," a disease that causes the heart to become enlarged and to pump inadequately. Her symptoms included general fatigue and shortness of breath. The physician stated in his letter that she "cannot return to any kind of job that would require any significant physical or psychological stress."

The disability plan provided two types of benefits: disability benefits for the first 24 months if the participant is unable to perform the "material duties" of the job, and disability benefits after the initial 24 months if the participant is unable to perform the duties of "any gainful work or service" for which the participant is reasonably qualified. The employee's claim for benefits was approved and she began receiving disability benefits.

Two months later, at the direction of the insurer the employee filed for Social Security disability benefits. The insurer recommended a particular law firm that specialized in obtaining such benefits. Although her claim was initially denied by Social Security, she eventually was adjudicated to be totally disabled retroactive to the first day of her medical leave, and was awarded retroactive benefits. However, as a result of the Social Security award, the insurer reduced the amount of the employee's future disability payments, and required reimbursement for overpayment of prior benefits based on the retroactive award amount from Social Security.

The insurer later advised the employee that, to continue receiving disability benefits, she was required to demonstrate that she met the second definition of total disability -- that she was incapable of performing the material duties of "any gainful work or service." During her medical leave, the employee had undergone significant treatment, taking as many as seven or eight prescription medications for her heart condition. Although her condition improved, the doctor stated that some of her improvement was due to the reduction of work-related stress. In March 2002, when completing a long-term disability benefits evaluation form, the doctor reported that the employee could lift up to 20 pounds occasionally, could sit eight hours of the day, etc. He also checked "yes" to the question of whether she was able to work in a sedentary occupation. Three months later, the doctor added that the patient could not endure any emotional stress or heavy exertion. Within days of that report, the employee worsened. On July 22, 2002, the physician reported that she was back earlier than expected, complaining of fatigue, shortness of breath and significant anxiety regarding the return to work. The doctor stated in a letter that day to the insurer that, "I do not believe the employee should be forced to return to any kind of even sedentary work particularly because it is the psychologic stress of work that really exacerbates her cardiovascular condition and symptomology. The patient basically should be considered completely disabled from her dilated cardiomyopathy as well as her history of ventricular tachycardia."

One month later, on August 28, 2002, the insurer notified the employee that her long-term disability benefits would be terminated the next month because "[T]here is no supportive medical documentation of the exacerbation of your cardiac condition and symptomology due to subjective complaints of workrelated stress." According to the insurer, the records submitted did not support cardiovascular impairment that would prevent her from performing full-time sedentary work. The insurer referenced correspondence from the physician, but did not mention his most recent July 22, 2002 letter, which stated she was not to return to work.

The employee appealed the denial of benefits and, while it was pending, her physician submitted another letter dated February 12, 2003 reiterating his earlier July 2002 opinion that she could not return to work. The insurer referred the matter to an independent physician's consultant board. Based on its review of the records, the board concluded that the employee "seems to be a reasonable candidate to try one of the sedentary job classes at least on a trial basis. If the job environment entails [a] significant degree of emotional distress, and the patient is unable to cope with that, then certainly permanent disability can be considered." The insurer issued a final denial of benefits on May 20, 2003. The notice of denial relied on the same information as in the prior denial notice as well as the report from the physician's consultant board. While acknowledging the February 2003 letter from the employee's physician, the insurer concluded that the "documentation on file does not support a disability that would prevent Ms. Glenn from performing any occupation, as defined in the plan." No mention was made of the July 2002 letter from the employee's physician, which essentially rendered the same opinion as his February 2003 letter that the employee could not return to work.

Review by the Lower Courts

The employee filed suit in the US District Court for the Southern District of Ohio, which upheld the insurer's determination. The district court found the insurer's decision was not "arbitrary and capricious" and granted summary judgment to the insurer. The employee appealed to the Sixth Circuit, which reversed the judgment of the district court, finding that the insurer's decision was "arbitrary and capricious." The Sixth Circuit explicitly took into account "the existence of a conflict of interest" because the insurer served the dual role of both making the benefit decision and paying for benefits. It concluded that the insurer's conflict of interest "did not receive appropriate consideration by the district court." The Sixth Circuit was particularly concerned that the denial notice gave no weight to the fact the employee was determined to be totally disabled by Social Security, that the insurer reaped a financial benefit by the Social Security determination of total disability, that neither of the denial notices addressed the July 2002 letter from the employee's physician, that the physician's consultant board did not appear to have received either the July 2002 or February 2003 letters from the employee's physician stating she could not return to work, and that the insurer had the authority to demand that the employee submit to physical examination by doctors of its choosing but opted instead for a file review by the physician's board.

Argument by Dual-Role Insurer

The insurer contends that the employee and the Sixth Circuit are attempting to impose a heightened standard of review not anticipated by Congress in enacting ERISA, and not intended by the plan sponsor in establishing an employee benefit plan. ERISA explicitly authorizes plan fiduciaries to evaluate and pay claims and establishes that the consolidation of functions within a single entity, standing alone, does not place fiduciaries in a conflict of interest. It is long settled that a fiduciary may have financial interest adverse to beneficiaries, as long as the fiduciary does not act upon those interests when making fiduciary decisions.

Brief for Petitioner, page 23.

Underscoring the need for the participant to first establish that the fiduciary acted on the basis of its own financial interests before a heightened level of review should apply, the insurer noted the likelihood of spurious lawsuits:

Brief for Petitioner, page 27.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.