First vs Ninth, and Structural Conflicts of Interest in ERISA Litigation

A frequent correspondent, even though he normally runs from ERISA cases as though he 'd been handed a basket full of snakes, forwarded me the Ninth Circuit's decision from earlier this week in Abatie v Alta Health and Life Insurance. Fascinating opinion. I could write an article or even a book on the decision, given its themes, its discussion of the historical development of the law on certain issues, and the rules for benefit litigation in the Ninth Circuit it declares (but that is what this blog is for, to discuss these kinds of things in a more timely manner than could be done in these other forms of media). What this means is you will probably see multiple posts on it from time to time, on different facets that are worth shining a light on.

For now though, what I wanted to comment on is its central focus, namely the impact on the standard of review of what is known as a structural conflict on behalf of a plan administrator in cases where the plan grants discretion to the administrator (and as a result the court should be applying the arbitrary and capricious standard of review to any judicial review of the administrator's decisions). I discussed structural conflicts and their effects a couple of days ago in a post on how the First Circuit deals with such a conflict. To reiterate, as the Ninth Circuit phrased it In Abate, "an insurer that acts as both the plan administrator and the funding source operates under what may be termed a structural conflict of interest." The First Circuit recently reaffirmed that this type of conflict, without more - namely proof that the administrator actually had a real world, not just a hypothetical, conflict, and made a benefit determination that was truly influenced by it - does not alter the standard of review. In contrast, the Ninth Circuit believes it does affect it, and how it does so is the primary subject of the opinion in Abate.

The rationale for the belief of the First Circuit, and other circuits that follow the same line of thought, that such structural conflicts can be ignored is that market forces should be sufficient to dissuade administrators from declining to pay benefits simply because they are the source of the funds, the idea being that, over time, market forces will punish those who do and reward those who do not. These structural conflicts usually entail insurers who both insure the benefits at issue and administer the claims made for benefits under the plan. The idea is that there will be a flight to quality, if you will, by plans and the companies who run them to insurers/administrators who do not act to their own benefit and the detriment of the plan's participants as a result of such a conflict.

Now, I am not totally convinced by this line of thinking, and clearly the judges of the Ninth Circuit aren't either, but I am more inclined than not to agree with it. I have never been totally inclined because it has always felt too much like what happens when lawyers play at being economists; they find a nice sounding macroeconomic idea and apply it as though true, without it ever having really been rigorously tested. On the other hand, based on my own experience of seeing, both in my own practice and in the case law, hundreds of cases in which such a conflict existed, it seems to me that the anecdotal evidence is clear that this reliance on the market does in fact seem to work and account for any problems posed by this potential conflict. The better companies that insure and/or administer plans do not, in fact, act out this conflict, even without anything more elaborate in the case law to prevent them from doing so than the assumption that the market will take care of the problem. My own belief is that such an approach is just the natural outgrowth of the overall mentality -from hiring to training to accountability - of the better run companies, who seem to operate on the assumption that good business practices pay off, or as I am inclined to say, that good business is itself good business. Recent research suggests that this may just be the case, Enron and the like notwithstanding; research indicates that "ethical business practices generate better financial performance," at least in the insurance industry (on this point, see here and here and here as well).

Meanwhile, the lesser companies, who may - it is almost never, if ever, really proven on the evidence to my satisfaction that they are doing so - be acting based on such a conflict, usually get caught and defeated simply under the traditional arbitrary and capricious standard without any change being imposed on the standard of review based on the existence of a mere structural conflict. And why is this? Because the administrative record, on which the court is basing its decision if the scope of review is the arbitrary and capricious standard, won't sufficiently support the decision of such a conflicted administrator if the conflict is the real reason for the denial of benefits. If you think about it, it is both logical and points out the irrelevance of the structural conflict. If the administrative record actually supported the administrator's decision to deny the claim, than the conflict either didn't exist or was irrelevant: the record evidence justifies the denial, and it is irrelevant if the claim was also denied because the administrator was also acting due to the conflict it faced. On the other hand, if the record evidence doesn't support the denial (which will presumably be the case if the only reason for the denial is the administrator's conflict of interest), than the administrator's decision will be overturned by the court as having been an arbitrary and capricious decision since it lacked sufficient support in the record, regardless of whether or not the reason for the denial was the administrator's conflict of interest.

So maybe I am a bit of a hometown fan, but I'll go with the First Circuit on this one.

Written By:R Rogers On August 18, 2006 2:13 PM

Under your reasoning, an insurer's decisions should always receive deference, whether or not in the ERISA realm, because the marketplace will punish unfair insurers. But we know that insurance companies will act badly - in particular circumstances - if they can get away with it. Else why would every state that I know of have insurance laws that impose punitive damages on insurance companies that act badly? 2 more questions: 1. Are you aware of the allegations against UNUM (I'm new to your blog)? 2. What percentage of insurance companies are not "good" and what do you say to the employees who get a bad one? Finally, I think that the idea of ERISA is that employers are providing the benefit to employees voluntarily, that they ought to be allowed to administer the plan as they see fit, and that the "marketplace" will punish an employer who unfairly administers a benefit program (because employees will be unhappy), but that when the insurance company is delegated fiduciary responsibilities that equation no longer works because it is too easy for the employer to blame an unreasonable decision on "the insurance company." The employer "gets his cake and eats it too" in that it gets the benefit of the plan but doesn't fully absorb the adverse consequences of unfair benefit denials.

Written By:John Doe On August 30, 2006 9:16 AM

The marketplace rationale assumes that competition exists for the business; it does not. First, insurers have certain exemptions from anti-trust laws. Second, in the long term benefits coverage arena, Unumprovident, MetLife, Prudential, The Hartford, The Standard, CIGNA, dwarf the remainder of the business. The policies are similar and employers do not have a real opportunity to shop the market. That's the same for health insurance in Massachusetts, where BC/BS, Tufts and Harvard dominate.Third, the insurer, protected by ERISA, does not suffer if it engages in bad conduct. It's greatest risk is payment of benefits already due, interest, fees for its counsel and plaintiff's. Insurers treat ERISA claims differently than those governed by state laws where "bad faith" damages exist.

Written By:Stephen Rosenberg On August 30, 2006 1:05 PM

John, if that is your real name (just kidding), whether it is health insurance or long term disability benefits, in my experience, the exact terms and extent of coverage can vary, depending on the size of the employer and what the employer is willing to pay for. The easiest example is companies that are willing to pay more for long term disability benefit policies that do not provide discretion to the administrator, or that provide different tests for disability than would other plans. I think the market is a little subtler than you present, but certainly not everyone agrees with me on that.

Written By:John Doe On August 30, 2006 1:15 PM

Can you identify an LTD insurer and its broker or agent that is currently willing to write an LTD plan that provides for de novo review? If you do, then I will pass the name of the insurer and the contact information to a number of clients immediately.

Written By:Stephen Rosenberg On August 30, 2006 1:31 PM

John, not my bailiwick. All I can comment on is what I have seen over the years in my practice.

Written By:james On February 1, 2007 8:44 PM

There are companies that still allow for a de novo review, including MetLife, and the federal employees have such a plan. It is just that you pay for what you get.