There’s a very interesting long term disability decision that was just issued by the District of New Hampshire that is worth a read, not so much for the case itself as for its commentary concerning the standard of review under ERISA in instances where the administrator has been granted discretionary authority by the plan. The court’s facts and the reasoning themselves are nothing out of the ordinary: the arbitrary and capricious standard applies, there is enough evidence in the record to support the administrator’s denial, and thus the administrator’s decision is, quite properly under current law, upheld. But what is interesting is the court’s discussion of its views as to the standard of review and how it affects the outcome of the case, and how those comments shed some light on the criticism that is out there of the law governing the standard of review.

The court acknowledged that the insurer of the plan, which was also the administrator of claims under the plan, had “fully and carefully reviewed [the claimant]’s medical history and thoroughly investigated her claims,” and that there was substantial evidence in the record to support the insurer’s denial of the claim for benefits; the court, however, nonetheless went on to make clear that it disagreed with the applicable body of law governing the standard of review and which mandated the outcome under those facts. The court expressed its displeasure with the First Circuit’s treatment of what are known as structural conflicts of interest, which is a fancy way of saying the circumstance in which the claim administrator deciding the claim for benefits is also the insurer of the benefits who has the obligation to pay the benefits. The court’s exact words? That: 

[N]umerous courts, including this one, have questioned the propriety, and even fairness, of the "arbitrary and capricious" standard of review in cases where the same entity that makes eligibility determinations also funds benefit payments. Two judges on a split panel of the First Circuit Court of Appeals recently suggested that the full court, sitting en banc, ought to revisit the standard of review applicable to ERISA cases in which the plan administrator determines benefits eligibility and also funds benefit payments. Denmark v. Liberty Life Assurance Co. of Boston, 481 F.3d 16, 31 (1st Cir. 2007) (Judge Lipez wrote: "I think it is time to reexamine the standard of review issue in an en banc proceeding. Although Judge Howard dissents from the judgment agreed to by Judge Selya and myself, he agrees with me, as indicated in his dissent, that we should reexamine the standard of review issue."). A petition for en banc review is apparently pending in Denmark. But, unless and until the court of appeals (or the Supreme Court) changes the governing standard of review, this court is obliged to apply the law as it currently exists.

Now, I don’t necessarily join in the belief that the First Circuit’s current law on the effect of such structural conflicts of interest is the wrong approach or needs to be modified, in the absence of Supreme Court changes to the law governing the standard of review in circumstances in which the administrator has been granted discretionary authority. You can find my thinking on that point here and here. As the District Court explained the law:

Under the current law of this circuit, merely pointing out that a plan administrator is also the entity that pays any benefits found due under the plan is insufficient to warrant departure from the applicable arbitrary and capricious standard of review. See, e.g., Wright v. R.R. Donnelley & Sons Co. Group Benefits Plan, 402 F.3d 67, 75 (1st Cir. 2005) ("[T]he fact that the plan administrator will have to pay the plaintiff’s claim out of its own assets does not change the arbitrary and capricious standard of review.") (citation and internal punctuation omitted); Doyle v. Paul Revere Life Ins. Co., 144 F.3d 181, 184 (1st Cir. 1998) (same). To warrant subjecting a plan administrator’s benefits eligibility determination to a stricter standard of review, a plaintiff must point to some evidence suggesting that its decision was actually influenced by improper factors.

I don’t see anything wrong with this standard, and the actual facts of cases decided recently in this circuit and its district courts concerning this issue support maintaining, rather than changing, this standard. When, as in the case that was before the District Court, a claimant cannot point to anything concrete from inside or outside of the administrative record to suggest that the administrator’s decision was actually distorted by its dual role, there is no reason that the dual role should change the standard of review or the outcome of the case. This point is well illustrated by this case here out of the First Circuit, in which I represented the prevailing defendants, and in which a panel of the First Circuit again suggested that the law concerning structural conflicts of interest should be altered. Yet in that case, the panel found that changing the law was irrelevant for purposes of the case pending before it and that the administrator’s decision would be upheld regardless of the standard of review that was applied, because the claim was properly handled and properly evaluated.

When, as in both of those cases, there is no actual evidence suggesting that the dual role altered the outcome, there is no justification for believing or acting as though it did. The truth, which you see when you spend enough time in the courtroom with these types of cases, is that, as these two and a host of other cases (both in which an alteration of the standard of review was warranted and those in which it was not) show, there will be some sort of distortion or disjunct between the evidence in the administrative record and the administrator’s handling of the claim if an untoward motive was actually involved; it may be disguised, but if you look closely you will find it. In contrast, when you cannot find some sort of gap in logic or reasoning or documentation between the administrator’s decision and the administrative record, there is a reason for this, which is that the determination was on the up and up. Thus, in the absence of evidence founded in the record to suggest an ulterior motive, namely the impact of the structural conflict of interest, there is no reason to assume the conflict affected the outcome and should be allowed to change the standard of review.

What’s more interesting is a second, almost throw away comment by the court, which I think goes more to the center of the complaints critics have about the standard of review, including in cases involving structural conflicts of interest. The court commented:

If this were a breach of contract case, in which [the claimant] sued her insurance company for disability benefits, the outcome might be different. There is, after all, substantial evidence in her medical records (including the opinions of two treating physicians) supportive of the view that [she] is disabled. But, because this case is governed by ERISA, what would otherwise be an insurance coverage or breach of contract case is, instead, one governed by principles of trust law. Liberty’s adverse benefits eligibility determination is subject to a far more deferential standard of review.

I think this comment by the court goes directly to what critics of the standard of review are really complaining about, which is not really that the standards of review being applied are wrong, but that they are applied at all. I believe the real complaint of critics of the law on this subject is instead that long term disability claims should be treated and resolved in the same manner as any other type of breach of contract or insurance denial (non-ERISA division) case. This is a whole different kettle of fish than arguing over how the standard of review should be affected by a structural conflict of interest or other issue on the margin, and instead goes right to the heart of the ERISA regime. To some extent, these on-going disputes in the case law that are directed at altering the standard of review to make them more favorable to claimants, such as in cases where the administrator is also the insurer of the benefits, are really proxy wars being fought instead of the real dispute that critics of the system have with denial of benefit claims under ERISA, which is the very application of ERISA doctrines, rather than traditional breach of contract doctrines, to these types of cases.

I have raised before the question of whether so-called socially conscious investing would be a breach of fiduciary duty if undertaken by a pension plan or 401(k) fiduciary. The National Law Journal has a neat opinion piece by law professor Edward Zelinsky right now to the effect that it would be. Here’s a link, although you may have to be a subscriber to access it. Either way, I think I am going to exercise my fair use rights under copyright law, and quote the professor’s conclusion on this particular point:

Inconvenient truth no. 3: Social investment dilutes fiduciary standards. Divestment for worthy causes, like other forms of social investing, opens the door to less noble uses of public pension funds by diluting the fiduciary standards governing pension trustees’ investment decisions. Suppose that a group seeks to use public retirement assets to support the Hamas-dominated regime in Gaza. There are, of course, persuasive distinctions between an anti-Sudan investment policy and a pro-Hamas policy. However, politicizing public pension investments for good causes will invariably turn such pensions into battlegrounds as others seek support for their causes, not all of which will be attractive.

Instructive in this context are the traditional standards of fiduciary conduct including, in Benjamin N. Cardozo’s famous formulation, "the duty of undivided loyalty." The insight animating this formulation is convincing: It does not matter if a fiduciary (like a public pension trustee) dilutes his loyalty to beneficiaries’ welfare for a commendable cause. Once fiduciaries weaken that loyalty by considering any objective other than the well-being of their beneficiaries, the door is opened to causes that may not be meritorious. Even if trustees only pursue estimable objectives, they pursue such objectives with others’ money, i.e., retiree’s retirement resources.

I discussed in an earlier post an academic paper by a different professor arguing to the contrary, and you can find that here. So now you have both sides of the coin, and can make your own call. For me, though, I will return to my own roots – and initial instincts – as a litigator, and repeat something I have said before: if representing a client sued for breach of fiduciary duty, I’d rather be in the position of defending an investment strategy that called for maximum possible returns than one calling for only the maximum possible returns available by investing in good doobie companies.

My colleague, computer patent guru Robert Plotkin, once referred to insurance as a leading indicator when it comes to the issue of global warming, and I have talked before about the idea that governments and societies will act to curb global warming and to deal with related problems only when we reach the point that these problems pose severe economic problems for major sectors of the economy. I have written before about how truly fundamental this issue is, in particular, for the insurance industry, and about the fact that changes in insurance coverage are likely to be the first major noticeable economic response to the issues posed by global warming.

Now, I recognize that sounds like the sonorous introduction to some Ken Burns special on PBS, but it’s a hard topic to delve into while maintaining a warm and good natured tone. And the reason for that is laid out right here, in this fascinating opinion piece from the Washington Post on the response and thinking of leading elements of the insurance industry, including Lloyd’s, to global warming. The article lays out both the risks to the industry posed by climate change (risks the article describes as going right to the question of the sustainability of large sectors of the insurance industry) and the insurance industry’s response to the problem, which is to call – out of its own self-interest – for governments to address and remediate the problem.

You can get a pretty good flavor for what the article presents as the industry’s perspective on the problem right here, in this quote from the article:  

Ten years ago, Peter Levene, chairman of Lloyds of London, was skeptical about global warming theories, but no longer. He believes carbon emissions caused by human activity are warming the Earth and causing severe weather-related events. "At Lloyds, we feel the effects of extreme weather more than most," he said in a March speech. "We don’t just live with risk — we have to pick up the pieces afterwards." Lloyds predicts that the United States will be hit by a hurricane causing $100 billion worth of damage, more than double that of Katrina. Industry analysts estimate that such an event would bankrupt as many as 40 insurers. Lloyd’s has warned: "The insurance industry must start actively adjusting in response to greenhouse gas trends if it is to survive."

Pretty much what I said here, but I have to admit, the thought’s much more sobering coming from Mr. Levene than coming from a blog post.

Instead of posting twice in the same morning, I am going to try to address two distinct substantive issues, one involving reinsurance and the other ERISA, all in the same post, hopefully without turning this post into some sort of Frankenstein monster combination of topics that instead should have been kept entirely separate.

On the first, ever wonder why so many reinsurance companies are domiciled in Bermuda? I thought so. The New York Times has an excellent article today explaining why, and as one might have guessed, it has to do with taxes. As the New York Times sums up the matter: 

At issue are federal rules that allow insurance premiums to be shifted from the United States to offshore affiliates — which reduces taxes — and allow the proceeds to be invested tax free, increasing the profit to parent companies. . . .The core of the dispute is an unusual tax treaty with Bermuda. It allows insurance companies based on the island to deduct from their American taxes premiums that their subsidiaries in the United States collect from American customers and send back to the headquarters abroad. In Bermuda and other tax havens, the money is invested tax free. This money is moved, under the law, through the purchase of reinsurance by the affiliates from their parent companies.

Personally, I really like Bermuda and have long wanted to have reinsurance clients there that would justify my opening an office in Bermuda, which I suspect influences my views on this issue, and so I will therefore keep them to myself.

The second is an ERISA issue, involving the Supreme Court’s decision to hear LaRue v. DeWolfe, Boberg and Associates. This case, which I discussed here and here, involves whether a plan participant can sue under ERISA to recover losses suffered only in that participant’s account, and not across the plan as a whole. As I discussed here, it makes sense that a participant can do so and I expect the Supreme Court to rule to that effect. The defendants, in an attempt to avoid the Supreme Court ever reaching this issue, moved to dismiss the appeal as moot on the ground that the plaintiff had cashed out of the plan and therefore cannot proceed with a claim against the plan for losses incurred in the plaintiff’s now cashed out account; whether such cashed out participants can proceed with such cases is something of a hot topic that has been decided in differing ways by trial level judges in the federal system, including by judges sitting in the same federal district court, as I discussed here. Well, Workplace Prof and SCOTUSBLOG are reporting that the Supreme Court has denied the motion to dismiss on that ground and the Supreme Court will go ahead and hear the case.

There, I did it – two items on two different issues, all for the price of one admission.

Fair’s fair, I suppose. As I discussed here, a growing consensus has emerged concerning the limited value and not so limited failings of arbitration as a forum for resolving complex disputes; as I have discussed in other posts, such as here, the efficacy and value of arbitration really depends on the particulars of the specific case a party is presenting.

In the interest of equal time, I suspect the American Arbitration Association would disagree with that consensus, and I suspect you can find much of how that organization views arbitration in the AAA’s Handbook on Commercial Arbitration, which I just received a sales pitch for. For those of you with an interest in commercial arbitration, a lot of the topics in the handbook look right on point and concern issues I have talked about on this blog, such as management of the complex case and judicial review of arbitration decisions. For anyone interested in more detail and greater depth on some of the issues related to arbitration that I have discussed on this blog, this book is a good place to start.

Regular readers know I like hard data, including statistics or other quantitative support for a position. In their absence, most legal and policy arguments are, well, just opinions. With that in mind, LegalMetric, which studies and reports on patent litigation data, has provided an interesting snapshot of the impact on patent infringement litigation of the Supreme Court’s KSR ruling from a few months back. The company’s findings: that “[s]ince the Supreme Court decision in KSR, patent owner win rates [have fallen] substantially below their long-term averages.” You can find some slides provided by the company that detail their findings here, which the company has offered to let me post with the proviso that I note that the data is their property.

Now, KSR, for those of you readers who aren’t patent people, made it, in theory, easier to invalidate a patent and therefore to defend against a claim of patent infringement, as discussed here. The findings reported by LegalMetric obviously reflects a small snapshot of a very short window in time, but if it holds up, it would suggest that patent reform, which is being pursued vigorously at the federal level by corporations who are frequently targeted by patent infringement suits, is not really needed to stem the claimed tide of unsupportable and vexatious patent infringement suits. Rather, the only thing actually needed may have been to tweak the courts’ interpretation and application of existing patent law, a pro-defendant tweak that the Supreme Court, based on this data, very clearly provided with its ruling in KSR.

For those of you who don’t know, Massachusetts is in the process of dragging its insurance system out of some sort of strange, almost pre-Thatcherite British collectivist era, and into the modern American economic hurly-burly that marks pretty much every other part of consumer life. Today’s Boston Globe has an interesting little article on the contretemps over the insurance commissioner’s willingness to allow auto insurers, in bringing marketplace competition into that market, to use credit scores in underwriting or setting premiums. The critics hold that insurers should not be allowed to use this information at all, on the thesis that it discriminates against low income purchasers of insurance. Could be, but maybe not: the article doesn’t exactly present any objective evidence as to this one way or the other. But what was interesting to me is that its focus on credit scores makes it appear as though reliance on socioeconomic data in rate setting in Massachusetts’ auto insurance market would be some sort of departure, and for the worse, from past practices that existed under Massachusetts’ prior regulatory auto insurance pricing system. Although auto insurance and pricing for it isn’t my gig, my recollection is that, even under the prior system, rates varied depending on the consumer’s zip code, or at least on where in the state they lived and garaged their cars. There is little doubt in my mind that place of garaging led to lower rates in wealthier communities, and thus the place of garaging approach similarly structured auto insurance pricing on the basis of income levels. That may or may not be a good thing, but one thing is for sure: the proposal to do it now through credit scoring isn’t some break from a past in which income levels were not a factor in setting rates. The only thing different is that now it would be a declared factor, in the form of credit scoring, if critics are right that scoring runs in tandem with income level (which may or may not be true), rather than hidden from sight by means of rate setting on the basis of location of residence.

By the way, I meant to mention this on Monday, but a million different fires that had to be put out got in the way, so I’ll mention it today instead: Suzanne Wynn’s ERISA carnival from this past weekend surveys and provides links to a truly interesting range of posts on ERISA related issues. I’d recommend taking a few minutes and looking at the posts she collected, many of them from some of the best known, as well as best, ERISA and benefit related bloggers around.

The title of today’s post, by the way, is a deliberate reference to The Band’s song from the early 70s.

I have posted a fair amount on the impact of what are becoming known generically as “Fair Share” statutes, which are attempts to “reform” health insurance on a state level by means of mandating that employers provide health insurance benefits. I have talked about three main themes in my various posts on this topic, all of which stem from a certain skepticism as to whether these types of legislative responses to the problem of the uninsured are as well thought out as they are well intended. The first is the question of whether they are preempted by ERISA, and whether the rush by many states into this topic is a waste of resources, on the thesis that these state initiatives are likely to be found preempted, under the current state of the law. The second is the question of intended and unintended outcomes, and whether many of these state laws are really well thought out, or, two, whether the legislatures enacting them really know what they are getting into (for instance, just think of the Maryland legislature naively believing it could enact a statute that only mandated health insurance for Wal-Mart employees without running afoul of ERISA preemption, which of course ended in the federal courts striking the act down as preempted). And the third, finally, is the fact that these acts don’t target the real problem underlying the high rates of the uninsured, namely the ever increasing costs of health insurance. I have talked about all of these quite a bit, and you can find posts on them by clicking on the preemption, health insurance, or Massachusetts Health Care Reform Act headings over on the left hand side of this blog.

Here’s a couple of interesting articles I wanted to pass along that hit on at least two, and maybe three, of these themes. The first is this article here, titled “Labor Market Effects of Employer Provided Health Insurance,” which explores the question of how mandating that employers provide health insurance, as many of these state reform acts do, impacts employment. One of its findings? That mandating health insurance for all workers does in fact distort the labor market, but that even more interestingly, although perhaps as one would expect, “mandating the insurance only for full-time workers leads to higher [rates of] coverage than [without a mandate, but also to] an increased number of part-time workers.” If, as one would expect and this article suggests, there is a trade off between employment and the extent to which state laws mandate health insurance coverage, one would hope that state legislatures carefully analyze this issue before joining the current rush to mandate health insurance coverage.

Now, I am beginning to feel obliged by the tenor of my posts on this issue to note that I don’t disagree that the rate of the uninsured in this country is a real problem, and that my skepticism really runs to whether the increasing number of state attempts to address the problem – something they are probably foreclosed from doing by ERISA preemption anyway – represents the most thoughtful and effective way to tackle this problem. And this thought leads to the second paper I wanted to mention, which is law student Darren Abernathy’s upcoming law review note addressing the question of how to draft these types of laws to avoid ERISA preemption. This, at least, is a thoughtful attempt to get around some of the problems that arise when states target the problem of the uninsured by means of health insurance reform statutes. We need more of that type of forward looking and proactive analysis, and less of the willy nilly charge into the issue we are seeing by many state and local governments, who, having apparently learned nothing from Maryland’s experience, just keep enacting legislation on the slim hope that it won’t be preempted, rather than on an analysis and strategy that might place the statutes they enact outside the scope of ERISA preemption.

What is the sound of the internet clapping? Who knows. A healthy round of applause is due, though, for prominent insurance coverage blogger David Rossmiller, who has spent the last several months on his blog -aptly named the Insurance Coverage Law Blog – detailing and dissecting the insurance coverage disputes arising in the aftermath of Hurricane Katrina. Really, probably no one has covered that aspect of the disaster more thoroughly and consistently, in any media. Appleman on Insurance has now just published his 42 page treatise on the history and application of the anti-concurrent cause language in insurance policies, with a focus on its application to losses arising from Hurricane Katrina. David has now posted the article on his blog, right here.

David, incidentally, somehow manages to practice as a partner in a Portland firm, post to his blog every single work day (even on vacation), and still write scholarly articles like this one. Either he doesn’t sleep, or the three hour time difference between where he is – Oregon – and where I am -Boston – somehow gives him a 27 hour day.