A few short notes of interest from a weekend of reading:

• Jerry Kalish has nice things to say about (and agrees with) my recent post concerning the Second Circuit’s decision – correct in my view – precluding summary plan descriptions from trumping the actual plan terms.

• I don’t know quite what to say about this article from yesterday’s Boston Globe about town retirement boards and their travel expenses, other than to note that if you don’t want to face exposure as a fiduciary, this type of conduct probably isn’t the way to go about it.

• And finally, WorkPlace Prof collected this information about whether health savings accounts constitute employee benefit plans governed by ERISA. He cites a report to the effect that they do not. Of particular interest, the post points out that employer contributions to the accounts will not necessarily transform them into ERISA governed plans, because employer contributions alone do not in and of themselves render a plan an ERISA governed plan. I have discussed before the totality of factual circumstances that are to be considered in the First Circuit to determine whether a benefit is an ERISA governed plan, and the fact that the source of funding alone is not determinative.

For those of you readers who are interested in the issue of fiduciary liability for excessive 401(k) fees – and who isn’t? – here is more on the subject.  I posted before about ways to avoid exposure to these types of claims, and Susan Mangiero has more on that topic here.  Meanwhile, Workplace Prof has this to say on the upcoming wave of litigation over this issue, and about Congress weighing in on this issue now as well.

This is an interesting little article – really a press release from OneBeacon about a new product the company is marketing – about a suite of insurance products targeted at the needs of small to mid-size media companies. Among the product’s constituent parts is media professional liability coverage, which the article points out includes coverage for “defamation, invasion of privacy, copyright and trademark infringement, emotional distress, trespass, and misappropriation of likeness.”

There are a few things that are interesting about this. The first is that I have long thought – and have written, such as here – that coverage for copyright, defamation, invasion of privacy and similar exposures is worth buying for any company that may face such claims. Media companies, in particular and quite obviously, face this exposure every day. These cases are almost never, in my experience, easy to get rid of cheap if you are a defendant. Sometimes this is because liability is clear – for instance, there is so much similarity between the challenged publication and the publication written by the plaintiff that a finding of copyright infringement is almost certain – and the plaintiff, as a result, has little motivation to compromise the damages and has, instead, a motivation to exaggerate them. Sometimes it is because the plaintiff has a legitimate claim to recover attorney’s fees if it prevails, so there is a motivation to keep on going in the hope of recovering the attorney’s fees the plaintiff has already expended. I could bore you for an hour listing these types of variables that can make these types of cases hard to settle. But the point is that they often are, which makes them expensive to defend, even under the best of circumstances. Big companies obviously don’t have to worry that much about those costs, but smaller companies, who are the target market for this product, clearly do. And that is why this is a market that would be well served by this product.

The second thing I wanted to mention is the wonders of marketing. The media professional liability coverage included in this suite, at least as described in the article, is essentially the old standby advertising injury coverage that has long been sold as an accompaniment to general liability policies. This is a neat rejiggering of that product to target a particular niche market.

David Rossmiller – who normally runs, as I have noted previously, from ERISA cases as from a basket of snakes – and Day on Torts both have posts today on the Fourth Circuit’s decision upholding an administrator’s denial of accidental death benefits under an ERISA governed plan where the deceased died in an automobile accident while driving drunk. The administrator deemed that the loss was not unexpected and not an accident for purposes of the plan, and thus not covered under the plan’s terms. The case is Eckelberry v. ReliaStar Life Insurance Company.

In the end, the Fourth Circuit’s decision is really, at heart, simply a case of the court recognizing the administrator’s right to apply a reasonable interpretation to the plan’s terms and to deny benefits if they should be denied based on that interpretation. Interestingly, the court engages in a long and detailed analysis of case law on accidents and unexpected injuries in evaluating the administrator’s decision and interpretation of the plan, but that mostly seems superfluous to me. While the court’s finding that the case law supported the administrator’s interpretation certainly lends support to the conclusion that the administrator’s determination and interpretation of the plan’s applicable terms were reasonable, the finding – and in fact the entire discussion – was probably unnecessary. This is because, at the end of the day – and the court in its opinion makes some gestures in this direction – the administrator’s application of the plan’s applicable terms to a drunk driving accident had to be upheld so long as it was in and of itself a reasonable interpretation of the plain language of the plan. Given the facts of the loss, and the plan’s terms governing what constitutes an accident, interpreting the plan’s terms as not encompassing this loss was well within the range of discretion granted to the administrator, and it really wasn’t relevant how federal courts have, in other contexts or cases, interpreted the term accident.

And in that observation probably lies the answer to the question David posed in his post as to how this case might have been different if it were an insurance declaratory judgment action and not an ERISA action. I doubt, in the end, if the court’s approach to the case would have varied much at all. As an ERISA action, as noted above, there really was no need for the court to analyze the judicial precedents bearing on the interpretation and application of the applicable plan terms, and instead the court should have – although it did not – focus simply on the objective reasonableness of the interpretation of the applicable plan terms adopted by the administrator. Rather than considering in depth whether the administrator’s interpretation was consistent with the case law, the more appropriate test would have been to consider whether the administrator’s interpretation was within the range of reasonable interpretations given the facts and the plan language; so long as it was, the determination had to be upheld.

In contrast, as an insurance declaratory judgment action, the appropriate approach would have been to proceed exactly as the court actually did, applying case law to the plan language and deciding based on that case law what interpretation should be given to the plan language. This is, at root, the road followed by the court here.

 

Here is an interesting post concerning a recent decision from the Second Circuit on the impact – there is apparently none in that circuit, given this post and the Second Circuit decision, Tocker v. Phillip Morris Companies, discussed in the post – of an administrator reserving discretion in determining claims for benefits only in the plan documents and not in the summary plan description itself.

Now I don’t necessarily agree with the writer of the post, who feels that if a participant cannot locate in the summary plan description the magical Firestone language that reserves discretion to the administrator, then de novo and not arbitrary and capricious review should apply. The writer’s view is that the summary exists to educate the participant, and the participant ought to be able to rely on it and find the reservation of discretion there, or else not have it applied against him or her. Personally, I favor a more realpolitik view of the world when it comes to establishing litigation rules, based on how we can expect people in the real world to act. Most participants, frankly, unless they have been educated about Firestone, discretionary language and standard of reviews by some other source, will have no idea what the Firestone language means or its effect, even if they find it in the summary plan description; for those who have been or choose to educate themselves sufficiently to understand that issue under the employee benefit plans provided by their employers, they will likewise understand that there are other sources of documents that they need to examine that govern the plan. The Second Circuit ruling in Tocker seems to fit that understanding of the real world quite well.

And some of this goes back to a fundamental issue, of whether participants really understand – or even read – the summary plan description, or whether it is instead simply something that gets pulled out by a participant’s lawyer after a claim for benefits has been denied. The summaries exist because we need to mandate disclosure, and certainly the more the better – but I don’t think it is realistic to structure a legal rule and indeed an entire regime around the myth that participants actually do read them, rely on them and understand them. When we do that, we move into simply creating traps that make the administration of plans more difficult and create loopholes to be exploited in litigation; while this may be good for lawyers’ wallets, I think we are all better served by legal rules that fit comfortably with how non-lawyers actually conduct themselves in their day to day lives.

On a more practical and technical level, the Tocker opinion provides an excellent overview of the law governing summary plan descriptions, and the role of those documents in the ERISA regime, for those of you interested in more information on those subjects.

I have written extensively before – including both here and here -about Abatie v. Alta Health, the Ninth Circuit’s relatively recent decision revising that circuit’s approach to structural conflicts of interest and the effect such conflicts should have on the standard of review in denial of benefit cases. The Ninth Circuit’s new rule, I noted, placed it in conflict with the position of other circuits on the same issue, most notably, for purposes of this blog, the First Circuit, whose approach is really diametrically opposed to that of the Ninth Circuit on this issue.

The internet is abuzz today with the story of the Supreme Court remanding a denied benefits case back to the Ninth Circuit for further consideration in light of the intervening decision from that circuit in Abatie. SCOTUS blog, really the gold standard in Supreme Court coverage, has the story here, as well as links here to the petition for certiorari filed by the administrator/insurer and here to the Supreme Court order remanding the case for further consideration.

What is perhaps more interesting, to me anyway, is the unknown future of the remanded case in light of that remand. I have written before that Abatie itself reads as though it was written in the hope of becoming the vehicle for the Supreme Court to return to the issue of standards of review and the effect of conflicts of interest on the arbitrary and capricious standard of review. Can we look forward to seeing the newly remanded decision back up to the Supreme Court later, after further consideration by the Ninth Circuit of it in light of the principles enunciated in Abatie, as the vehicle for that inquiry?

On a side note, by the way, the petition for certiorari is itself a terrific review of the split among the circuits on the issues noted above.

Some of you hopefully saw my recommendation the other day concerning this morning’s webinar on 401(k) plan fees and the attendant obligations of fiduciaries. The webinar discussed in detail the obligations of plan sponsors and other fiduciaries with regard to 401(k) plans and their accompanying fees. On the key issue of how to avoid incurring liability for breach of fiduciary duty as a result of the fees incurred by 401(k) plans and their impact on plan performance, the speakers emphasized  a commitment to due diligence.  In particular, the speakers favor a systemic and periodic review of the entire issue of the fees affecting the plan, and proper investigation and selection of funds and advisors with the issue of fees firmly in mind. In other words, don’t put the plan together without thinking about the issues of fees and ensuring that the applicable fees are consistent with industry benchmarks, and even after you do that, don’t just forget about the issue, but instead return to the topic regularly and make sure fees and performance remain appropriate. There is no magic wand to protect against liability exposures of this nature, but a documented consistent course of conduct that makes certain that fees remain consistent with relevant benchmarks will go far towards insulating fiduciaries from liability on the basis of excessive plan fees.

In some ways, the entire issue reminds me of a story a well-seasoned money manager told me about his firm’s selection many years ago to manage a portion of the funds of a municipal pension plan. The plan selected multiple advisors, each charged with a different portion of the assets, and each was assigned an appropriate benchmark against which its performance would be measured. Each was also told that after a set period of time, the plan would review all of the managers’ performances as against the applicable benchmarks, and the trailing performers would be replaced, and the others would continue to manage their portions, at least until the next scheduled review, at which point the trailers at that point would be replaced.

Isn’t this exactly what we mean by diligent, reasonable conduct by fiduciaries – a consistent, regular effort to ensure that fund assets are being managed to the advantage of participants, based on a comparison to appropriate benchmarks?

I have written before about the American Rule – which requires parties to a lawsuit, in the absence of a fee shifting statute or contractual agreement, to pay their own legal fees – and the exception under Massachusetts law that runs in favor of insureds who prevail in coverage cases against their insurers. The Supreme Judicial Court has now established that this exception runs only to disputes over an insurer’s duty to defend, and not to disputes over the duty to indemnify. Thus, while an insured who proves that its insurer breached a duty to defend can recover from the insurer its legal fees in proving this point, the same is not true for an insured who proves that its insurer breached the duty to indemnify. Here’s the story, with a link to the case.

This resolves an unsettled point of Massachusetts law, as to whether the right to recover attorneys fees runs along with a claim over the duty to indemnify, or instead only along with a claim for breach of the duty to defend. It turns out to be the latter only.

In the long run, it’s a better decision than the opposite holding would have been. A decision to deny indemnity without a reasonable basis for doing so is already punishable in Massachusetts under the state’s consumer protection act. When, in contrast, a denial of indemnity is reasonable, an insurer should be able to try to prove that its coverage determination was correct without having to factor in the risk of having to pay the insured’s legal fees if a court finds that the insurer’s interpretation of its coverage obligations, while reasonable, was wrong.

Two things to chew on over the holiday, other than the turducken (I have always wanted to use that word in a sentence), one to know about before it occurs, the other to note before it disappears. I guess I could take that dichotomy a little further, and note that one concerns the first half of the blog’s title, and the other, the other half.

The first: Susan Mangiero, who writes the excellent blog Pension Risk Matters, is hosting a webinar on November 28 covering issues related to investment fees, the management of 401(k) plans, and fiduciary obligations. The webinar, covering “401(k) plan fees – what they are, how they can affect reported performance and the fiduciary practices that address investment management fees” is driven by the fact that:

In the aftermath of the Pension Protection Act of 2006, 401(k) plan sponsors are required to carefully select "fiduciary advisors", identify appropriate default investment choices for participants and comply with more rigorous federal reporting procedures. All of this could spell trouble for retirement plan fiduciaries who fail to realize that regulation, public awareness and employee angst put them in the spotlight as never before. This is especially apropos with respect to plan fees.

You can find more information on the webinar here.

The second: Insurance coverage lawyers, almost by definition, have to be contracts geeks. At the end of the day, what they are really doing is fighting over the language in contracts, a particular type of contract certainly, but contracts nonetheless. And here, before it vanishes from the internet, is the story of how much money there is in not being a contracts geek.