June 25, 2008
US Supreme Court Rules on Plan Conflict of Interest and the Standard of Review in ERISA Benefits Legislation
On June 19, 2008, the U.S. Supreme Court ruled (6-3) in Metropolitan Insurance Company, et al. v. Glenn that there is a conflict of interest when a benefit plan administrator both funds the benefit and evaluates whether to pay benefit claims. This is true whether the plan administrator is the employer itself or an insurance company that insures the benefit: when the plan administrator has a financial interest in whether benefits are paid, it has a conflict of interest. The High Court further ruled that courts should take this conflict of interest into account when reviewing these benefit claims denials, but did not set out a specific standard for how the conflict of interest should affect that review.1
This Capital Checkup provides background for the decision and an overview of the facts in the case. The decision should not have any immediate impact on plan operations.
The Employee Retirement Income Security Act (ERISA) provides for benefit claims to be reviewed "internally" by plan administrators. These plan administrators evaluate benefit claims and make decisions on whether to grant or deny a benefit. After this internal review is completed, claimants can challenge any benefit denial in court. ERISA does not say what standard courts should use to review these benefit denials.
In 1989, the U.S. Supreme Court held in Firestone Tire & Rubber Company v. Bruch that the abuse-of-discretion standard applies to ERISA plans if the plan language grants the plan administrator the discretion to construe the terms of the plan ("discretionary language"). In that case, the U.S. Supreme Court stated that courts should defer to the decision of the plan administrator, and only overturn a benefit denial when it concludes that the plan denial was unreasonable on its face, that is, the plan acted in an arbitrary and capricious manner in denying the benefit. Absent appropriate discretionary language, the court can review the claim on its own, without deferring to the plan's internal benefit decision. This is called the "de novo standard."
In the years following the Firestone decision, the federal courts of appeal have taken varying positions on how their review is affected by the prospect of a conflict of interest that exists on the administrator's part. This is what the Glenn case addresses. The Court's attempt, in Glenn, to resolve this question does not seem to give clear guidance for the future.
Facts in the MetLife Case
The MetLife case involved the review of a long-term disability claim. An employee of Sears, Wanda Glenn, was diagnosed with a heart condition in 2000. She applied for a disability benefit under her employer's plan, which was insured and administered by MetLife. She received two years of disability benefits under the plan, based on MetLife's conclusion that she could no longer perform the duties of her current job. However, to continue receiving disability benefits after two years, Glenn had to show that, due to her medical condition, she could no longer perform, not only her own job, but also the duties of any job for which she was "reasonably qualified." MetLife denied her claim for continuing benefits after the initial two years.
Glenn challenged this denial in federal district court and was not successful. The Court of Appeals, reviewing MetLife's decision, reversed the district court for a number of reasons, taking into account the fact that the decision-maker had a conflict of interest because it not only funded the benefit but also decided whether it would be paid. The U.S. Supreme Court affirmed the Court of Appeals' ruling.
Implications for Plan Sponsors
This case should not have any direct and immediate impact on plan operations. Courts will have to decide on a case-by-case basis how they will weigh a plan administrator's conflict of interest, as many of the federal courts do today. The Glenn opinion specifically states that the standard of review set out in Firestone — whether there was an abuse of discretion in the case of a discretionary determination authorized by the plan — should not change. As a result, the real impact of this case may be to prevent courts from applying the stricter de novo review standard when the decision maker has a conflict. It is too early to say whether this decision will result in courts reversing more or fewer internal claims decisions.
In light of Glenn, plan sponsors might consider taking steps to insulate the party deciding on claims from being influenced by a conflict, in order to avoid having judges discount their internal determinations. However, at this point it is hard to tell whether those efforts would be worth the cost. Plan sponsors should look to their legal counsel for authoritative advice on whether and how to react to the Glenn decision.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on the implications of this Supreme Court decision. The Segal Company can be retained to work with plan sponsors and their attorneys to design procedures for fair and accurate claims review.
- The decision is available on the U.S. Supreme Court's Web site. (Click on the following text to return to Capital Checkup.)
Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.