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United States Supreme Court Rules that an Entity which both Administers and Funds an ERISA Benefits Plan Operates Under a Conflict of Interest that Must be Considered When Reviewing Claim Denials

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Richard C. Kraus, Joel C. Farrar & Nicole E. Stratton
Foster Swift Health Care Law Report
July 2008

On June 19, 2008, the United State Supreme Court held that an ERISA plan administrator that both evaluates benefit claims and pays the benefits has a conflict of interest that affects judicial review of benefits decisions. Such a conflict exists when (1) the employer both funds and administers a self-insured plan, or (2) in a fully insured plan, the insurance company that insures the benefits also evaluates the claims. In both arrangements, the plan administrator owes a fiduciary duty to beneficiaries and participants when evaluating claims, which inevitably conflicts with the administrator’s own interests. As a result, the conflict of interest is a factor that courts should consider when reviewing the denial of a claim for benefits. The case is Metropolitan Life Insurance Co. v. Glenn.

The Supreme Court reaffirmed its prior rule that judicial review is limited when a plan grants its administrator discretionary authority to determine eligibility for benefits. The courts still look to whether the administrator abused its discretion in making the benefits decision. In Metropolitan Life, the Court held that an administrator’s conflict of interest is "one factor among many that a reviewing judge must take into account." The existence of a conflict is given more weight "where circumstances suggest a higher likelihood that it affected the benefits decision." In this particular case, the administrator found that the employee was able to work despite a finding of disability by Social Security, downplayed detailed reports from treating physicians, and failed to provide all of the physician reports to its reviewing expert. On those facts, the Court found that the administrator abused its discretion.

The decision specifically refused to provide courts with any more detailed instructions than the "one factor among many" standard. However, the Court did indicate that active steps to reduce potential bias and promote accuracy can lessen the importance of an administrator’s conflict. One way is to wall off claims administrators from those interested in a company’s finances. Another is to impose management checks that penalize inaccurate decision-making or provide incentives to reward accuracy.

The Supreme Court acknowledged that its decision did not give any clear standards or guidelines for lower courts to apply when reviewing ERISA benefits decision. Unfortunately, this will lead to continued uncertainty and unpredictability for employers and administrators involved in ERISA litigation. This places additional importance on establishing and maintaining procedures designed to ensure fair and accurate determinations of benefits claims. It also confirms the necessity of carefully documenting the information and factors considered in making benefits decisions.