Employment: Recent Decisions Clarify Standards Courts Use When Reviewing ERISA Benefit Determinations
A pair of recent ERISA decisions from the Tenth Circuit Court of Appeals (the court which hears appeals from Oklahoma federal district courts) – one holding in favor of a plan beneficiary, the other holding in favor of a plan administrator – serve as reminders to administrators of their obligations to beneficiaries when making benefit determinations under ERISA plans which grant the administrator discretion in administering the plan.
Benefit determinations must be reasonable and made in good faith.
If a benefit determination winds up in court, a plan administrator must be able to demonstrate its decision was reasonable. Moreover, the circumstances under which the decision was made may call into question the administrator’s good faith. That is what occurred in Phelan v. Wyoming Associated Builders, decided by the Tenth Circuit on July 31, 2009.
Case One: Scott Phelan, an employee of the Lock Shop, was diagnosed with bone cancer. He was covered by a healthcare plan of his employer, which was a member of a trade association that maintained a trust to provide health insurance benefits for its members’ employees. Just as Mr. Phelan was about to submit a large claim relating to his cancer treatment, the association terminated the Lock Shop’s membership in the insurance trust because it submitted a premium payment that was supposedly late and in the wrong form. Mr. Phelan’s claim was therefore denied.
The late payment which prompted cancellation was supposed to be “received” by the trust’s bank by December 20. On December 19 the Lock Shop sent a check by Federal Express to the trust’s bank, and was assured by Federal Express the check would be delivered to the bank in the morning of the 20th. Unfortunately, a severe snowstorm hit overnight, delaying all deliveries. The check made it to the bank by 3:15 on the afternoon of the 20th, but the bank had closed at noon, so the payment was not “posted” to the trust’s bank account until the 21st. The plan administrator interpreted the word “received” to mean actually posted in the trust account, not merely received by the bank.
Because the plan granted the administrator discretion in interpreting its terms, the administrator’s decision was governed by the arbitrary and capricious standard of review. Under this standard, the question for the court was whether the administrator’s decision was reasonable and made in good faith.
The factors a court evaluates to determine whether a decision is reasonable include (1) whether the decision resulted from a reasoned and principled process, (2) whether the decision is consistent with prior interpretations by the plan administrator, (3) whether the decision is reasonable in light of any external standards, and (4) whether the decision is consistent with the purposes of the plan. The Tenth Circuit agreed that the plan was ambiguous, and the administrator was “operating within the realm of reasonableness” in interpreting the word “received” to mean “posted.”
But simply finding the interpretation made by the plan administrator was reasonable did not end the inquiry. In addition, the decision must be made in good faith. To this end, the court noted that the trust was experiencing financial difficulties. The trust had paid almost $4.5 million in claims in the past year, while collecting only $3.3 million in premiums. Two claims alone – including Mr. Phelan’s – accounted for $1.2 million in claims paid. Under these circumstances, the court noted that “while [the trust’s] interpretation of the policy language might have been within some objective zone of reasonableness, it would most certainly not be reasonable to adopt this reasoning as a rascally pretext for avoiding the expensive claim of one of its beneficiaries.” The court held the decision was motivated by bad faith – solely to avoid paying a claim – and therefore overturned it.
Thus, plan administrators must be aware that choosing one reasonable interpretation over an equally reasonable alternative for the sole reason to deny an expensive claim does not amount to the good faith plan administrators owe their fiduciaries. In making their decision, plan administrators should document the good faith reason one alternative was chosen over another in case the decision winds up in court and good faith becomes an issue.
An administrator can take steps to reduce the importance of a conflict of interest.
Case Two: The weight to be given a conflict of interest – when the administrator of the plan is also responsible for paying benefits – was addressed last year by the United States Supreme Court which stated a court should take into account a combination of factors in reviewing a decision, of which a conflict of interest is one. In the words of the Supreme Court, a conflict “should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision . . . [and] should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy . . . .” The Tenth Circuit applied the Supreme Court’s conflict analysis in Holcomb v. UNUM Life Insurance Co. of America, decided August 11, 2009.
In May 2003 Barbara Holcomb began receiving long-term disability benefits under a plan administered and insured by UNUM. The plan provided for 24 months of benefits when the employee is limited from performing her regular occupation, and benefits after 24 months when the employee is unable to perform the duties of any gainful occupation.
In February 2005 UNUM notified Ms. Holcomb the 24 month period was about to expire, and it would be reviewing her file to determine if she qualified for additional benefits. After UNUM determined she did not qualify for additional benefits, Ms. Holcomb administratively appealed. UNUM then requested an independent, board certified doctor review Ms. Holcomb’s file, and requested Ms. Holcomb undergo an examination by an independent neuropsychologist. Based upon these reviews, UNUM denied Ms. Holcomb’s appeal.
The Tenth Circuit concluded UNUM did not abuse its discretion in denying further benefits to Ms. Holcomb. The court noted that UNUM took steps to reduce its inherent conflict of interest by hiring two independent doctors, and therefore did not rely solely on its own physicians and nurses. Based on UNUM’s actions, and in accordance with the Supreme Court’s decision, the court gave little weight to the conflict of interest factor.
The Tenth Circuit’s decision in Holcomb demonstrates that a conflict of interest does not have to weigh against the plan administrator. If an employer or administrator takes active steps to reduce potential bias and to promote accuracy – for example, “walling off” those responsible for claims determinations from those interested in firm finances, or putting in place management checks that penalize inaccurate decision making regardless of who benefits from the inaccuracy – the conflict of interest should not weigh as heavily, and perhaps not at all, as a factor when the court considers whether the benefit determination was reasonable and made in good faith.
By Jon E. Brightmire, firstname.lastname@example.org