Supreme Court Establishes Important New Standard for ERISA Benefit Plans
October 22, 2008
Mark E. Baker- Northern Virginia
The U.S. Supreme Court recently held that an entity that both determines benefits eligibility and pays benefits under an ERISA-covered employee benefit plan has a conflict of interest that should be considered in determining whether benefits were wrongfully denied. The Court made clear that the conflict of interest is “a factor” to be considered along with other circumstances when determining whether a plan administrator abused its discretion in denying benefits, and that courts should continue to review discretionary benefit determinations with a deferential standard. See Metropolitan Life Insurance Co. v. Glenn, S.Ct. Docket No. 06-923 (June 19, 2008), reported at, 554 U.S. ___ (2008). The decision will have an important impact on how courts decide claims that challenge benefit denials under employee benefit plans pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(a)(1)(B).
Case Background
ERISA permits employees who are denied benefits under employer-sponsored benefit plans to challenge those denials in federal court. Wanda Glenn brought such a claim when she was denied long-term disability (LTD) benefits under her employer’s long-term disability plan administered by Metropolitan Life Insurance Company (Met Life). Met Life had denied Glenn’s LTD application on the grounds that she was capable of performing full-time sedentary work. Glenn disputed that finding, first exhausting her administrative remedies for challenging Met Life’s determination and then resorting to federal court when Met Life stood by its decision. While the District Court denied Glenn’s claim, the Court of Appeals for the Sixth Circuit ruled in her favor. In doing so, the Court of Appeals treated “as a relevant factor” a “conflict of interest” arising from the fact that Met Life was “authorized both to decide whether an employee is eligible for benefits and to pay those benefits.”
Met Life sought Supreme Court review on the question of “whether a plan administrator that both evaluates and pays claims operates under a conflict of interest in making discretionary benefit determinations.” The Court agreed to consider both that question and the question of how any such conflict should be considered during judicial review of a discretionary benefit determination.
The Court’s Ruling
After first endorsing the established standards for judicial review of benefit determinations by plan administrators under ERISA § 1132(a)(1)(B), the Court held that an administrator with the duty to both evaluate claims for benefits and pay claims faces the kind of “conflict of interest” that the established review standards had long recognized. The Court found that such a conflict exists for both employers and insurance companies who serve in the dual role of claims reviewer and payer.
Turning to the issue of how courts should treat the conflict, the Court held that it should be weighed “as a ‘factor in determining whether there is an abuse of discretion’” by the plan administrator. The Court explained that this factor should be considered using the same standard of deferential review that has long applied to review of discretionary plan determinations. “In principle,” the Court stated, “conflicts are but one factor among many that a reviewing judge must take into account.”
Thus, while acknowledging the “dual role” conflict that can arise, the Court did not give that conflict controlling weight. Rather, the Court stressed that, like other factors to be considered in reviewing benefits determinations, the importance of the conflict would vary according to the circumstances of the particular case.
Practical Significance
Although the Metropolitan Life decision deals with seemingly esoteric issues of how courts should decide ERISA benefit denial claims, it has important practical significance for employers. First, in definitively recognizing that plan administrators have a relevant conflict of interest if they both decide benefits eligibility and pay the benefits, the decision puts employers and insurers who hold such a dual role at greater legal risk under ERISA.
Second, in recognizing a circumstantially-based standard for reviewing the conflict, the decision creates a strong incentive for employers to carefully examine how their benefits plans are administered and operated on a day-to-day basis. The more integrated and co-mingled benefits eligibility determinations are with considerations of profitability and financial performance, the more likely it is that the conflict of interest will be deemed a highly relevant factor that should tip the balance in favor of plaintiffs who challenge benefit denials.
In the wake of Metropolitan Life, employers should take a hard look at how their benefit plan administration is structured and carried out and at what changes might be made to reduce the risk that ERISA claims for benefit denials will be successful.
For more information, contact:
Mark Baker
703.720.8088
mark.baker@hklaw.com
toll free: 1.888.688.8500
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