Supreme Court Finds Conflict In Insurer Plan Administration

WASHINGTON--The Supreme Court ruled today that there is an inherent conflict of interest in cases where an insurance company serves as both the administrator and provider of disability coverage for a retirement plan.

In a divided 7-2 decision, which also prompted concurring decisions, the court ruled against Metropolitan Life Insurance Company.

The decision was handed down in Metlife vs. Glenn, No. 06-923.

"We here decide that this dual role creates a conflict of interest; that a reviewing court should consider that conflict as a factor in determining whether the plan administrator has abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case," Justice Stephen Breyer said in the majority opinion.

The court's ruling effectively upheld the 1989 precedent set in a case titled Firestone Tire & Rubber Co. vs. Bruch.

The lawyer who argued the case for the claimant, Joshua Rosenkranz of Heller Ehrman LLP in New York, said, "This was a critically important ruling for any employee seeking to recover the benefits that he was promised--and there are thousands of them every year."

He said MetLife took the position "that an insurance company necessarily acts only in the interests of claimants, so that a court should completely defer to the insurance company when it denies benefits, as if the insurance company were completely indifferent to whether or not it pays claims."

By contrast, Mr. Rosenkranz said, "The Supreme Court understood that this position defies common sense, common experience, and all the facts about how insurance companies make their money. Anyone who has ever had a dispute with an insurance company knows that they are not necessarily always bent on paying what they owe.

"The Supreme Court held that lower courts should consider that reality when they review claim denials," he added.

In its latest decision, the Supreme Court held that, as in Firestone, "a court should be 'guided by principles of trust law,' analogizing a plan administrator to a trustee and considering a benefit determination a fiduciary act."

In the case, MetLife was appealing a decision by the 6th U.S. Circuit Court of Appeals, Columbus, Ohio, which sided with Norma Glenn, whose request for permanent disability benefits from the pension plan of Sears, Roebuck, was rejected by MetLife.

In a decision reversing a lower court, the 6th Circuit panel sided in September 2006 with Ms. Glenn, saying that it was entitled to consider MetLife's dual role in deciding benefits and paying them.

The 6th Circuit decision held that MetLife "acted under a conflict of interest" and made a decision that "was not the product of a principled and deliberative reasoning process."

Eric Serron, a partner at Steptoe & Johnson, Washington, D.C. specializing in ERISA issues, said the decision was significant because it clarified the existing precedent in Firestone.

He said it did so because all nine justices agreed with the Sixth Circuit's conclusion in its MetLife decision that an insurer playing both of these roles is acting with a conflict of interest.

A majority of the Justices also indicated that an employer playing both roles would have a conflict of interest, he said.

Mr. Serron said the majority's decision includes language that may be helpful for insurers going forward.

He said this was because in describing the circumstances that would reduce the significance of an insurer's playing both roles, the majority indicated that "It should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.