Benefit determinations by a plan administrator should be viewed by the courts as a fiduciary act, according to a recent U.S. Supreme Court decision that upheld an earlier standard.
The Supreme Court ruled 7-2 in Metlife v. Glenn that an insurer that serves as both the provider and administrator of disability benefits has an inherent conflict of interest.
While the court ruled that conflicts of interest within a plan should be considered during legal challenges to a benefits decision, it also provided plans with a means of mitigating the potential damage from those conflicts.
"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 wrote in an opinion for the majority in the June 19 ruling against Metropolitan Life Insurance Company.
Effectively, the court upheld the standard set in the prior precedent, Firestone Tire & Rubber Co. v. Bruch, a 1989 decision.
In MetLife, 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."
For fiduciary liability insurers, the impact of the decision may not yet be felt, but they believe clients will have to be made aware of the decision, if they aren't already, and of the court's prescription for reducing conflict of interest risk.
"Virtually every plan has a conflict of interest at some level," said Rhonda Prussack, executive vice president and product manager for fiduciary liability with AIG. As a result, she said, the question becomes one of what can companies expect to occur as a result of the ruling.
"We certainly believe that this is likely to lead to more challenges" when a plan participant disagrees with a benefits decision, she said–and "more defense costs."
Christine Dart, vice president and specialty insurance worldwide fiduciary product manager for Chubb, noted, however, that the court's ruling also provided companies with possible steps that could be taken to minimize the legal risk posed by a conflict of interest.
The court, she said, noted that "if you have a procedure in place where there's a wall" between the plan administrator and those in charge of finances, then that conflict can be given less weight in legal consideration.
In addition, Ms. Prussack said the court also said companies "can establish an independent committee to ensure that benefit decisions are 'right,'" in this case meaning independent, or they could hire an independent fiduciary to play a similar role.
For their part, Ms. Prussack said fiduciary liability insurers can "make sure they're asking these questions of their clients" regarding how they operate and what potential there is for conflicts of interest.
In general, Ms. Prussack said that AIG would take a "wait and see" approach, and would not be making any dramatic changes to how it underwrites fiduciary liability. The company will not try to investigate the details of how its clients' plans are structured to find potential conflicts, she said, but will instead focus on educating their clients about the possible implications of such conflicts. "It's certainly something that we'll be discussing," she said.
In terms of underwriting, Ms. Dart said she "would look to see if [fiduciary insurance customers] are familiar with the decision," and if they examined their own plans to gauge their potential for conflict of interest. "We would certainly be asking what they are doing to protect themselves," she said.
In the case, a unit of MetLife in New York was appealing a decision of a panel of the 6th U.S. Circuit Court of Appeals, Columbus, Ohio. The court sided with Wanda Glenn, a former employee of Sears, Roebuck and Company, whose request for permanent disability benefits was rejected by MetLife.
In a decision reversing a lower court in September 2006, the 6th Circuit panel sided 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."
It was that decision that the Supreme Court upheld.
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."
MetLife took the position that the court should defer to the judgment of the insurance company when the company denies benefits, assuming that it is indifferent to whether or not it must pay claims, Mr. Rosenkranz said.
"The Supreme Court understood that this position defies common sense," he said. "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."
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