Supreme Court Rules on Insurer's Conflict of Interest

MetLife (Metropolitan Life Ins. Co.) and Long Term Disability Plan for Associates of
Sears, Roebuck and Company v. Wanda Glenn. US Supreme Court opinion - 6/19/08.

Background:

Glenn was a long-time employee and manager of Sears women's department. She was covered by Sear's ERISA-governed LTD plan, insured by MetLife. The plan documents invested MetLife with discretionary authority. In 2000, Glenn took a medical leave based on cardiac problems (cardiomyopathy and ventricular dysfunction) and submitted a disability claim. MetLife approved the claim (under the own-occ definition), and advised Glenn to seek social security disability income benefits (“SSDI”), which would then be deducted, dollar-for-dollar, from her MetLife benefits. MetLife referred Glenn to an SSDI attorney to represent her, and provided that attorney with medical records from MetLife’s claim file.

The SSA determined that Glenn was disabled and awarded her SSDI benefits. The SSA’s determination was based in part on information not provided by MetLife and in part on the absence of certain MetLife documentation which was not submitted to SSA. (Glenn never submitted to SSA a MetLife APS and PCA stating she could perform sedentary work.) After deducting her attorney’s fees, MetLife recouped from Glenn the balance of the retroactive benefit award, applying it to the resulting overpayment, and reduced Glenn’s monthly benefit by “almost 100%” of her monthly SSDI benefit. Shortly thereafter (at the 2-year test change), MetLife decided Glenn did not meet the policy’s any-occ definition of totally disabled (stating that her condition had improved to the point where she could perform sedentary work) and terminated her benefits. Glenn appealed, presenting to MetLife some (but not all) of the documentation which she previously submitted to the SSA which was not part of MetLife’s file. Specifically, she never presented to MetLife a letter by the APS physician stating she could not work full-time and could not work under any type of stress. MetLife maintained their termination on appeal.

Glenn filed suit in the US District Court and lost, the Court deferring to MetLife’s discretionary authority. Glenn appealed, and the 6th Circuit Court of Appeals reversed, stating that MetLife operated under a conflict on interest and citing various acts supporting that conclusion.

MetLife appealed to the U.S. Supreme Court, which rendered its decision on 6/19/08. Justice Breyer delivered the majority opinion of the Court; Justices Stevens, Souter, Ginsburg, and Alito concurred. Chief Justice Roberts filed an opinion concurring in part and concurring on the judgment, but dissenting relative to how a court should assess a conflict of interest. Justice Kennedy filed an opinion concurring in part and dissenting in part relative to how a court should assess a conflict of interest. He also would have remanded to the 6th Circuit for additional findings.) Justice Scalia filed a dissenting opinion in which Justice Thomas concurred, criticizing how the majority opinion eroded the deference that is to be accorded to an ERISA fiduciary with discretion. He also would have remanded to the 6th Circuit for additional findings.)

Questions Presented to the Supreme Court:

1. Does an insurer who has both discretionary authority to make claim decisions and also funds the plan benefits automatically operate under a conflict of interest?

2. If so, how should that conflict of interest be assessed on judicial review of an adverse claim determination?

Summary:

The Court unanimously agreed that MetLife was operating under a conflict of interest, as its claim determinations had a direct impact on its net income. However, the majority opinion failed to clarify exactly how a theoretical conflict of interest should be factored in to an assessment of whether the conflicted claim administrator abused its discretion. In that respect, federal District (trial) Courts and Circuit Courts of Appeals are somewhat free to continue pursuing divergent standards of review, including the advice contained in the dissenting opinions.

The Existence of a Conflict of Interest:

The Court reiterated that the standard for review of a claim determination made by a claim administrator with discretionary authority is to determine whether the claim administrator abused its discretion. It then stated that the existence of a conflict of interest was just one factor to be considered in making that determination, but in and of itself, does not automatically mean that that the claim administrator necessarily abused its discretion in arriving at a financially self-serving adverse claim determination. The Court then unanimously found that MetLife (or any claim administrator with discretionary authority who is also financially responsible for the payment of claims) necessarily operates under a conflict of interest.

Evaluating a Conflict of Interest:

In reviewing the 6th Circuit’s decision, the Court noted that other factors were considered in arriving at that determination.

The Court of Appeals ultimately set aside MetLife’s denial of benefits in light of a combination of several circumstances: (1) the conflict of interest; (2) MetLife’s failure to reconcile its own conclusion that Glenn could work in other jobs with the Social Security Administration’s conclusion that she could not; (3) MetLife’s focus upon one treating physician report suggesting that Glenn could work in other jobs at the expense of other, more detailed treating physician reports indicating that she could not; (4) MetLife’s failure to provide all of the treating physician reports to its own hired experts; and (5) MetLife’s failure to take account of evidence indicating that stress aggravated Glenn’s condition.

The Court declined to develop a “bright-line” rule for evaluating conflicts of interest and other factors, stating:

Benefits decisions arise in too many contexts, concern too many circumstances, and can relate in too many different ways to conflicts—which themselves vary in kind and in degree of seriousness—for us to come up with a one-size-fits-all procedural system that is likely to promote fair and accurate review.

However, the Court did note several ways that a conflicted claim administrator could reduce, or even eliminate, conflict of interest as a relevant factor.

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 decisionmaking irrespective of whom the inaccuracy benefits.

Chief Justice Roberts, while agreeing with the result, disagreed with how a conflict of interest should be factored in. Specifically, he stated that the existence of a conflict of interest should have no weight, and should not add weight to other factors, unless the claim administrator acted improperly because of that conflict of interest.

The majority’s approach would allow the bare existence of a conflict to enhance the significance of other factors already considered by reviewing courts, even if the conflict is not shown to have played any role in the denial of benefits. The end result is to increase the level of scrutiny in every case in which there is a conflict—that is, in many if not most ERISA cases - thereby undermining the deference owed to plan administrators when the plan vests discretion in them. I would instead consider the conflict of interest on review only where there is evidence that the benefits denial was motivated or affected by the administrator’s conflict. No such evidence was presented in this case. I would nonetheless affirm the judgment of the Sixth Circuit, because that court was justified in finding an abuse of discretion on the facts of this case—conflict or not.

He went on to cite specific examples where the evidence showed that the claim administrator’s conflict motivated an improper determination:

It may, for example, appear on the face of the plan [citation omitted] (offering hypothetical example of a plan that gives “a bonus for administrators who denied benefits to every 10th beneficiary”); it may be shown by evidence of other improper incentives, see [citation omitted] (insurer provided incentives and bonuses to claims reviewers for “claims savings”); or it may be shown by a pattern or practice of unreasonably denying meritorious claims, see [citation omitted] finding a “pattern of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics”). The mere existence of a conflict, however, is not justification for heightening the level of scrutiny, either on its own or by enhancing the significance of other factors.

Justice Kennedy agreed with the majority’s analysis, but disagreed with the result. Rather than confirming the 6th Circuit’s decision (reversing MetLife’s determination), he stated the case should have been remanded to the 6th Circuit to determine whether MetLife had taken any of the suggested steps to insulate its claim department from the insurer’s financial considerations, thus extinguishing the conflict of interest as a factor in assessing whether or not MetLife abused its discretion.

But as far as one can tell, the Court of Appeals made no effort to assess whether MetLife employed structural safeguards to avoid conflicts of interest, safeguards the Court says can cause the importance of a conflict to vanish. … By reaching out to decide the merits of this case without remanding, the Court disadvantages MetLife solely for its failure to anticipate the instructions in today’s opinion.

In their dissenting opinion, Justices Scalia and Thomas reviewed the history of ERISA relative to treating a claim administrator in the same way as a trustee.

… our cases make clear that it is to be governed by the law of trusts. Under that law, a fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision. There is no evidence of that here. …

The Restatement [of Trusts] does indeed list in Comment d certain circumstances (including conflict of interest) that “may be relevant” to deciding whether a trustee has abused his discretion. … In trust law, a court reviewing a trustee’s decision would substitute its own de novo judgment for a trustee’s only if it found either that the trustee had no discretion in making the decision, [citation omitted], or that the trustee had discretion but abused it, [citation omitted.] Otherwise, the court would defer to the trustee. … A trustee abuses his discretion by acting dishonestly when, for example, he accepts bribes. [citation omitted] A trustee abuses his discretion by failing to use his judgment, when he acts “without knowledge of or inquiry into the relevant circumstances and merely as a result of his arbitrary decision or whim.” [citation omitted] A trustee abuses his discretion by acting unreasonably when his decision is substantively unreasonable either with regard to his exercise of a discretionary power or with regard to his assessment of whether the preconditions to that exercise have been met. [citation omitted] And—most important for this case—a trustee abuses his discretion by acting on an improper motive when he acts “from a motive other than to further the purposes of the trust.” … The four abuses of discretion are clearly separate and distinct.

Relative to the deference to be accorded a claim administrator with discretion, Scalia stated:

A trustee without a conflict could take either of two reasonable courses of action, but a trustee with a conflict, facing the same two choices, would be compelled to take the course that avoids the appearance of self-dealing. He would have to do that even if he thought the other one would better serve the beneficiary’s interest, lest his determination be set aside as unreasonable. … A trustee’s conflict of interest is relevant (and only relevant) for determining whether he abused his discretion by acting with an improper motive. It does not itself prove that he did so, …

Reasonable is reasonable. A reasonable decision is one over which reasonable minds seeking the “best” or “right”
answer could disagree. It is a course that a trustee acting in the best interest of the beneficiary might have chosen. Gradating reasonableness, and making it a “factor” in the improper-motive determination, would have the precise effect of eliminating the discretion that the settlor has intentionally conferred upon the trustee with a conflict, for such a trustee would be foreclosed from making an otherwise reasonable decision.

I conclude that the only possible basis for finding an abuse of discretion in this case would be unreasonableness of petitioner’s determination of no disability. The principal factor suggesting that is the finding of disability by the Social Security Administration (SSA). But ERISA fiduciaries need not always reconcile their determinations with the SSA’s, nor is the SSA’s conclusion entitled to any special weight. [Citation omitted.] The SSA’s determination may have been wrong, and it was contradicted by other medical opinion.

We did not take this case to make the reasonableness determination, but rather to clarify when a conflict exists, and how it should be taken into account. I would remand to the Court of Appeals for its determination of the reasonableness of petitioner’s denial, without regard to the existence of a conflict of interest.



Impact:

The Court’s opinion will most likely result in a flurry of activity by conflicted claim administrators (employers administering their own self-funded claims and insurers administering their own insured claims) to insulate their claim departments from financial considerations in order to diminish or extinguish conflicts of interest as a factor in an abuse of discretion assessment. Some companies may look to a TPA, acting independently of any financial considerations, to provide claim services in order to resolve their conflict whereas many would likely prefer to keep their claim administration in-house. In that case, there may be more of move to add such a separation only when claims have already been denied, such as an “appeals only” service. This would allow insurers to keep claims in-house while using the TPA to create a “Chinese Wall” on those claims which present the greatest likelihood of undergoing judicial scrutiny and the ambiguous standard of review described above.

Lessons Learned:

The majority, as well as Chief Justice Roberts, viewed MetLife’s failure to investigate and address the conflicting SSA determination as a significant abuse of discretion. When denying or terminating benefits based on an any-occupation definition of disability relative to a claimant known to have been approved for SSDI, claims associates should consider including in the denial / termination letter, as an additional item to be provided on appeal, all SSDI award letters and any documentation submitted to SSDI not referenced in the denial / termination letter. This should be considered regardless of whether or not the claims administrator assisted the claimant in obtaining SSDI benefits.