• Dual Role of Insurers Creates Conflict Requiring Totality of the Circumstances Review
  • July 3, 2008
  • Law Firm: Baker & Hostetler LLP - Cleveland Office
  • In an important case for employers sponsoring ERISA-covered plans, such as a disability plan, where an insurer also acts as an administrator adjudicating claims, the U.S. Supreme Court ("Court") announced its 6-3 decision in Metropolitan Life Insurance Co. v. Glenn, U.S. No. 06-923, on June 19, 2008, and held that benefit determinations ("Determinations") by such insurers continue to be subject to review using the deferential standard established in Firestone Tire & Rubber Co. v. Bruch , 49 U.S. 101,115 (1989), but hold that the conflict of interest must be taken into account in such Determinations.

    Employers often delegate the responsibility for making Determinations to third party insurers and pay those insurers a premium to cover the cost of benefits paid as a result of such Determinations. This dual role creates a facially obvious conflict of interest since the insurer "both determines whether an employee is eligible for benefits and pays benefits out of its own pocket."

    Applying the four principles used in Firestone, the Court found 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."

    In this case, the Court opens the door for a "totality of the circumstances" standard to be applied, and offers great deference to lower courts in deciding that standard. However, the decision to reverse MetLife's determination in this case was based primarily on the court's view that MetLife abused its discretion in making the Determination because MetLife "emphasized a certain medical report that favored a denial of benefits, had de-emphasized certain other reports that suggested a contrary conclusion, and had failed to provide its independent vocational and medical experts with all of the relevant evidence."

    The Court recognized that its "elucidation of Firestone's standard does not consist of a detailed set of instructions," noting that "[b]enefits decisions arise in too many contexts, concern too many circumstances, and can relate in too many different ways to conflicts . . . for [the Court] to come up with a one-size-fits-all procedural system that is likely to promote fair and accurate review." Moreover, the Court further provided that "when judges review the lawfulness of benefits denials, they will often [need] to take account of several different considerations of which a conflict of interest is one."

    The Court did note that deferential review will be less important "[w]here 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."

    Despite this potentially detrimental decision for insurers and employers, the standard established by this case and how it will be applied by the courts in reviewing cases is murky at best. While the decision might open the door for additional disputes between employees and insurers in the event of a benefits denial, employers and insurers can and should take certain steps to secure the most favorable level of deferential review, such as creating internal safeguards for accurate claims decision-making.