Opinion ID: 3011361
Heading Depth: 1
Heading Rank: 4

Heading: Is Heightened Review Required When an

Text: Insurance Company Both Funds and Administers Benefits? Informed by our canvass of the jurisprudence, we are persuaded that heightened scrutiny is required when an insurance company is both plan administrator and funder. We find especially persuasive the analysis of the Fourth, Fifth, Eighth, Tenth and Eleventh Circuits, and their conclusion that potential self-dealing warrants that fiduciary insurer's decisions be closely inspected. We do not denigrate the Seventh Circuit's suggestion that if a carrier denied clearly meritorious claims on a regular basis and _________________________________________________________________ 5. The purpose of the remand was to permit Reliance Standard to revisit its denial of benefits, because the panel thought that Reliance Standard had misunderstood Dr. Bahler's assessment of Pinto's capabilities. Therefore, the prior panel did not need to precisely assess the structural relationship, nor determine a method for shaping our arbitrary and capricious review when there is a conflict. Both issues are now squarely before us. 19 became notoriously unfriendly to claimants, unions and employees might protest and demand that their employer switch to a different insurance plan. Nor do we think that most insurance companies are unmoved by the importance of building a strong reputation and competing successfully for the business of administering plans. An insurance company can hardly sell policies if it is too severe in administering them. Doe v. Travelers Ins. Co., 167 F.3d 53, 57 (1st Cir. 1999). However, ERISA litigation generally arises only in close cases, and there would seem to be insufficient incentive for the carrier to treat borderline cases (unlikely to become causes celebres) with the level of attentiveness and solicitude that Congress imagined when it created ERISA fiduciaries. Rather, insurance carriers have an active incentive to deny close claims in order to keep costs down and keep themselves competitive so that companies will choose to use them as their insurers, an economic consideration overlooked by the Seventh Circuit. To amplify, while in a perfect world, employees might pressure their companies to switch from self-dealing insurers, there are likely to be problems of imperfect information and information flow. Employees typically do not have access to information about claim-denying by insurance companies, and the relationship between employees and insurance companies is quite attenuated; so long as obviously meritorious claims are well-handled, it is unlikely that an insurance company's business will suffer because of its client's employees' dissatisfaction. Additionally, many claims for benefits are made after individuals have left active employment and are seeking pension or disability benefits. Details about the handling of those claims, whether responsible or irresponsible, are unlikely to seep into the collective knowledge of the stillactive employees. If Pinto's claim is denied, few at RhonePoulenc will learn of it, and Reliance Standard will have little motive to heed the economic advice of the Seventh Circuit that it is a poor business decision to resist paying meritorious claims for benefits. Mers, 144 F.3d at 1020. We also observe that the typical employer-funded pension plan is set up to be actuarially grounded, with the company making fixed contributions to the pension fund, and a 20 provision requiring that the money paid into the fund may be used only for maintaining the fund and paying out pensions. As we explained in Abnathya and Mitchell, the employer in such a circumstance incurs no direct expense as a result of the allowance of benefits, nor does it benefit directly from the denial or discontinuation of benefits. Abnathya, 2 F.3d at 45 n.5; Mitchell, 113. F.3d at 437 n.4. In contrast, although there is nothing in the record indicating the precise nature of Reliance Standard's internal structure, the typical insurance company is structured such that its profits are directly affected by the claims it pays out and those it denies.6 We recognize that the preceding section involves implicit assumptions about economic behavior, but such assumptions have become necessary in the post-Firestone era as we, and other courts, must somehow determine when a conflict warrants close scrutiny. Inasmuch as we are making such assumptions, however, they seem less exceptional than those of the Seventh Circuit, which, we believe, has an overly optimistic view of the flow of information and the sophistication of employees. Furthermore, while all circuits that have considered these questions appear to agree that some level of conflict may be unavoidable and not every conflict will heighten the level of scrutiny, the Seventh and Second Circuits alone require evidence of actual self dealing, and hold that the nature of the relationship itself can never, or almost never, affect the standard of review. Needless to say, Firestone contains no such requirement, and its use of the word conflict instead of direct evidence of bias counsels against the most stern reading. As we opined in Kotrosits, the Firestone court appears, by recognizing the import of a conflict, to have implicitly adopted the position . . . that, where the _________________________________________________________________ 6. We do not, of course, pretend to establish an absolute, per se rule, recognizing that different relationships between the parties could effect a different result. Cf. Metropolitan Life Ins. Co. v. Potter, 992 F. Supp. 717 (D.N.J. 1998) ([A] conflict may arguably be ameliorated where, as here, the plan is experience-rated because the premiums charged to the employer are adjusted annually based on claims paid the previous year and thus the fiduciary's incentive to deny claims to increase profits is lessened, if not eliminated.). 21 claimant demonstrates that it would be inequitable to defer to the plan administrator, stricter scrutiny of his decision is in order. 970 F.2d at 1172. Finally, this is not a scenario where a smoking gun is likely to surface, and direct evidence of a conflict is rarely likely to appear in any plan administrator's decision. Our reading, we believe, infuses at least some meaning into the Firestone regime. Finally, the unique role of insurance companies within ERISA supports our position. ERISA generally requires that assets of a benefits plan be held in trust by one or more trustees. 29 U.S.C. S 1103(a). However, this requirement is excepted for insurance companies; the requirements that the assets be held in a trust does not apply to assets of a plan which consist of insurance contracts or policies issued by an insurance company qualified to do business in a State. 29 U.S.C. S 1103(b)(1). Therefore,[i]nasmuch as `the basis for the deferential standard for review in the first place was the trust nature of most ERISA plans,' the most important reason for deferential review is lacking. Brown v. Blue Cross and Blue Shield of Ala., 898 F.2d 1556, 1561 (11th Cir. 1990) (quoting Moon v. American Home Assurance Co., 888 F.2d 86, 89 (11th Cir. 1989)). Our own case law in the general area, set forth in Section II.E, supports our conclusion. These opinions are selfconsciously laden with negative pregnants, suggesting that structural bias could heighten the review. For example, we noted that the defendants in those cases did not incur a direct expense as a result of the allowance of benefits, or benefit directly from the denial or discontinuation of benefits, Abnathya, 2 F.3d at 45 n.5; Mitchell, 113 F.3d at 437 n.4, implying that a company that did profit directly would be subject to a more stringent standard. Likewise, the most deferential review was appropriate when the employer had incentives to avoid the loss of morale and higher wage demands that could result from denials of benefits, Nazay, 949 F.2d at 1335, and there was only a possibility of future indirect consequences to it, Kotrostis, 970 F.2d at 1173. By negative implication, a heightened standard of review would appear to be appropriate when a plan funder like an insurance company incurs a direct expense, the consequences to it are direct and 22 contemporary, and, while it has incentives to maintain good business relationships, it lacks the incentive toavoid the loss of morale and higher wage demands that result from a denial of benefits. We are also supported by the fact that the great bulk of district courts in this Circuit have interpreted this precedent as mandating heightened scrutiny when the insurance company is the insurer and makes determinations.7 For all the foregoing reasons, we believe that a higher standard of review is required when reviewing benefits denials of insurance companies paying ERISA benefits out of their own funds.