Opinion ID: 3011361
Heading Depth: 1
Heading Rank: 2

Heading: Reviewing Conflicted Decisions

Text: Our analysis of the issue in this case must begin with Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). Prior to Firestone, courts had adopted different approaches to the conflict of interest problem under ERISA, many choosing to vary the degree of deference they gave ERISA benefits administrators operating under a conflict of interest. See Brown v. Blue Cross & Blue Shield of Ala., 898 F.2d 1556, 1560 (11th Cir. 1990) (collecting cases). However, as one court of appeals has stated, the Supreme Court [in Firestone] . . . swept the standard of review board clear. De Nobel v. Vitro Corp., 885 F.2d 1180, 1185 (4th Cir. 1989). Firestone began when a group of plaintiffs sued their employer, who was also the ERISA plan administrator, for wrongfully terminating welfare and pension benefits. A panel of this court considered the relevant principles of trust law, with special attention to the rationales for the general deference given to impartial trustees, concluding that those reasons carry little or no force when trustees are in a position to profit from denying trust benefits. See Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134, 145 (3d Cir. 1987). We also considered the incentives and actual relationship of the parties, and the fact that the benefit plan was contracted for and its terms subject to negotiation. Id. We concluded that trust and contract principles both dictated that our review of the conflicted benefits denial should be de novo, giving no deference to either the administrator's or participants' interpretations. We essentially applied the principles governing construction of contracts between parties bargaining at arms length. Id. The Supreme Court affirmed the specific holding in that case--that the administrator's decision should be reviewed de novo, giving no deference to either party--but used a significantly different rationale. The Court began by stating that interpretation of ERISA should be governed by the common law of trusts, and then grounded the de novo 10 review on the fact that the plan gave the administrator no discretion to interpret the plan. See Firestone , 489 U.S. at 111. The Court observed that trust principles dictated that fiduciaries should be given no deference when making nondiscretionary decisions, see 489 U.S. at 111; see also supra note 2. It then turned to a brief discussion pertinent to this case, noting that a deferential standard of review [is] appropriate when a trustee exercises discretionary powers,2 but that if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a factor in determining whether there is an abuse of discretion. Id. at 115 (quoting Restatement (Second) of TrustsS 187, cmt. d (1959)) (emphasis added). Since Firestone, courts have struggled to give effect to this delphic statement, and to determine both what constitutes a conflict of interest and how a conflict should affect the scrutiny of an administrator's decision to deny benefits. The next two Sections discuss these problems as applied to an independent insurer who is empowered with discretion to determine who deserves benefits under a plan which it funds.
Employers typically structure the relationship of ERISA plan administration, interpretation, and funding in one of three ways. First, the employer may fund a plan and pay an independent third party to interpret the plan and make plan benefits determinations. Second, the employer may _________________________________________________________________ 2. In an article entitled The Supreme Court Flunks Trusts, 1990 S. Ct. Rev. 207, Professor John H. Langbein argues that the Supreme Court's correlation of arbitrary and capricious review with discretionary decisions and de novo review with nondiscretionary decisions has no foundation in the common law of trusts. See id. at 219. He submits that in our opinion in Bruch we were following trust-law tradition in scrutinizing fiduciary conduct more closely when conflict of interest is suspected. Id. at 217. Langbein correctly predicted that companies would quickly redraft their plans to confer unambiguous grants of discretion so as to garner deferential review, see id. at 221, and also predicted that the problems of how courts should deal with conflicted fiduciaries would resurface, see id. at 222. 11 establish a plan, ensure its liquidity, and create an internal benefits committee vested with the discretion to interpret the plan's terms and administer benefits. Third, the employer may pay an independent insurance company to fund, interpret, and administer a plan. While we have previously held that the first two arrangements do not, in themselves, typically constitute the kind of conflict of interest mentioned in Firestone, see infra Section E, today we address the third arrangement for the first time, concluding that it generally presents a conflict and thus invites a heightened standard of review.3 Our sister circuits that have examined this issue have fallen into two basic camps. Most hold that the nature of the relationship between the funds, the decision, and the beneficiary invites self-dealing and therefore requires closer scrutiny, but others allow heightened review only if there is independent evidence that the conflict infected a particular benefits denial.
Insurance Company Administrator is Operating under an Inherent Conflict The Eleventh Circuit was the first to conclude that an insurance company acts under a strong conflict of interest when both administering and paying out benefits under an ERISA plan. Brown v. Blue Cross & Blue Shield of Ala., 898 F.2d 1556, 1561 (11th Cir. 1990). It held that there is an inherent conflict between the roles assumed by an insurance company that administers claims under a policy it issued. . . . Because an insurance company _________________________________________________________________ 3. There may be, of course, variations on each of these arrangements. For example, an employer may pay out of a fund fixed by actuarial tables, which the employer only pays into, but cannot withdraw from, or one from which the employer may withdraw unused assets. An insurance company that administers funds might charge the employing company a fixed fee, or the fee could be closely dependent on the benefits payouts. Any such difference might affect a district court's assessment of the incentives of an administrator/insurer and therefore affect the nature of its review. 12 pays out to beneficiaries from its own assets rather than the assets of a trust, its fiduciary role lies in perpetual conflict with its profit-making role as a business. Id. at 1561 (internal quotations omitted). The Brown court noted that a structural conflict of interest may unconsciously encourage even a principled fiduciary to make decisions that are not solely in the interest of the beneficiary. See id. at 1565. Under this view, although the arrangement is not illegal or inappropriate under ERISA, it warrants heightened scrutiny. [J]udicial hesitation to inquire into the fiduciary's motives will leave the beneficiaries unprotected unless the existence of a substantial conflicting interest shifts the burden to thefiduciary to demonstrate that its decision is not infected with selfinterest. Id. In Doe v. Group Hospitalization & Med. Servs. , 3 F.3d 80 (4th Cir. 1993), the Fourth Circuit, like the Eleventh, concluded that a conflict flows inherently from the nature of the relationship when an employer contracts with an insurance company to provide and determine ERISA benefits. Id. at 86. Undoubtedly, [Blue Cross's] profit from the insurance contract depends on whether the claims allowed exceed the assumed risks. To the extent that Blue Cross has discretion to avoid paying claims, it thereby promotes the potential for its own profit. . . . Even the most careful and sensitive fiduciary in those circumstances may unconsciously favor its profit interest over the interests of the plan, leaving beneficiaries less protected than when the trustee acts without selfinterest and solely for the benefit of the plan. Id. at 86-87. See also Bedrick v. Travelers Ins. Co., 93 F.3d 149, 154 (4th Cir. 1996) (citing Doe). The Fifth Circuit, in a recent en banc discussion, also affirmed a commitment to heightened scrutiny of decisions by an insurer who administers benefits from its own funds. In Vega v. Nat'l Life Ins. Serv., Inc., 188 F.3d 287 (5th Cir. 1999), the plan administrator insurance company was a subsidiary of the plan insurer (the court treated the interests as aligned), and while the court recognized that if the company denied 13 meritorious claims, its reputation may suffer as a result and others may be less willing to enter into contracts where the company has discretion to decide claims, id. at 295 n.8, it concluded that these incentives did not outweigh the strong incentive to self-deal, see id. at 295-98. The Tenth Circuit and Eighth Circuits have also concluded that when an insurance company acts as the administrator for benefits coming from its own funds, the conflict warrants a more searching review. See Armstrong v. Aetna Life Ins. Co., 128 F.3d 1263 (8th Cir. 1997); Pitman v. Blue Cross & Blue Shield of Okla., 24 F.3d 118, 120-22 (10th Cir. 1994) (citing Doe).
Insurance Company Structural Relationship Does not Give Rise to a Conflict That Should Affect