Opinion ID: 164315
Heading Depth: 4
Heading Rank: 2

Heading: Second tier

Text: 42 While not every type of conflict of interest will require further deference reduction, our previous jurisprudence requires that we decreas[e] the level of deference in proportion to the severity of the conflict. Jones v. Kodak Med. Assistance Plan, 169 F.3d 1287, 1291 (10th Cir. 1999). Thus, in certain types of cases merely shifting the burden (first-tier cases) will not adequately increase the level of judicial scrutiny in proportion to the severity of the conflict of interest. Therefore, in addition to shifting the burden of proof in all conflict cases, the reviewing court must grant even less deference to the plan administrator in those types of cases where a sufficiently serious conflict of interest exists (second-tier cases). Cf. Chambers, 100 F.3d at 827 ([T]he arbitrary and capricious standard is sufficiently flexible to allow a reviewing court to adjust for the circumstances alleged, such as trustee bias in favor of a third-party or self-dealing by the trustee.) (quotation marks omitted). 43 In particular, when a plan administrator, who also serves as the third party insurer, has denied coverage, an additional reduction in deference is appropriate: the denial of coverage may be upheld only if the plan administrator/third party insurer establishes by a preponderance of the evidence that the denial is warranted. See Kennedy, Judicial Standard, 50 Am. U.L.Rev. at 1174 (commenting on the shifting of the burden of proof to fiduciaries with conflicts of interest). Although we need not determine every instance in which a conflict of sufficient severity requires a further deference reduction, we do hold that such a sufficiently severe conflict exists where, as in the present case, the third-party insurer acts as the plan administrator and denies coverage for the insured. 44 We note that at least two other courts of appeals, in considering this type of conflict, suggest that UNUM does not face an especially serious conflict of interest and requires only a small reduction in deference. For instance, the Fifth Circuit states in dicta: 45 When a minimal basis for a conflict is established, we review the decision with only a modicum less deference than we otherwise would. In the instant case, the district court held that UNUM had an inherent conflict of interest because it was both the insurer and the plan administrator, which determined whether to pay claims under the Policy. Accordingly, the district court found that UNUM's decision to deny Lain's claim was subject to a modicum less deference. 46 Lain v. UNUM Life Ins. Co. of Am., 279 F.3d 337, 343 (5th Cir.2002) (internal citations and some quotation marks omitted). 47 The Fourth Circuit suggests a similar approach: 48 In cases like this one, when the plan administrator is also the plan's insurer, a conflict of interest exists. To safeguard against the potential for bias on the part of the insurer, a reviewing court must shift the standard of review to the extent necessary to counteract evidence of undue influence. We find virtually no evidence of self-dealing in the record, and therefore agree with the district court that the appropriate standard of review remains abuse of discretion, albeit with a concomitant skepticism of unsupported statements of UNUM representatives. 49 Jones v. UNUM Life Ins. Co. of Am., 57 Fed.Appx. 159, 160 (4th Cir.2003) (unpublished) (citations omitted). 50 We find neither Lain nor Jones persuasive. Here, the plan administrator directly profits from the denial of claims, due to its dual position as third-party insurer and plan administrator. Indeed, UNUM faces a more severe conflict of interest than that facing other conflicted plan administrators because UNUM is not subject to countervailing pressures that work in favor of insureds. For instance, a reduced conflict of interest exists in cases in which the employer, or the employee's union, acts as the plan administrator, because they must balance their incentive to deny claims — and thus decrease premiums — with their desire to prevent declining employee morale, to retain skilled employees, and to mollify demands for wage increases. See Smathers v. Multi-Tool, Inc./Multi-Plastics, Inc. Employee Health & Welfare Plan, 298 F.3d 191, 197 (3d Cir.2002) ([T]he risk of a conflict of interest is decreased where the administrator and funder of the plan is the employer, rather than an insurance company, because the employer has incentives to avoid the loss of morale and higher wage demands that could result from denials of benefits.) (internal quotation marks omitted). 51 The serious nature of the conflict of interest faced by third-party insurer/plan administrators such as UNUM, puts the plan administrator on notice that its decisions will be judged for their reasonableness and provides the courts with a record that must show that the conflict of interest did not taint such decision. Kennedy, Judicial Standard, at 1174. We thus modify our traditional arbitrary and capricious analysis in these cases to require support for the administrator's decision to deny coverage by a preponderance of the evidence, rather than the traditional requirement of substantial evidence. Sandoval, 967 F.2d at 380 n. 4. Preponderance of the evidence presents a higher standard of proof than substantial evidence. Id. at 382 (holding that substantial evidence is such evidence that a reasonable mind might accept as adequate to support the conclusion reached by the [decision maker].... [and] requires more than a scintilla but less than a preponderance) (internal quotation marks omitted). 52 Application of this heightened standard of review comports with established law. 4 Under ERISA, an insurer bears the burden to prove facts supporting an exclusion of coverage. McGee v. Equicor-Equitable HCA Corp., 953 F.2d 1192, 1205 (10th Cir.1992). Federal courts treat insurer claims of policy exclusions as affirmative defenses. See 5 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D § 1271 (1990) ([F]ederal courts have treated as [an] affirmative defense[] for purposes of Rule 8(c) ... [a] claim by an insurer that the loss suffered by the insured was excepted by the policy's terms.). Thus, as an affirmative defense, an exclusion of coverage requires that the insurer provide proof by a preponderance of the evidence. See, e.g., Brownlow v. Aman, 740 F.2d 1476, 1486-88 (10th Cir.1984) (holding that a defendant must prove its affirmative defenses by a preponderance of the evidence); Cleary v. Knapp Shoes, Inc., 924 F.Supp. 309, 315 (D.Mass.1996) ([A] plan administrator attempting to establish exclusion from coverage has the burden to establish by a preponderance of evidence that a covered employee's illness or medical condition is excludable.) (internal quotation marks omitted). 53