ERISA conflict of interest

You already know that many ERISA plans contain discretionary language, which calls for a court to review the ERISA claim denial under an abuse of discretion standard.

But many times a structural “conflict of interest” can occur where the plan administrator has the “dual role” of administering and funding the plan benefit. Courts typically look for evidence that the structural conflict actually affected the claim handling, which can affect the scrutiny of review.

One well-known and easy way to inoculate the effect of structural conflicts of interest is to use “independent peer reviewers.”

Here’s the case of Green v. Life Insurance Company of North America (LINA), ___ Fed. Appx. __ (10th Cir. September 26, 2018) that highlights the point.

FACTS: In December 2014, Green, a tractor-trailer operator experienced “cloudy and foggy vision” and sought medical treatment. Three unsuccessful surgeries resulted in permanent loss of vision, rendering him unable to work as a truck driver. Green sought ERISA-governed disability benefits, administered and funded by LINA. The ERISA plan contained discretionary language.

LINA denied the claim, concluding Green’s condition was a pre-existing condition: the posterior vitreous detachment Green experienced in December 2014 likely caused a retinal tear and eventual detachment in 2015. Green sued to recover benefits.

ISSUE: Whether the structural conflict of interest affected the claim?

HELD: The structural conflict of interest was properly addressed by LINA.

  1. “LINA properly dealt with its conflict of interest in its dual capacity role by twice referring Mr. Green’s case to independent medical reviewers.” Op. at 6.
  2. LINA made a reasonable and good faith determination that Mr. Green had a pre-existing condition…that caused or substantially contributed to his vision loss….LINA relied on five doctors’ opinions, two of whom were Mr. Green’s own doctors, and all of whom agreed….” Op. at 7.

You know that in ERISA cases most courts typically will limit review to the administrative record, absent special circumstances. Courts may also allow limited discovery when assessing whether a “conflict of interest” affected the claim determination. A conflict of interest can arise, for example, when the insurer of the ERISA governed benefit is both the “evaluator and the payor.”

But watch out when Plaintiff asserts a breach of fiduciary duty claim. There is very strong precedent to obtain early dismissal of these claims. See, e.g., Rochow v. LINA, 780 F. 3d 364 (6th Cir. 2015).

AND…if you don’t move early to dismiss these dubious claims, the court may allow very broad discovery.

Here’s the case of Milby v. Liberty Life Assurance Co. of Boston, 2016 WL 4599919 (W. D. Ky. September 2, 2016)(Since the dubious breach of fiduciary duty claim had not been dismissed, the court allowed broad discovery).

FACTS: Plaintiff sought broad discovery in a claim involving ERISA-governed long term disability benefits. Plaintiff alleged Liberty Life was both the evaluator and payor of the claim and therefore sought discovery into Liberty’s conflict of interest. Liberty argued review of the claim denial should be limited to the administrative record, and there should be no discovery, or significantly limited “conflict” discovery.

ISSUE: What discovery is allowed when Plaintiff asserts a breach of fiduciary duty claim?

U.S. DISTRICT COURT HELD:

  1. “An ERISA plaintiff may pursue a claim under § 1132(a)(3), but only when it “is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § [1132](a)(1)(B) is otherwise shown to be inadequate.” Op. at 3.
  2. Plaintiff “alleges numerous flaws in Hartford’s claims process, but only one injury: the denial of benefits. He contends that without discovery, it is impossible to determine what remedies are adequate…. But [Plaintiff’s] alleged injury—the denial of benefits—can be remedied by § 1132(a)(1)(B), which allows [Plaintiff] “to recover benefits due to him.” 29 U.S.C. § 1132(a)(1)(B). No discovery is necessary to make this determination. …[Plaintiff]… has failed to allege “an injury separate and distinct from the denial of benefits” or show why “the remedy afforded by Congress under § [1132](a)(1)(B) is … inadequate,” the Court will dismiss his § 1132(a)(3) claim. Op. at 3.
  3. “Despite Liberty’s strenuous arguments in favor of the eventual dismissal of Milby’s breach of fiduciary duty claim, it has not filed any motion that could potentially dispose of the claim. Even if Liberty might succeed if it filed the long-promised motion for partial judgment on the pleadings, it cannot escape the fact that Milby currently has a pending cause of action pursuant to Section 1132(a)(3).” Op. at 5.
  4. Since the breach of fiduciary duty claim has not been dismissed yet, the scope of discovery will not be limited to the administrative record. [T]his Court finds that discovery is permissible in this case due to the existence of a breach of fiduciary duty claim pursuant to § 1132(a)(3). Op. at 5.

KEY TAKE AWAY: When Plaintiff asserts a breach of fiduciary duty claim (like the one in Rochow v. LINA), move to dismiss the claim early. This can help foreclose arguments for broad discovery.

You already know that evidence of a “conflict of interest” can change the standard of review the court applies in ERISA claims.

But proper structuring of multi-employer benefit plans can avoid an inherent conflict of interest.

Here’s the case of Foltz v. Barnhart Crane and Rigging, Inc., __ Fed. Appx. __ (6th Cir. February 29, 2016)(This case also shows that the Worker Compensation exclusion can trump ERISA disability benefits.) [PDF]

FACTS.  Foltz worked at an oil refinery and was exposed to toxic vapor, which caused chemical pneumonia. He required three months of hospitalization. Foltz submitted a disability claim under the ERISA plan. The plan excludes disability benefits if “benefits are payable under any Worker’s Compensation Act….”  The Plan concluded his illness was work-related and denied his disability claim.

TRIAL COURT: The Plan properly exercised its discretion in denying Foltz’s ERISA disability claim because of the Worker Compensation exclusion.

SIXTH CIRCUIT HELD: AFFIRMED.

  1. “When an ERISA plan relies on an exclusion to deny benefits,…the plan (not the employee) has the burden of proving the exclusion applies.”  Op. at 5.
  2. “[T]he evidence in the administrative record clearly shows that the Fund carried its burden to establish that Foltz’s illness was, in fact, work-related.”  Op. at 5.
  3. As a multi-employer benefit plan, “individual trustees on the Board receive no personal financial benefit from approving or denying claims.  This structure does not create an inherent conflict of interest….”  Op. at 6.