You might recall from a previous posting that I discussed the Supreme Court's decision in Metropolitan Life Insurance Co. v. Glenn. In that case, the Court held that there is an inherent conflict affecting insurance companies that both decide and pay claims for benefits. This conflict must be considered in determining whether an insurance company abused its discretion in denying a claim for benefits. This does not eliminate the application of the "arbitrary and capricious" standard of review that ordinarily applies to benefit determinations. Instead, is creates a two-step analysis for courts that are asked to review claims determinations. The first is to determine whether a structural conflict exists which occurs when the administrator both evaluates claims for benefits and pays for them. If this is the case, then step two applies and the court then must determine how much weight the conflict should be afforded in determining whether the administrator abused its discretion in denying the claim.
Subsequent to Glenn, the Second Circuit Court of Appeals recently ruled in Durakovic v. Building Service 32 BJ Pension Fund, that, like insurance companies, Taft-Hartley funds are inherently conflicted when making benefit determinations, and that this conflict needs to be considered by federal district courts when reviewing plan determinations under an arbitrary and capricious standard of review. This could have significant implications for these multiemployer plans and their future benefit plan determinations.
By way of background, Taft-Hartley (or multiemployer plans) are generally administered by a board of trustees, with equal numbers of union and management trustees. Appeal of benefit determinations are made to the board that ultimately makes a ruling on the appeal. The assumption is always that the balance of union and management takes away any perceived conflict because both sides would be equally represented in a decision process.
In Durakovic, an employee applied for disability benefits from her union-sponsored plans. The plans provided benefits to those deemed to be disabled. The plans denied her claim for disability benefits after a review of her appeal and she subsequently filed suit in federal district court challenging the funds’ decision. On appeal, it was agreed that the challenged decision was subject to an arbitrary and capricious standard of review by the court. However, both parties disagreed with the district court’s decision that the Fund’s “conflict” was a relevant factor. The plans argued that they were not conflicted within the meaning of Glenn because Taft-Hartley funds are administered by an entity composed equally of union and employer representatives. Durakovic argued that the conflict should have been accorded more weight.
The Second Circuit first concluded that the same structural conflict that was identified in Glenn exists for all Taft Hartley funds. The Court reasoned that while the employer representatives on the Board of Trustees have fiduciary interests that weigh in favor of the trusts’ beneficiaries they also have other interests that weigh to the contrary (such as potential reductions in employer contributions). According to the court, the fact that a board of trustees is “evenly balanced between union and employer does not negate the conflict.” Oddly, the Court immediately acknowledged that its finding of an inherent conflict was at odds with the view of the Ninth Circuit, which had previously held that a Taft-Hartley fund is not conflicted within the meaning of Glenn because it is a multi-employer trust in which the trustees do not have a personal interest and evaluations are made by a balanced board of trustees.
Having thus concluded that a conflict existed, the Court next determined that the Trustees’ decision was “unsupported by substantial evidence, and therefore arbitrary and capricious.” It therefore reversed the district court’s judgment and granted summary judgment in favor of the Durakovic.
This determination that all Taft Hartley funds have an inherent conflict certainly presents an interesting problem for multiemployer plans. There is the possibility of possible increased future litigation costs. Certainly I think this makes it even more important that trustees keep complete administrative records about appeals decisions to help refute any claim of conflict. Above all, trustees should be reminded to leave their “conflicts” at the door and make sure they are prepared to show the inherent conflict is not a real one.