The United States Supreme Court recently issued a decision in Metropolitan Life Ins. Co. v. Glenn1 affirming a decision by the Sixth Circuit Court of Appeals to set aside an ERISA plan administrator's denial of long-term disability benefits. The decision is noteworthy because Supreme Court clarified that an ERISA plan administrator that both decides and pays benefits claims operates under an inherent conflict of interest2. The Court also held that a conflict of interest must be considered as a factor by the federal courts in determining whether the plan administrator acted arbitrarily and capriciously in denying benefits3.
Conflicts of Interest Under Firestone Tire & Rubber Co. v. Bruch
A bit of background is in order. In 1989, several years prior to Glenn, the Supreme Court set the standard of review for an appeal of a denial of benefits under an ERISA plan4. The Court stated four principles that courts should consider in reviewing a denial of benefits5. The fourth principle provided 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"6. The Firestone Court did not expound on the nature of the conflict or the weight to be given to the conflict.
Consequently, considerable uncertainty resulted among the federal courts regarding the significance and application of conflicts of interest. The Court accepted review of the Sixth Circuit decision in Glenn to revisit and clarify the Firestone decision as it applied this principle of conflict of interest.
The Facts of Glenn
Glenn, a former employee of Sears, sued the Metropolitan Life Insurance Company (MetLife), a third-party administrator for the Sears long-term disability plan, after MetLife denied her claim for long-term disability benefits7. Under the Sears plan, MetLife was given discretionary authority to determine eligibility for benefits, and was also responsible for payment of valid claims8.
In 2000, MetLife granted Glenn an initial 24 months of disability benefits under the plan after she was diagnosed with a serious heart condition9. At the same time, MetLife encouraged Glenn to apply for Social Security disability benefits10. In 2002, the Social Security Administration granted Glenn permanent disability payments retroactive to 2000 based on its determination that her illness prevented her from performing "any jobs [for which she could qualify] existing in significant numbers in the national economy"11. As is often the case, the Social Security payments went to the plan to reduce benefits due under the plan.
In order to continue receiving disability benefits after the initial 24 month period, Glenn was required to file another claim with MetLife and meet a stricter standard for disability -- that her condition rendered her incapable of performing "'the material duties of any gainful occupation for which' she was 'reasonably qualified'"12. MetLife denied Glenn's claim for extended benefits because it found that she was "capable of performing full time sedentary work" 13.
Glenn filed suit in federal court in Columbus seeking judicial review of MetLife's denial of benefits. The district court denied Glenn relief14. Glenn appealed to the Sixth Circuit. The Sixth Circuit reviewed the administrative record under a deferential standard, but, in doing so, treated as a relevant factor that conflict of interest that arose from MetLife acting as both the plan administrator (which required it to decide eligibility for benefits) and insurer (which required it to pay claims for benefits)15. After taking the inherent conflict into consideration, the Sixth Circuit reversed the district court's decision and set aside Metlife's denial of long-term disability benefits to Glenn.
Conflicts of Interest
The majority opinion in Glenn was authored by Justice Breyer. As to the first issue -- whether a conflict of interest existed -- the Court held that an employer or insurer that is in the dual role of evaluating claims for benefits and paying those claims is acting under the type of conflict to which the court was referring in Firestone16. Citing Firestone, Justice Breyer wrote "every dollar provided in benefits is a dollar spent by . . . the employer; and every dollar saved . . . is a dollar in [the employer's] pocket"17.
Judicial Review of the Conflict of Interest
The Court then addressed how such conflicts of interest should be taken into account upon judicial review. The Court held that the existence of a conflict of interest does not alter the standard of review. Rather, the conflict should "be weighed as a factor in determining whether there is an abuse of discretion"18. The Court adopted a "totality of the circumstances" test, in which the conflict of interest is one factor to be considered alongside a myriad of other factors in determining the propriety of the benefits denial.
The Court indicated that the weight to be accorded a conflict of interest may "prove more important" in certain circumstances where there is a likelihood of bias, and may be "less important" where an administrator has taken active steps to reduce the potential for bias19.
Application and What to Expect
While the manner in which federal courts will apply Glenn remains unclear, the decision makes clear some important principles: (1) one acting as both the arbiter and payer of benefits under an ERISA plan acts under an inherent conflict of interest; (2) that conflict of interest does not alter the underlying standard of review applied by the courts; and (3) the conflict of interest is a factor to be weighed by the courts along with other relevant factors in determining whether the decision to be deny benefits was arbitrary and capricious.
The opinion does provide guidance to plan administrators as to how to minimize the impact of conflicts. The Court specifically stated that a conflict of interest is a less significant factor where "the administrator has taken active steps to reduce potential bias and to promote accuracy," for example "by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits"20. Thus, prudent plan administrators may wish to implement such controls if they have not already done so.