A recent decision from a federal district court in the Tenth Circuit provides an example of the potential erosion of the distinction between claims for wrongful denial of benefits and breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), following the Sixth Circuit’s 2013 decision in Rochow v. LINA, 737 F.3d 415 (6th Cir. 2013) (Rochow II), in which a three-member panel of that court affirmed the district court’s order requiring disgorgement of profits flowing from the wrongful denial of benefits.

In Faltermeier v. Aetna Life Ins. Co., No. 15-CV-2255-JAR-TJJ (D. Kan. May 28, 2015), the district court allowed a plan participant to amend his complaint to include a breach of fiduciary duty based on the insurer’s alleged failure to consider an expert report that was submitted just one day before the final decision denying benefits was issued.

Although the Sixth Circuit sitting en banc ultimately vacated the Rochow IIdecision in Rochow v. Life Ins. Co. of North America, 780 F.3d 364 (6th Cir. Mar. 5, 2015) (Rochow III), thus maintaining the distinction between denial of benefits and breach of fiduciary duty, the rationale of Rochow IImay have nevertheless inspired some creative advocacy on behalf of plan participants/beneficiaries to which counsel for insurers and claims fiduciaries should be prepared to respond, as illustrated by the Faltermeierdecision.

ERISA Background

ERISA provides for six remedial provisions, including review and recovery of wrongfully denied benefits pursuant to §502(a)(1), and the “catch-all” breach of fiduciary duty provision pursuant to §502(a)(3).

Federal district courts are permitted to review the denial of benefits under an arbitrary and capricious standard based on the administrative record before the claims administrator. The applicable standard for the equitable claims brought pursuant to §502(a)(3) is that of a prudent person exercising the care, skill, prudence and diligence under the prevailing circumstance. 29 U.S.C. §1104(a)(1)(B). ERISA and its implementing regulations generally permit deference to plan administrators and claims fiduciaries.Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989).

Where the claim fiduciary makes not only the benefit determination but also the plan funding decision, there is a conflict of interest. That conflict is a factor to be considered in determining whether the decision-making was arbitrary and capricious but may “prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy.” Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 128 S.Ct. 2343, 171 L.Ed.2d 299 (2008).

Use of an independent medical review to support the claim fiduciary’s initial decision renders the conflict of interest factor of limited weight. Fite v. Bayer Corp., 554 Fed. Appx. 712 (10th Cir. 2014) (benefits claim denial affirmed). Further, a claim fiduciary may not assert a different basis to support the denial on judicial review of the decision, but he/she may change the basis for denial from that listed in the initial denial to the final denial decision (from a claimant’s appeal of the initial denial) as supported by the administrative record. Id.

Tenth Circuit Precedent on Benefit Denials and Breach of Fiduciary Duty

The Tenth Circuit has historically disallowed a participant’s or beneficiary’s claim for breach of fiduciary duty pursuant to §502(a)(3) when ERISA provides for another adequate remedy, such as recovery of improperly denied benefits pursuant to §502(a)(1)(B). See, e.g., Moore v. Berg Enters., Inc., 201 F.3d 448 n.2 (10th Cir. 1999) (citing Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996)).

Recent District Court Decision: Faltermeier

In Faltermeier, however, the district court allowed a plan participant to amend his complaint to include a breach of fiduciary duty based on the claim fiduciary’s alleged failure to consider an expert report that was submitted just one day before its final decision denying benefits was issued. The expert report allegedly supported the plan participant’s position that he was disabled from his occupation and that his condition was permanent and progressive. In opposing the motion to amend, the claim fiduciary argued it was futile given that the breach of fiduciary duty claim was based on a wrongful denial of benefits, and therefore subject to dismissal. The district court allowed the amendment, reasoning that the breach of fiduciary duty cause of action could be asserted as an alternative claim for relief.

There are several potential consequences of the district court’s decision to allow the amendment in Faltermeier. On the denial of benefits claim, the court will review the record before the plan administrator under the abuse of discretion standard. However, the plan participant will also be entitled to discovery related to whether there was a breach of fiduciary duty and to produce evidence for the court to determine if there was a breach of a fiduciary duty. In other words, the court will likely be able to review and consider the expert report, which was not part of the administrative record, in determining whether the denial of benefits was improper. The district court would essentially be reviewing the denial of benefits de novo, and not under the arbitrary and capricious standard. The result is not only an erosion of the distinction between claims for denial of benefits and breach of fiduciary duty but also an erosion of the claim fiduciary’s discretionary authority.

Whether the claim fiduciary should have considered the expert report – new information – in Faltermeier is a factor to consider under the “abuse of discretion” standard applicable in benefits denials under ERISA §502(a)(1)(B), but only if the information was timely submitted and not considered or discussed in the final denial. If the expert report was untimely submitted, the failure to consider or to discuss that information would typically not constitute an abuse of discretion.

Practice Pointer

Faced with the simple allegation that the administrator may not have considered an expert report relevant to the participant’s claim for benefits – which arguably feels unfair – the court in Faltermeier may have felt compelled to address the perceived inequity by allowing the amendment. In cases similar to this one, a potential response could be to request a remand in order to have a clearer record regarding timeliness and a better understanding of whether consideration of a denial of claim is supported by the record before the claims administrator, even with the availability of the additional information.

Whether the breach of fiduciary claim in Faltermeier will ultimately be successful is an open question, as Aetna subsequently filed a motion to dismiss that claim, including inter alia an argument of failure to exhaust administrative remedies on the breach of fiduciary duty claim.  Nevertheless, Faltermeier illustrates that creative advocacy on behalf of plan participants/beneficiaries following Rochow II may couple typically dismissible remedies and expand the nature of relief sought, notwithstanding Rochow III.