In an opinion authored by Judge Berzon for Stephan v. Unum Life Insurance Company of America, 697 F.3d 917 (9th Cir. 2012), the Ninth Circuit Court of Appeals reviewed the Northern District of California’s decision to uphold Unum Life Insurance Company’s benefit determination for Stephan. The district court’s decision was affirmed in part, reversed in part, and remanded in part. The appellate court agreed with the district court in that (1) the proper standard of review was an abuse of discretion; and (2) it correctly determined that Unum operated under a conflict of interest when determining the benefits claim. However, the Stephan court also found that the district court erred in various ways including: (1) it failed to apply the traditional rules of summary judgment to its analysis; and (2) it was incorrect in not applying the fiduciary exception to the attorney-client privilege to certain internal memoranda between Unum’s claims analyst and its in-house counsel.  

Factual Background

In August 2007, just three months after Stephan began a new job at Thomas Weisel Partners (TWP), he was in a tragic bicycling accident that rendered him permanently disabled. Stephan was insured under TWP’s long-term disability insurance plan, which was issued and administered by the defendant, Unum. At issue in the case was whether Stephan’s benefits were properly calculated by Unum. In calculating Stephan’s earnings, Unum only accounted for his monthly salary, and did not include his annual bonus.

Standard of Review

If an ERISA plan grants the plan administrator discretionary authority, then the administrator’s decision will not be disturbed by a court if it is found to be reasonable. Here, because the plan did grant the administrator discretionary authority, the case was reviewed under this standard.

Conflict of Interest

Because the plan administrator was found to have discretionary authority, the court reviewed whether there was an abuse of that discretion. The court stated that a degree of skepticism should apply to an administrator’s decision, and the degree should vary based upon the extent to which the decision appears to have been affected by a conflict of interest. Here, a conflict of interest existed based on the fact that Unum both decided who received the benefits and pays for them. However, in reviewing the impact of the conflict of interest, the court found that if an insurer has taken active steps to reduce potential bias and to promote accuracy, the conflict may be given minimal weight.  

The court suggested that the district court hold a bench trial to determine the impact of Unum’s conflict of interest.

Summary Judgment as It Applies in a Conflict of Interest Situation

Prior Ninth Circuit precedent noted the limited application of traditional summary judgment principles in ERISA cases governed by the abuse-of-discretion standard of judicial review. (“Where, as here, the abuse of discretion standard applies in an ERISA benefits denial case, a motion for summary judgment is, in most respects, merely the conduit to bring the legal question before the district court and the usual test of summary judgment, such as whether a genuine dispute of material fact exist, do not apply.” (Nolan v. Heald College, 551 F.3d 1148, 1154 (9th Cir. 2009)). However, the court found that consideration of a conflict of interest is an exception to this feature in ERISA cases. Therefore, the court held that the district court may rule on the summary judgment, if a renewed motion is made, but it must do so in accordance with the traditional summary judgment principles.  

Fiduciary Exception to the Attorney-Client Privilege in the ERISA Context

In the ERISA context, the fiduciary exception to the traditional attorney-client privilege provides that an employer acting in the capacity of an ERISA fiduciary is not permitted to assert the attorney-client privilege against plan beneficiaries on matters of plan administration. However, although this exception applies generally, the Stephan court became the first in the Ninth Circuit to address whether this exception applies to insurance companies in particular. The court noted that the issue of whether the fiduciary exception was applicable to insurance companies had been previously addressed by the Third Circuit Court of Appeals in Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007). However, the Ninth Circuit stated that every district court to consider the question following Wachtel had rejected the approach and held that the fiduciary exception does apply to insurance companies.  

The Stephan court discussed the fact that prior courts have utilized two rationales for applying an exception to the attorney-client privilege in the ERISA context: (1) the ERISA trustee has a duty to disclose to plan beneficiaries all information regarding administration of the plan; and (2) the ERISA fiduciary is a representative for the beneficiary of the trust he is administering, thus, the plan beneficiary is the “real client.” It concluded both of these rationales should also apply equally to an insurer serving in the role of an ERISA fiduciary.  

The Court of Appeals continued by stating that neither the United States Code (29 U.S.C.§ 1133) nor the Code of Federal Regulations (29 C.F.R. § 2560.503-1(h)(2)(ii)) provides any reason why “the disclosure of information is any less important where an insurer, rather than a trustee or other ERISA fiduciary, is the decision maker.” It concluded there was no basis for excluding insurers from the fiduciary exception.

The court held that the fiduciary exception to the attorney-client privilege applied to the documents utilized by Unum and its in-house counsel, in making the determination of Stephan’s claim.