Regardless of whether a company's employee benefit plans are entirely self-funded or funded in whole or part through insurance, many employers' plans are structured so that a single entity is responsible for both administering the plan and funding its benefits. In Metropolitan Life Insurance Company v. Glenn, 554 U.S. ___, 2008 WL 2444796 (June 19, 2008), the U.S. Supreme Court ruled that all such plans have a potential conflict of interest, subjecting the plan's benefit determinations to judicial review that could reject the determinations based on the plan's conflict of interest.
The MetLife Decision
Wanda Glenn worked as an employee of Sears, Roebuck and Company for approximately fourteen years. After she was diagnosed with severe dilated cardiomyopathy (a heart muscle disorder), her cardiologist advised her that the stress of her job was complicating her illness and recommended she cease working. In 2000, Glenn resigned her job with Sears and applied for disability benefits under Sears' long-term disability insurance plan. This plan, governed by the federal Employee Retirement Income Security Act of 1974 ("ERISA"), was administered and funded by MetLife. Initially, MetLife approved Glenn's claim for long-term disability benefits. In 2003, MetLife terminated Glenn's disability benefits because it determined that she was no longer totally disabled under the plan's definition. Glenn sued to recover her benefits.
The federal trial court ruled in favor of MetLife. Reversing the trial court's ruling, the Court of Appeals determined that MetLife terminated Glenn's benefits while operating under an apparent conflict of interest because MetLife made eligibility decisions and also paid the benefits claims.
The U.S. Supreme Court reviewed the case to decide: (1) whether a claims administrator of an ERISA plan, who also funds the plan, has a conflict of interest that must be weighed in a court's review of the administrator's benefit determination, as stated in Firestone Tire & Rubber v. Bruch, 489 U.S. 101 (1989)(holding that judges hearing such lawsuits must apply a more stringent standard of review in cases involving a conflict of interest); and (2) if a conflict of interest exists, how that conflict should be handled on judicial review.
The Supreme Court affirmed the lower court's decision, finding that both administering benefit claims and paying the benefits creates a conflict of interest. The Court stated that when an employer administers its own self-funded ERISA plan, every dollar paid in benefit claims is one dollar less in the employer's pocket. The Court found that even where market pressure exists to provide appropriate claims assessments for plan beneficiaries, as where a plan's benefits are funded by insurance, a conflict of interest still exists.
The Court held that the existence of a conflict of interest does not change the standard of judicial review. ERISA continues to apply a deferential standard of review to the decisions of a plan administrator, even where a conflict exists. However, the Court held that federal judges are required to take the conflict into account, as one of many factors in a potentially broad "totality of the circumstances" test. Although conflicts of interest always must be taken into account, the Court indicated that this factor could be more important where evidence suggests that the conflict may have affected the plan administrator's benefit determination.
Significantly, the Court also found that the conflict of interest arising from a plan that is administered and funded by a single entity can be mitigated by structuring the plan so that either: (i) claims administration functions are separated from the plan's financial operations, (ii) a check-and –balance system exists to promote proper benefit determinations, or (iii) delegating authority for benefit determinations to a third party whose only function is to evaluate the claims of plan beneficiaries under the terms of the employer's plan.
Lessons for Employers
While this case dealt specifically with an insurance company that administered an insured plan, the Court admonished employers that if they administer their own self-funded plans, they would face a similar conflict of interest. Therefore, disgruntled plan beneficiaries now have a potentially powerful tool to threaten or file litigation alleging that plans administered and funded by a single entity have a conflict of interest that led the plan to improperly deny benefits.
Employers should promptly analyze their employee benefit plans to identify arguable structural conflicts of interest in the plans and consider steps to reduce the potential liabilities arising from such conflicts. Such steps might include restructuring the plans to take advantage of the Supreme Court's suggestions for mitigating the problem.