When a payment of benefits comes out of the plan administrator’s pocket, the administrator has an incentive to resolve a close case in favor of a denial of benefits. . . In any event, a majority of the Supreme Court Justices consider the potential conflict of interest of a plan administrator (or its staff) serious enough to be given weight in judicial review of the denial of benefits.
But how much weight should it be given?
Marrs v. Motorola, 2009 U.S. App. LEXIS 18129 (7th Cir. Ill. Aug. 14, 2009)
This recent opinion out of the Seventh Circuit answers a question over the termination of disability benefits through plan amendment in the context of a larger question over what deference should be paid to the plan interpretation of a conflicted fiduciary.
In 1997 Michael Marrs, an employee of Motorola, ceased working because of a psychiatric condition and began drawing disability benefits under Motorola’s Disability Income Plan.
Motorola amended the plan to place a two-year limit on benefits for disability resulting from certain “Mental, Nervous, Alcohol, [or] Drug-Related” (MNAD) conditions. Prior to the amendment, the paln imposed no time limit on MNAD benefits.
Although Marrs had already received benefits for more than two years, he was given an additional two years of benefits, starting on the date of the amendment. That period has ended and the benefits have ceased.
Limitation of Benefits in Pay Status
The controversy first turned on the meaning of a provision in the plan that read as follows:
[No amendment] “shall adversely affect the rights of any Participant to receive benefits with respect to periods of Disability prior to the adoption date of the [amendment].”
The Participant’s View
Marrs interpreted “periods of Disability prior to the adoption date” to mean one or more periods of disability that began before the plan was amended but may not have ended before then.
The Court’s View
The Court disagreed, stating:
That is a forced reading. The reference in the plan to “periods” rather than “period” suggests the segmentation of a period of disability, with some segments (”periods”) lying before and some after the amendment.
The Court reasoned through some semantical angles on the language. The interpretation it reached, was not ironclad, but Judge Posner mused that “[w] this interpretation, which is the plan administrator’s interpretation, is correct or not, it is reasonable; and we are inclined to stop with that observation.
Is Deference Required?
The Court noted that the interpretation question before it differed from a typical claim for benefits case, stating:
True, the issue in this case is the interpretation of a plan document rather than the application of the plan’s criteria for an award of benefits to particular facts; and the interpretation of a contract, unless extrinsic evidence is considered, is usually treated as an issue of law, which an appellate tribunal therefore resolves without deferring to the opinion of the first-line decision maker.
And then the Court sets the tone for the rest of its opinion with the following keynote:
But when an ERISA plan gives the plan administrator discretion to interpret its terms as well as to determine eligibility for benefits under terms the meaning of which is not questioned, the court can, as the parties to this case agree, reject the administrator’s interpretation only if it is unreasonable (”arbitrary and capricious”).
While the administrator may not ignore unambigous language, Judge Posner opines that “the administrator’s use of interpretive tools to disambiguate ambiguous language is, one would think, by the terms of the plan entitled to deferential consideration by a reviewing court.”
Judge Posner cautioned against rote application of principles of contract interpretation in ERISA cases.
Confusion may have been injected into the issue of deference to interpretive discretion by cases which say that the interpretation of an ERISA plan is governed by the ordinary federal common law principles of contract interpretation . . .
These principles may be aids to interpretation, he observes, but not warrants for ignoring adminstrator’s discretion in application of plan terms.
The Court’s Take On Glenn
Judge Posner finds the Glenn opinion ambiguous.
There are two ways to read the majority opinion. One, which tracks its language and has been echoed in opinions in this and other circuits makes the existence of a conflict of interest one factor out of many in determining reasonableness. That sounds like a balancing test in which unweighted factors mysteriously are weighed. Such a test is not conducive to providing guidance to courts or plan administrators.
Rejecting this approach, Judge Posner reverts to a simple abuse of discretion test as the first position on a claim denial. His focus: Is the decision reasonable?
Posner observes that both a decision in favor of the applicant for benefits and a decision against may be reasonable. Thus, in his view, the “decisive consideration” is the likelihood that the conflict of interest influenced the decision. (He finds support for this point in the Glenn statement that “The conflict of interest at issue . . . should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision . . . “)
Stated another way, it is not the existence of a conflict of interest (a given in almost all ERISA cases) but the gravity of the conflict that is critical.
Assessing The Gravity Of Conflict
Posner says the gravity of conflict will be “inferred from the circumstances”. The focus on such proof might turn on “procedural unreasonableness” in the plan administrator’s handling of the claim in issue versus efforts by a administrator to minimize a conflict of interest.
He ends up with a test much like that advocated by Justice Scalia’s dissenting opinion. Posner concludes that:
There are no indications in this case, however, that the plan administrator labored under a conflict of interest serious enough to influence his decision consciously or unconsciously—a decision that was otherwise entirely reasonable—decisively.
Scalia’s position, which Posner claims to distinguish, is described as follows:
A dissent by Justice Scalia argued that a conflict of interest should only prompt an inquiry into the existence of improper motive that would render the plan administrator’s decision unreasonable. If the decision is reasonable, he argued, in the sense in which “a reasonable decision is one over which reasonable minds seeking the ‘best’ or ‘right’ answer could disagree,” the fact that the administrator had a conflict of interest is irrelevant, id. at 2360, “unless the conflict actually and improperly motivates the decision.”
Note: The only difference I can see in Scalia and Posner on this point is that Scalia says that if a decisionmaker has no improper motive then the conflict could not have affected the decision and Posner wants to say that the conflict might have “unconsciously” affected the decision. I do not believe that distinction could make a material difference. In either instance the claimant must show circumstantial evidence of a subjective bias. As troublesome as the Glenn “combination of factors” approach may be, the Seventh Circuit’s alternative is little more than a restatement of the rejected approach preferred by Justice Scalia in his dissent. As broad a path as permitted by the pragmatic factor-based approach in Glenn, Judge Posner appears to have found a way to exceed what Glenn permits.
Vesting Issue – The other imporant issue presented in this case involves “vesting” in the welfare plan context. Employee welfare benefit plans” 29 U.S.C.A. § 1002(1) are exempt from the statutory vesting requirements that ERISA imposes on pension benefits. Nevertheless, the terms of a plan may create vested rights in welfare benefits even though the employer is under no obligation to do so. Blackshear v. Reliance Std. Life Ins. Co., 509 F.3d 634 (4th Cir. N.C. 2007).
Vesting Analysis By Benefit Type – In Wheeler v. Dynamic Eng’g, Inc., 62 F.3d 634, 637 (4th Cir. 1995), for example, the Fourth Circuit rejected an attempt to amend a group medical insurance policy to eliminate coverage retroactively for a specific course of treatment that the beneficiary had already begun.
As noted in Dejoe v. Unum Life Ins. Co. of Am., 2008 U.S. Dist. LEXIS 57438 (D. Me. July 28, 2008), however, disability plans have been distinguished from life and health plans. There, the Plaintiff argued that ”when performance is due under the terms of any contract, a later retroactive modification can have no effect on a beneficiary’s claim to benefits under that contract. Id. at 12. In support of the latter contention.” The Plaintiff cited Member Servs. Life Ins. Co. v. American Nat’l Bank & Trust Co., 130 F.3d 950, 956 (10th Cir. 1997), Blackshear v. Reliance Standard Life Ins. Co., 509 F.3d 634, 641 (4th Cir. 2007), and Filipowicz v. American Stores Benefit Plans Comm., 56 F.3d 807, 815 (7th Cir. 1995).
The court distinguished these cases, stating:
With respect to the [plaintiff’s] argument, the cases cited by the plaintiff do not involve disability benefit plans. Each opinion is carefully limited to its facts. Two deal with life insurance policies, the third with medical insurance. Member Servs., 130 F.3d at 952; Blackshear, 509 F.3d at 636; Filipowicz, 56 F.3d at 810. That is the initial critical distinction between these cases and the one at hand. An insured life can only end once; the event giving rise to a specific benefit occurs only once. While the condition of death continues, the entitlement to benefits under the life insurance policy does not. A single payment becomes due at the time of death. To use the plaintiff’s words, that is when the insurer’s performance “became due.” See Member Servs., 130 F.3d at 957. Similarly, the medical expenses for which payment is due occur once and do not continue indefinitely.
By contrast, a disabled individual could recover sufficiently to return to work. The disability policy entitles a beneficiary to periodic payments that, by its terms, may be adjusted at various times. Even in Member Servs., where the court found that allowing the insurer to recoup payments made for medical expenses before the amendment of the policy at issue was barred under general contract law, that ruling applied only to payments made before the date of the amendment; it did not bar a reduction in payments thereafter. 130 F.3d at 957. Here, the defendant has reimbursed the plaintiff for amounts withheld to account for a reduction in benefits before the date of Policy Amendment No. 7. Under Member Servs., nothing more is required.