:: Thorny Issues Presented In Grants Of Discretion To Benefit Administrators

“As an independent, non-fiduciary, third-party administrator, Everest might still be liable . . . if the Geddesses had made claims against Everest individually, distinct from its role as United’s agent. But they did not. Nor did the district court find any basis for personal liability against Everest. For these reasons, the money judgment [on the first cause of action] against Everest is reversed.”

The Court finds that, in light of the Tenth Circuit’s decision in this case, Everest must be dismissed, and its Motion for a Order of Dismissal will be granted.

Geddes v. U.S.A. United Staffing Alliance, L.L.C., 2008 U.S. Dist. LEXIS 92275 (November 13, 2008) (quoting, Geddes v. United Staffing Alliance Employee Medical Plan, 469 F.3d 919, 931 (10th Cir. 2006))

The Geddes saga concludes with dismissal of the third party administrator and an award of attorneys’ fees as well.  You may recall the controversial 10th Circuit decision wherein the Court considered whether a fiduciary’s delegation of duties to a non-fiduciary (the TPA) affected the standard of review.

The conclusion, disputed in a cogently written dissent, was that it did not. See, :: Tenth Circuit Opinion Creates Split In Circuits In Standard of Review Decision

On remand, the district court found no basis to hold the TPA in the case and in this recent decision both dismissed Everest and acceded to its bid for attorneys’ fees.

This case warrants study by defendants and plaintiffs alike.

First, as a matter of law, note the contrasting views on the principle issue of delegation.   The court in Holden v. Blue Cross & Blue Shield of Tex., Inc., 2008 U.S. Dist. LEXIS 79164 (September 30, 2008) sums up the contrasting views.

Section 1105(c)(1)(B) of ERISA states that “[t]he instrument under which a plan is maintained may expressly provide for procedures . . . for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan.” 29 U.S.C. 1105(c)(1)(B); see Chevron Chem. Co. v. Oil, Chem. and Atomic Workers Local Union 4-447, 47 F.3d 139, 144 (5th Cir. 1995) (finding that plan administrator could delegate fiduciary responsibility because plan documents expressly provided for appointment of reviewer by administrator).

The circuits to address this issue have held that when an ERISA plan specifically authorizes its fiduciary to employ an independent third party to review benefit claims, even while reserving final authority to the fiduciary over benefits determinations, the standard of review that would apply to an act by the delegating fiduciary also applies to the acts of the party to whom the responsibility was delegated. See Madden v. ITT Long Term Disability Plan for Salaried Employees, 914 F.2d 1279, 1284-85 (9th Cir. 1990)  [(applying abuse of discretion review to findings by third party to which authority had properly been delegated in plan documents); Geddes v. United Staffing Alliance Employee Med. Plan, 469 F.3d 919, 925-27 (10th Cir. 2006) (same).

In this context, then, the question:  may a fiduciary delegate authority to nonfiduciaries?

The courts have divided as to whether the fiduciary may delegate authority only to other fiduciaries. Compare Geddes, 469 F.3d at 927 (plan administrator may delegate to a nonfiduciary third party because the third party acts as an agent of the fiduciary; “[i]f a plan administrator has been allotted discretionary authority in the plan document, the decisions of both it and its agents are entitled to judiciary defererence.”) with Baker v. Big Star Div. of the Grand Union Co., 893 F.2d 288, 291-92 (11th Cir. 1990) (holding that to qualify for abuse of discretion standard, an ERISA plan administrator that delegates its authority must do so only to other fiduciaries.).

There is tension in the Tenth Circuit’s view, as aptly summarized by the dissent.  On the one hand, the TPA argues that it only exercises ministerial duties and thus is not a fiduciary.  Most claims administration agreements will carefully preserve this distinction.

Yet, on the majority’s view, the TPA has taken the baton, so to speak, from the fiduciary via delegation of fiduciary’s duties.  So who does have fiduciary responsibility in this instance?  There appears to be a void.

Here’s the dissent’s point of view:

The critical legal premise of the majority opinion, it appears, is the conclusion that 29 U.S.C. § 1105(c)(1) permits the delegation of non-fiduciaries to carry out fiduciary responsibilities. Maj. op. at 9-10. As shown infra, no factual basis exists for application of this conclusion of law in this case where only ministerial duties were delegated. Moreover, the conclusion is wrong as a matter of law. Under ERISA, if a party exercises discretion, it is a fiduciary. 29 U.S.C. § 1002(21)(A). See also Baker v. Big Star Div. of the Grand Union Co., 893 F.2d 288, 291 (11th Cir. 1990) (”[I]t is clear that an administrator with discretionary authority is a fiduciary.”) (emphasis in original).

The other circuits that have considered this issue have reached this same conclusion. See Rodriguez-Abreu v. Chase Manhattan Bank, 986 F.2d 580, 584 (1st Cir. 1993) (”To be an effective delegation of discretionary authority so that the deferential standard of review will apply, therefore, the fiduciary must properly designate a delegate for the fiduciary’s discretionary authority.”); Madden v. ITT Long Term Disability Plan, 914 F.2d 1279, 1283-85 (9th Cir. 1990) (”[W]e hold that where . . . a named fiduciary properly designates another fiduciary, delegating its discretionary authority, the ‘arbitrary and capricious’ standard of review . . . applies . . . .”); and Baker v. Big Star Div. of the Grand Union Co., 893 F.2d 288, 291 (11th Cir. 1990). See also Nichols v. Prudential Ins. Co., 406 F.3d 98, 109 (2d Cir. 2005) (”[W]e conclude that we may give deferential review only to actual exercises of discretion.”).

Note: Employers and TPA’s should give careful thought to these case authorities in drafting claims administration agreements.  At a minimum, the agreements and the plan language should be coordinated on grants of authority.  Obviously, explicit grants of authority are preferred and may in some jurisdictions be required to gain deferential review of claims denials.  Administrative practices should conform to the agreement terms with attention to documentation of decisions as responsibility is allocated by plan terms.