:: The Effect Of Conflicts Of Interest On The Scope Of Discovery (Unit 1)

With limited exceptions, discovery in an ERISA action seeking judicial review of the denial of benefits is restricted to consideration of the administrative record. . . . One such exception is where the participant or beneficiary alleges that the plan administrator operates under a conflict of interest.

Alexander v. Hartford Life and Acc. Ins. Co., Slip Copy, 2008 WL 906786 (N.D.Tex.) (April 03, 2008)

The scope of judicial review in ERISA claim for benefit cases has presented one of the classic debates that belie the tired old bromide to the effect that ERISA is a “comprehensive and reticulated” statute needing no supplementation.

As the caselaw illustrates, the federal courts themselves struggle to articulate essential structures for the civil remedies provisions, including the most basic concept of the proper standard of review. The subject of permissible discovery is yet another important, but divisive issue.

This recent district court opinion will offer us the opportunity to outline several conflict of interest issues that have divided the courts on the subject of permissible discovery. I will set these topics up in a short series of posts for convenient reference.

First, let’s take a look at the issue noted in the excerpt above. Note that this opinion is that of a district court in the Fifth Circuit, but the opinion notes variances in the law among the circuits in several instances.

Discovery On The Issue Of Administrator’s Conflict Of Interest

The court states that general rule that:

With limited exceptions, discovery in an ERISA action seeking judicial review of the denial of benefits is restricted to consideration of the administrative record. See Vega v. National Life Insurance Services, Inc., 188 F.3d 287,299 (5th Cir.1999) (en banc).

And, then, we have an exception that:

. . . where the participant or beneficiary alleges that the plan administrator operates under a conflict of interest. See, e.g. Faykus-Orr v. Liberty Life Assurance Co. of Boston, No. 3-06-CV-0750-D, 2006 WL 3734213 at *1 (N.D.Tex. Dec.18, 2006) (Kaplan, J).

Which then has the practical effect that:

In such cases, discovery outside the administrative record is permitted to enable the beneficiary to develop evidence demonstrating the extent of the conflict. Id.; see also Kergosien v. Ocean Energy, Inc., 390 F.3d 346, 356 (5th Cir.2004) (“There is no practical way for the extent of the administrator’s conflict of interest to be determined without [ ] going beyond the record of the administrator.”).

Of course, though not mentioned by the district court, we are ever mindful that the Supreme Court has taken up the issue of the effect of a conflict of interest on the standard of review in MetLife v. Glenn, and all must be said with an eye to the ultimate holding in that case.

But for now, at any rate, it can be said that:

The extent of the administrator’s conflict of interest is relevant in ERISA cases because “[t]he greater the evidence of conflict on the part of the administrator, the less deferential [the court’s] abuse of discretion standard will be.” Vega, 188 F.3d at 297. See also Ellis v. Liberty Life Assurance Co. of Boston, 394 F.3d 262, 270 (5th Cir.2004), cert. denied, 545 U.S. 1128, 125 S.Ct. 2941, 162 L.Ed.2d 867 (2005) (“The degree to which a court must abrogate its deference to the administrator depends on the extent to which the challenging party has succeeded in substantiating its claims that there is a conflict.”).

Discovery Permitted

Cases such as Alexander are interesting because that give specific discovery requests that were before the court. In this case, on the issue of conflict of interest, the disputed discovery requests were requests for production as follows:

Request No. 5:

Any contracts governing the role played in the claims or appeal process of Pamela Alexander’s claim by Amy Boys.

Request No. 6:

Any contracts governing the role played in the claims or appeal process of Pamela Alexander’s claim by Diane Farley.

(For context, note that both Boys and Farley are Hartford employees who were involved in the decision to deny plaintiff’s disability claim.)

Holding

Having noted the exception to the general rule limiting discovery, the court ruled with the plaintiffs on this issue for the most part. The court agreed with plaintiff that at least some of the documents covered by this discovery request could shed light on the extent of defendant’s conflict of interest in both administering and insuring the plan.

Note: In support of its holding the court cited Faykus-Orr v. Liberty Life Assur. Co. of Boston (N.D. Tex. 2006), 2006 WL 3734213 at *2. In that case, the following discovery was permitted:

In Interrogatory No. 17 and Request No. 10, plaintiff seeks information and documents pertaining to:

Liberty’s compensation system or policy for the category or job description of any of the personnel, who had decision making authority, involved in reviewing Plaintiff’s Claim for LTD benefits, and for their respective supervisors up to the head of the claims department, including any policy, method or calculation of performance evaluations and/or bonuses, pay increases or benefits paid to said personnel for the period of 2001 to present, including but not limited to the individual criteria under which employees are evaluated to determine the amount of their bonus or compensation.

The court agrees with plaintiff that this discovery may shed light on the extent of defendant’s conflict of interest in both administering and insuring the plan.

Objective Of Discovery – The court noted that:

More particularly, the court would be justified in giving defendant’s decision to deny benefits less deference if discovery revealed that its decisionmakers were compensated or rewarded for cutting benefits or denying claims.

Cited authorities:

  • Lain v. UNUM Life Insurance Co. of America, 279 F.3d 337, 343 n. 7 (5th Cir.2002) (district court justified in finding that administrator’s decision was entitled to a “modicum less deference” under sliding-scale analysis where employees received substantial financial bonus incentives to deny claims);
  • Faykus-Orr v. Liberty Life Assur. Co. of Boston (N.D. Tex. 2006), 2006 WL 3734213 at *2;
  • Pylant v. Hartford Life and Accident Insurance Co., No. 3-05-CV-0379-G, op. at 4 (N.D.Tex. Jan. 20, 2006) (Kaplan, J.), aff’d, 2006 WL 3247314 (N.D.Tex. Nov.9, 2006) (same);
  • Arensberg v. UNUM Life Insurance Co. of America, No. 3-02-CV-0108-P, 2003 WL 23193265 at *13 (N.D.Tex. Aug.27, 2003) (evidence of financial arrangement that rewarded administrator for cutting benefits was a factor in determining abuse of discretion).

The Dividing Line – Here’s the dividing line for discoverability under the court’s ruling:

To the extent any of the documents specified in Request Nos. 5 & 6 reveal the manner or formula by which Boys and Farley are compensated, or show that these employees had a financial incentive to reduce benefits or deny disability claims, those documents must be produced. Otherwise, defendant need not produce documents responsive to Request Nos. 5 & 6.

Next Unit – In the following unit, I will take up another interesting part of the court’s holding. Aside from the conflict of interest between the administrator and the insurer, what of conflicts potential conflicts of interest involving third parties? On this interesting point, the court notes a split of authorities, and that will constitute the subject of the next post.