Many large companies offer employees “self-insured” or “self-funded” ERISA plans to provide disability insurance or health insurance benefits. However, these companies are not in the business of administering health or disability claims. This makes sense. Boeing doesn’t know how to evaluate a short term disability claim. Intel isn’t in the long term disability business. AT&T doesn’t know how to read medical billing codes. So, instead of trying to do this itself, most companies hire other companies to administer the disability or health insurance claims.
These “third-party” companies are either in the business of administering ERISA benefit plans (e.g. Sedgwick and Reed Group) or are already administering these types of claims because they offer medical or disability insurance themselves (e.g. Cigna and Aetna). In theory, a benefit of this structure is that the entity making the claims decision is not the same entity that has to pay the claim. There is no structural conflict of interest.
How do courts view this type of structure if a lawsuit is filed? In such a situation there was a denial of disability benefits or a medical claim was denied. If the ERISA Plan conferred discretionary authority to the claim administrator – and almost all do this – the court reviews the denial of benefits under the plan for an abuse of discretion. Firestone Tire & Rubber Co. v. Brunch, 489 U.S. 101, 115 (1989). Once the court determines that the insurance policy unambiguously grants discretion to the entity that denied the claim – here the third party administrator – the court must determine whether the administrator or fiduciary was operating under a conflict of interest. Metropolitan Life Ins. Co. (MetLife) v. Glenn, 554 U.S. 105 (2008) (“Often the entity that administers the plan, such as an employer or an insurance company, both determines whether an employee is eligible for benefits and pays benefits out of its own pocket. We here decide that this dual role creates a conflict of interest; that a reviewing court should consider that conflict as a factor in determining whether the plan administrator abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case.”); Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 965 (9th Cir. 2006) (“Abuse of discretion review applies to a discretion-granting plan even if the administrator has a conflict of interest. But Firestone also makes clear that the existence of a conflict of interest is relevant to how a court conducts abuse of discretion review.”).
We pause here to observe that many states have issued legislation banning or invalidating discretionary clauses. California is one of those states. In 2012 it implemented California Insurance Code Section 10110.6. However, considering this is an insurance code section, it only applies to insurance policies. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, Plan No. 625, 856 F.3d 686, 692 (9th Cir. 2017) (“if any discretionary provision is covered by the statute, ‘the courts shall treat that provision as void and unenforceable.”). Are self-insured or self-funded benefit plans “insurance” such that they are subject to California’s ban on discretionary clauses? In a word, “no.” A detailed explanation, including the interrelation of ERISA provisions known as the “preemption clause,” the “savings clause,” and the “deemer clause,” can be found in the Ninth Circuit’s decision in Williby v. Aetna Life Insurance Co., 867 F.3d 1129 (9th Cir. 2017).
Returning to the issue of conflict of interest, we already established that there is no structural conflict of interest for a third-party administrator because it does not pay the disability benefit or medical benefit out of its own pocket. But does that mean there is absolutely no conflict of interest for a court to consider when deciding a case under the abuse of discretion standard? Should the court view the decision with no skepticism? Most attorneys will answer both questions with a “yes.” A skilled and experienced ERISA attorney will keep digging.
That’s exactly what Kantor & Kantor did in a case involving a self-funded long term disability plan administered – but not insured – by Aetna. Kantor & Kantor’s attorneys went through over 6,000 pages of documents with a fine-toothed comb to find anything to help support our client’s claim. We found something many other less skilled, less experienced trial attorneys may have missed.
Buried in the administrative services agreement between Aetna and the self-funding employer was contract language tying Aetna’s insurance based claims procedures to its third-party claims handling procedures. As a result, we were not only able to argue that as a third-party administrator Aetna wanted to keep the employer happy (creating an indirect structural conflict of interest) but it had a direct conflict of interest:
Aetna is a claim fiduciary under the Plan. Defendant paid Aetna to administer the Plan. Aetna certainly wished to continue that financial relationship. Thus, Aetna had an incentive to minimize the payments made by Defendant under the Plan. This incentive conflicts with Aetna’s fiduciary duties, including promoting the interests of employees under the Plan. It also constitutes a conflict of interest that calls for a modified abuse of discretion standard. Barnes v. BellSouth Corp., 2003 WL 22399567 at *7-*8 (W.D.N.C. October 20, 2003) (“payment to an administrator by an employer to determine whether the employer must pay disability claims, will create a conflict of interest such that the administrator’s decisions should be reviewed under a modified abuse of discretion standard[.]”); Anderson v. Sara Lee Corp., 348 F. Supp. 2d 618, 625 (W.D.N.C. 2004); King v. Square D Co., 2004 WL 537730 at *15 (W.D.N.C. February 13, 2004).
This conflict factor grows in significance herein because Aetna is a for-profit insurance company. If Aetna employed a different method for administering claims under the Plan than it used to administer claims it insured (where it has a dollar-for-dollar financial conflict of interest), Aetna’s insurance company status would be less relevant. However, Aetna was contractually obligated to use “Aetna’s normal benefit determination and applicable disability cost control standards….” (5974). Because Aetna’s normal standards are the product of a conflict of interest, using them to administer claims under the Plan also yields decisions infected by that conflict of interest. Defendant claims Aetna has no conflict of interest, but Defendant is asking the Court to look at a wolf dressed in sheep’s clothing and ignore that it is still a wolf contractually obligated to act like a wolf.
Kantor & Kantor’s argument to the court at trial was successful. In a published decision issued by Judge Percy Anderson in the United States District Court, Central District of California the court held:
Here, Aetna is not the funding source for the plan. It therefore does not operate under a structural conflict of interest. Nevertheless, it promised to apply, “to the extent applicable,” its “normal claim determination, payment and audit procedures, and cost control standards in a manner consistent with the terms of the Plan, the Services Agreement, and applicable law.” (AR 5957.) Although the Court’s ultimate determination would be the same even if it applied no skepticism at all to Aetna’s decision to terminate [Kantor & Kantor’s client’s] benefits, the Court concludes that a minimal level of skepticism is appropriate in these circumstances to inform its review of Aetna’s determinations under the abuse of discretion standard.
Harder v. Bristol-Myers Squibb Company Long Term Disability Plan, 281 F. Supp. 3d 939, 951 (C.D. Cal. 2017) (subsequently vacated).
A copy of the court’s full ruling can be found HERE. Following this ruling, the court entered judgment in favor of Kantor & Kantor’s client regarding her long term disability benefits, ordered the payment to Plaintiff of her past disability benefits, plus prejudgment and postjudgment interest on that amount at the interest rate established by 28 U.S.C. section 1961, and that her long term disability benefits needed to continue to be paid so long as Plaintiff remained disabled under the terms of the long term disability plan. The court also ordered the Defendant to pay Kantor & Kantor $112,910.00 in attorneys’ fees and pay our client’s costs of $1,145.76. A copy of the judgment can be found HERE.
If your claim has been denied and the benefits are self-insured or self-funded, it is important that no stone is left unturned in the evaluation of whether the third-party administrator had a conflict of interest when making your claim determination. Please contact a Kantor & Kantor attorney for a free consultation at (818) 886-2525 or use our online form.