Last week the Seventh Circuit U.S. Court of Appeals issued a decision, Rud v. Liberty Life Ass. Co. Of Boston, written by Judge Richard Posner. Judge Posner is a prolific author and commentator on various topics, a real renaissance man. He writes well and because he avoids legalese and is very much a "cut to the chase" kind of thinker, his decisions usually make for interesting reading. Rud is no exception. Among other things, the case deals with how the language of an ERISA plan should be interpreted and enforced.
Most insurance companies place a boilerplate clause in their policies along the lines of this: "the insurer has the discretion to interpret the terms of this policy and determine eligibility for benefits. The insurer’s decisions shall be binding on the parties." Over 15 years ago, in Firestone Tire & Rubber v. Bruch, the U.S. Supreme Court held that this type of discretion granting language limits the ability of judges to reverse an ERISA plan’s denial to situations where the decision-maker was arbitrary and capricious. Thus, so long as the decision-maker is not completely unreasonable, federal judges will generally not reverse its denial of a claim. However, in Bruch the Supreme Court also stated that if the decision-maker has a conflict of interest, that conflict requires a judge to scrutinize the insurer’s decision more carefully and skeptically than they otherwise would under an arbitrary and capricious standard of review.
In Rud, Judge Posner rationalizes away the conflict of interest language of Bruch by stating that every contract involves a conflict of interest because "each party wants to get as much out of the contract as possible." However, in the case of a health or disability insurance company, there is tremendous opportunity to make sure the insurer gets more than its fair share of benefit out of a policy. Insurance companies draft their policies with little or no input from the insured person, unilaterally determine the premium they will charge and make the ultimate decision about whether a particular claim will be paid or denied. In addition, insurance is very complex and confusing. As a practical matter, there is little opportunity or ability for an insured person to challenge anything but the most obvious error an insurer makes in denying a claim.
Despite the degree to which the insurer and Joe Lunchbucket are unequal in their ability to protect their respective financial interests, Judge Posner goes on to state: "it is hard to see why, if the plan unequivocally authorizes the insurance company to make the conclusive determination of eligibility, the courts should rewrite the provision." Relying on the importance of preserving the right parties have to contract freely about whatever they want, Rud holds that even when there is a conflict of interest, courts should be reluctant to second guess the terms parties place in their contract. It’s a very laissez-faire approach to the issue, consistent with Judge Posner’s reputation as a scholar heavily influenced by free market thinking and economic analysis. This approach to interpretation and enforcement of contracts has been around for quite awhile--as long, in fact, as judges have been around to settle disputes between contracting parties.
However, there is another school of thought on how contracts should be interpreted and enforced. Rather than simply require parties to a contract to live with the literal contract terms down to the last jot and tittle, no matter how one sided they may be, some judges faced with deciding how a contract should be enforced consider the circumstances surrounding how the contract came to be, the relative knowledge and sophistication of the parties, and the economic balance, or lack of it, between them. It’s not hard to think of examples where a judge should do exactly that. If a father of a 16 year old girl decides to supplement the family income by selling his daughter into prostitution, no court will rule in favor of the pimp who sues to enforce the contract when dad later reneges on the deal. Whether to enforce that contract isn’t a close call because the contract between dad and pimp was illegal in the first place. But there will be closer calls about enforcing contracts involving situations that do not involve illegality and about which reasonable minds may disagree.
So what does ERISA have to say about the relationship between insurers and employers on the one hand and employees and their dependents on the other? ERISA was passed to protect employees and their dependents from losing pension and other fringe benefits. To put these protections in place, Congress relied heavily on principles of trust law to supplement and modify the law of contracts. Trust law applies to protect the interests of a party who is vulnerable to being abused, deceived or is otherwise incapable of protecting their interests. The prototypical trust law scenario is where assets are being held for minors or otherwise incompetent individuals.
In the years leading up to 1974 when ERISA was passed, several things occurred that caused Congress to act. The Studebaker corporation went bankrupt and left thousands of employees with pennies on the dollar for pension benefits the employees had negotiated and helped fund over their working careers. In addition, several unions were involved in stealing the pension funds of their members. So Congress imported a number of trust law principles into ERISA. For example, insurers and ERISA plan administrators have a fiduciary relationship with employees and their dependents. These fiduciaries hold ERISA plan assets in trust for the employees and their dependents. 29 U.S.C. §1103. If there is a denial of benefits that an employee believes is wrong, the statute is designed to provide "ready access to Federal courts." 29 U.S.C. §1001(b). In its role as an ERISA fiduciary, an insurer must act solely in the interest of the employees and their dependents and for the exclusive purposes of providing them benefits. 29 U.S.C. §1104(a)(1)(A). An ERISA fiduciary must be completely loyal to the economic interests of the employees and their dependents. That is why the Supreme Court referred in Bruch to the need for judges to take into account any conflict of interest an ERISA fiduciary has.
ERISA's fiduciary duty standards sound inconsistent with an insurer’s profit making purpose don’t they? In fact, the tension between ERISA’s trust law principles and the reality of relying on profit making entities to carry out ERISA’s fiduciary duties is very significant. It generates a lot of litigation.
The problem I have with Judge Posner’s analysis in Rud is that it almost completely ignores ERISA’s trust law component. This is no small error. ERISA’s trust law principles undermine the heart of Judge Posner’s rationale for why federal courts should not second guess the way in which an insurance company sometimes deals with the people it insures. Unfortunately, my experience is that Judge Posner’s pro-insurer, pro-employer result is much more common than it should be among the federal judiciary deciding ERISA cases. When the economic interests of an insurer or employer conflict with its fiduciary duties under ERISA, many judges are too quick to simply ignore the latter and gut ERISA’s fiduciary protections in the process.