Aug 17, 2017

Delegation of Discretionary Authority


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11/17/2008
Brian S. King
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Geddes v. United Staffing Alliance Employee Medical Plan, 2006 U.S. App. LEXIS 28249 is a case issued earlier this week from the U.S. Court of Appeals for the Tenth Circuit with a number of noteworthy issues. One deals with what is a proper delegation of discretionary authority under ERISA. The U.S. Supreme Court ruled in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) that if an ERISA plan provides the plan administrator with discretion to interpret the terms of the plan and determine eligibility for benefits, that administrator’s decision will not be overturned unless it is found to be arbitrary and capricious by a judge. Arbitrary and capricious conduct is tough to prove. Some courts say that as long as the decision falls anywhere along the continuum of reasonableness it will be upheld. Most courts to consider the issue hold that to be entitled to such deference the decision-maker must be 1) given discretionary authority by the ERISA plan documents and 2) must actually exercise that discretion. If either of those conditions fail, the decision is not entitled to any deference and the court will review it for whether it is right or wrong. The difference between an arbitrary and capricious standard of review and one that evaluates whether the decision-maker is right, a de novo standard of review, is significant. There will undoubtedly be many cases where a decision will be wrong but not completely unreasonable. Thus, ERISA plans and their administrators fight hard to get an arbitrary and capricious standard of review and plan participants work hard to persuade courts that the less deferential, de novo, standard of review is proper. Andrew Geddes suffered serious spinal court injuries when he dove into shallow waters at Lake Powell. He incurred large medical bills and submitted them to United Staffing Alliance’s ERISA plan for payment. The plan denied a large portion of the claims and the Geddeses brought suit alleging the claims were wrongfully underpaid. The plan documents stated that United Staffing Alliance had the discretionary authority to determine eligibility for benefits and interpret the terms of the plan and that while it could hire an independent claims administrator to process the claims, United Staffing Alliance would make all final decisions about the benefits to be paid. United Staffing Alliance retained Everest Administrators to do all claims administration for the plan. All the claims processing and decision-making in the case was done by Everest; there was nothing to indicate United Staffing Alliance ever had anything to do with evaluating Andrew’s claims. The Geddeses argued that the failure of United Staffing Alliance, the only entity given discretion to decide whether the claims should be paid, to provide any input into the process of denying the claim other than directing Andrew's healthcare providers to send the medical bills to Everest, meant the claim had to be reviewed under the de novo rather than the arbitrary and capricious standard of review. The trial court agreed. The Tenth Circuit reversed the trial court in a 2-1 decision. The majority opinion borrows trust law principles to hold that where an ERISA plan administrator vested with discretion retains other individuals to perform work for the fiduciary, that agent’s actions are also cloaked with the fiduciary’s discretion, at least for purposes of utilizing an arbitrary and capricious standard of review. The court went on to state that this was true even where, as was the case for Everest, the agent acts in a purely ministerial capacity. The dissenting opinion points out that the majority’s analysis is against the weight of authority from other courts to consider the issue. As the dissent frames the issue, “[t]he question is whether a fiduciary which has reserved to itself all fiduciary obligations and all discretion and then does nothing should be afforded the same deferential review that we would give to the decisions of a fiduciary which actually exercised its reserved discretion to make the final determinations on contested claims.” When you put it that way, the correct decision seems pretty straightforward and it should go the way of the dissent. We like to think that judges act with machine-like analytical precision combined with Solomonic wisdom. But in fact there is a high degree of unpredictability connected with judicial decisions.

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