The U.S. Court of Appeals for the First Circuit issued a decision last week, Denmark v. Liberty Life, ___ F.3d ___, 2007 U.S. App. LEXIS 7143 (1st Cir. 2007), with three separate opinions from the panel. Denmark had a long term disability claim through an insurance policy her employer had with Liberty Life. She had severe and incapacitating fibromyalgia. Her treating physicians agreed that she was disabled by her illness. Liberty Life retained a physician to perform its own medical exam of Denmark. That physician agreed with Denmark’s two treating doctors that she was disabled. Liberty Life was not deterred. It maintained its denial of the claim based on the opinions of a nurse and two physicians. These individuals based their conclusions on reviews of Denmark’s medical records. None of them personally examined Denmark. So the outcome of the case boils down to whose opinions carry more weight. Right? Wrong. Denmark illustrates well the inordinate advantage a deferential standard of review provides to ERISA plans and their fiduciaries. The decision is dominated by a discussion among the three judges about the standard of review. The First Circuit, along with every other Circuit, ruled long ago that if an insurer places “magic language” in its policy granting itself discretion to interpret the terms of the policy and determine eligibility for benefits, the insurer gives itself a dramatic leg up in preventing the federal judiciary from overturning its denial. Simply by inserting this language in its policy, an insurer can tie a federal judge’s hands and dictate that its decision may be overturned only if the court determines that the insurer acted in an arbitrary and capricious manner. Under this standard of review the court is not evaluating whether the insurer’s decision is correct. Its review is something much less stringent. The First Circuit articulated its review as evaluating whether the insurer’s decision “was reasoned and supported by substantial evidence.” Different Circuits explain a deferential standard of review in different ways. But underlying the standard is the idea that it really doesn’t matter if the court would have decided the claim differently if it had been faced with it as a matter of first impression. The question is whether the insurer acted unreasonably. In Denmark Judge Lipez wrote the lead opinion. He bores in quickly on what is troubling him: the degree to which a pure arbitrary and capricious standard of review should be adjusted to take into account the inherent conflict of interest an insurer has when it makes decisions about whether to pay money under its policy while at the same time acting as an ERISA fiduciary with the duty to act solely in the interests of the plan participants and beneficiaries and for the exclusive purpose of providing them benefits. The conflict is significant and inherent. Yet Judge Lipez doesn’t believe the First Circuit’s cases provide an effective mechanism to take the conflict into account by tempering the deference shown to the insurer. He believes Liberty Life’s actions are supported by substantial evidence and are not unreasoned. But he also advocates that the First Circuit take up the issue of how to handle an insurer’s conflict of interest within ERISA in en banc form: all the judges in the Circuit getting together to decide the issue. Judge Selya writes an opinion concurring in Judge Lipez’s result but indicating he does not believe en banc consideration of the issue is necessary. Judge Howard dissents on the basis that he believes Liberty Life has acted arbitrarily and capriciously in denying Denmark benefits. But he joins with Lipez’s call for en banc review. Jonathan Feigenbaum, a first rate plaintiff’s ERISA lawyer in Boston, who represents Denmark is not going to pass up the invitation to petition the Circuit for en banc review. Expect to hear more about Denmark.