How Federal Courts Treat Insurers As Conflicted Fiduciaries
Cases across the federal judiciary dealing with conflicted ERISA fiduciaries and how to treat them are, well, conflicted. Specifically, as I’ve blogged before, an insurer of an ERISA plan is a fiduciary with the obligation under 29 U.S.C. §1104(a)(1) to act solely in the interest of ERISA participants and beneficiaries and for the exclusive purpose of providing them benefits. At the same time, insurers operate for profit in a competitive market. Their officers and directors owe a fiduciary duty to the companies’ shareholders to maximize the bottom line. It doesn’t take a genius to recognize that these are competing considerations to some degree.
Most Circuit courts across the country agree that insurers have a significant conflict. See, for a recent example, the Ninth Circuit treatment of the issue in Abatie v. Alta Health & Life Ins. Co. But not all. As an example, two cases within the same circuit show the range of thinking on this matter. They are Fought v. UNUM Life Ins. Co., 379 F.3d 997 (10th Cir. 2004), cert. den. 544 U.S. 1026 (2005) and Adamson v. UNUM Life Ins. Co., 455 F.3d 1209 (10th Cir. 2006). I’ve placed a copy of each case in the "hits" and "misses" sections of the website library here and here.
Fought contains an extensive discussion of the inherent conflict of interest insurers have when they choose to act as ERISA fiduciaries. As a result, the Tenth Circuit holds that when an insurer attempts to grant itself discretionary authority and bootstrap itself into obtaining an arbitrary and capricious standard of review from a court, the court will largely refuse to defer to the insurer but will instead take a hard look at its decision and the process by which the insurer made that decision. Fought is built on a number of cases acknowledging an insurer’s conflict of interest where it acts both as payer of claims and ERISA fiduciary from both within the Circuit and from other District and Circuit courts across the country. The Fought panel modified its original opinion somewhat after UNUM’s petition for rehearing and the Supreme Court thereafter refused UNUM’s petition for writ of certiorari. In short, Fought was decided, reconsidered and modified and then the Supreme Court refused to reconsider it. You would think the matter of insurers’ inherent conflicts of interest would be settled, at least in the Tenth Circuit. However, the schizophrenic nature of the federal judiciary on this insurer conflict of interest issue can be seen in how the same Circuit treated it in Adamson, decided last month.
As with Fought, Adamson dealt with an insurer’s decision to deny benefits to an ERISA claimant. However, Adamson attempts to cast doubt on the fundamental concept of insurer conflict of interest. For example, in Adamson the court states that the “observations” in Fought regarding conflict of interest “were never meant to be an ipso facto conclusive presumption to be applied without regard to the facts of the case. . ..” Slip opinion at p. 7. Actually, the extended discussion of an insurer’s inherent conflict of interest was at the heart of the holding in Fought and left no question that establishing a presumption of a conflict of interest was precisely what the Tenth Circuit was after where an insurer acts as both a profit making entity and an ERISA fiduciary deciding claims under ERISA’s fiduciary duty of loyalty. Fought, slip opinion, pp. 16-24. Nevertheless, at least some of the Judges in the Tenth Circuit have heartburn with this concept.
Adamson goes on to question the entire concept of a for-profit insurer ever having economic interests that are at odds with its insureds. The court states: “it might be just as easily observed that an insurer has an incentive to pay claims and to get it right so as to avoid dissatisfaction (from plans as customers) and lawsuits.” Adamson slip opinion, p. 7. This is worthy of a loud guffaw. It lends support to the idea that some federal judges simply live in ivory towers, safely insulated from the economic realities of the world.
Look, I love insurance companies. They put my children through college. I have purchased for my own protection every type of insurance, health, life, disability, that I commonly litigate for others and a lot of other types as well. I don’t view insurers as having horns on their figurative heads. In my experience insurers do not routinely deny claims that clearly should be paid. But they also do not routinely pay claims where they have a plausible basis to deny them. Many insurance claims are not black and white. They deal with ambiguities in facts, policy language and the intersection of the two. And when it comes to those claims, you can bet that insurers are more likely than not to deny them. Paying such a claim in a competitive insurance market is simply foolish. The federal judiciary needs to be an effective cop on the beat to police insurance companies.
I don’t expect that insurers will act other than in an economically self interested manner to one degree or another. The idea presented in Adamson that insurers are just as likely to treat a “gray area” claim with an eye toward looking out for the economic interests of the insured, and go ahead and pay that claim, as they are likely to look out for their own economic interests and deny that claim, is simply absurd. It is a panglossian, rose-tinted attitude about the realities of the world that does much more harm than good. Believing that all is for the best in this, the best of possible worlds, does not make it so.
Effective legal remedies that make insureds whole for the loss insurers cause their insureds when they wrongfully deny claims is a critical necessity in this world of ours. Unfortunately, as I’ve written about before, such remedies do not exist under ERISA. That is one reason it is so self-evidently not true, regardless of what Adamson suggests, that insurers tremble at the thought of being sued for denying an ERISA claim. When the only thing an insurer is exposed to pay is the benefits themselves, without any consequential damages, there isn’t a lot for the insurer to worry about in terms of lost revenue from unhappy insureds who sue you.
Fortunately, Fought’s definitive analysis of the conflict issue is binding on later panels in the Tenth Circuit. Indeed, the court in Adamson acknowledges the same thing when it refers to Fought as being precedential in the Tenth Circuit. But the decisions in Fought and Adamson point out that federal courts across the country continue to have some diversity in thinking about the degree to which insurers are inherently and significantly conflicted when they act as payers of claims at the same time they are ERISA fiduciaries.