Who Bears The Loss When Plan Documents Are Ambiguous?
So, to continue the thought of yesterday’s post, with regard to providing information about employee benefits, we have relatively complex information being provided to a population that is frequently fundamentally illiterate. On the other side of the table we have relatively sophisticated insurers and employers sponsoring self-funded plans drafting their Summary Plan Descriptions (SPD). Over time, perhaps, illiteracy levels can and should be decreased and health insurance concepts, perhaps, can be made less inherently intricate and readily explainable. But if either occurs at all it will take a long time and occur incrementally. The more realistic prospect for improving the clarity of SPDs lies with insurers and employers putting greater effort into providing more precise and simple language in their documents. Alternatively, or perhaps, in addition, insurers and employers can design their plans in more straightforward ways. The fly in the ointment is Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). In Firestone, the Supreme Court held that if ERISA plan administrators place language in their plan documents giving those administrators discretion to interpret the terms of the ERISA plan, decisions the administrators make to deny benefits to employees will not be reversed unless the denials are completely unreasonable or “arbitrary and capricious.” The effect of the Supreme Court’s ruling is to guarantee that sentient drafters of ERISA plans will place language granting discretionary authority in their plan documents. With discretionary authority, ERISA plan administrators are required to act as fiduciaries to plan participants and beneficiaries. This means they must discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing them benefits. 29 U.S.C. §1104(a)(1)(A). They must place the financial interests of those participants and beneficiaries ahead of the insurer’s or the employer’s interest. However, insurers and corporations sponsoring employee benefit plans also operate in a competitive market where increasing net profit is the key to staying alive. Without rigorous policing by courts and effective remedies available to participants and beneficiaries, the temptation to (1) design plan documents with intended ambiguity and (2) include grants of discretionary authority in the plan documents and (3) exercise that discretionary authority to interpret those ambiguous plan terms to favor the financial interests of insurers or corporate sponsors of ERISA plans is great. If the federal judiciary is willing to enforce boilerplate language in your SPD giving you “sole discretion to interpret the terms of the plan” and then allow you to interpret ambiguous SPD language to protect your own financial self interest when a claim falls in a gray area, it’s not difficult to see in what direction insurers will move. I've blogged before about the lack of remedy the federal judiciary has provided for insurers that rely on ambiguous language to deny benefits. Concerns about insurer overreaching in dealing with ambiguous language is not merely theoretical. Courts routinely uphold denials of claims by deferring to an ERISA plan administrator’s self-interested interpretation of ambiguous language. Take a look at Kimber v. Thiokol Corporation, 196 F.3d 1092 (10th Cir. 1999) if you doubt it. You can find Kimber in the “Misses” section of this website’s library. Lynn Kimber worked for Thiokol for over twenty years. He started out as a heavy equipment operator. But his diabetes took a toll. His eyesight grew worse and, as a result, he was no longer able to safely operate the equipment. Thiokol moved him to a desk job. Over time the diabetes took additional vital functions away. Lynn started to have kidney failure, neuropathy in his hands and feet and other problems. Finally, Lynn, his physicians and Thiokol concluded he could no longer work. But Lynn wasn’t out of luck--Thiokol had a self-funded disability benefits plan! His physicians were unanimous in stating that Lynn could no longer perform his job or any job for that matter. Thiokol agreed and began to pay Lynn benefits based on his physical impairments. After about 18 months the administrator for the disability plan checked in with Lynn again and asked him to submit medical records verifying that he continued to be disabled. No problem. Lynn’s physicians verified that, if anything, Lynn’s condition had deteriorated. Not surprising given the nature of diabetes. No one ever recovers from that debilitating disease. In addition to his continuing physical problems, his physicians noted that since leaving his job Lynn had become somewhat depressed and suffered from mild dementia, another direct effect of diabetes. Thiokol pounced on these references to depression and mild dementia. Their plan documents limited the payment of benefits to 24 months rather than paying to age 65 when disability was “due to a mental condition.” After Lynn had been on disability for two years, Thiokol cut off his benefits. Lynn sued to have his benefits reinstated. He argued that the “due to a mental condition” language did not apply because, by all accounts, he was completely disabled for purely physical reasons before his physicians even noted any depression or mild dementia. Moreover, everyone also acknowledged that the cause of any mental conditions he had was the underlying physical illness of diabetes. Finally, even if the depression and mild dementia were “mental” conditions and were partially disabling, they were clearly not significant as a cause of Lynn not being able to work. It’s not as if he had ever recovered from the underlying physical conditions that caused him to be disabled in the first place, a point Thiokol had never disputed. However, the plan administrator had inserted the magic discretionary authority language in the SPD. The trial court acknowledged that the phrase “due to a mental condition” was ambiguous. I’ve blogged previously about the inherent ambiguity in determining what is a “mental condition.” But, given the restriction on overturning the denial of benefits only if Thiokol’s action was an abuse of discretion, the trial court ruled in favor of Thiokol. The Tenth Circuit affirmed the denial. It ruled that the plan administrator’s decision would not be disturbed if it fell anywhere on a “continuum of reasonableness–even if on the low end.” In other words, unless the ERISA plan administrator’s denial was completely outrageous, it would be upheld. Kimber is a travesty for a number of reasons. One of the most compelling problems with the decision is that it places the loss that comes with denying benefits based on ambiguous language squarely on the employee and his dependents. The decision ignores the obligation ERISA plan administrators have to draft clear, specific and readable plan documents. It also disregards the fiduciary obligations the statute imposes on plan administrators to act solely in the interests of plan participants and beneficiaries and for the exclusive purpose of providing them benefits. It is a prominent “miss” in the annals of ERISA jurisprudence. So, to answer the question posed in the title of this post, you bear the loss.