ERISA Wants Your Claim to be Denied – Part III

This week we’ve been considering the theory of “efficient breach,” which holds that it’s a fine thing to do to breach a contract so long as everyone comes out even or ahead. A critical aspect of this theory is that the breaching party has to make the other party whole, and if it can incur that expense and still come out ahead then giddyup.

So a party thinking about breaching a contract has to figure out what that expense is likely to be – how much is it likely to cost to make the other party whole? Only then will the breaching party have a number to compare to the gain he expects to realize from breaching.

Now consider Deny-Em-All Insurance Company (“DIC”) doing this calculus under the influence of ERISA. Let’s see, says DIC, since we have granted ourselves “discretion” in the policy and therefore can only be liable if it can be shown we were “arbitrary and capricious,” there’s a good chance that we won’t be liable at all and the cost of "making the other party whole" will be ... zero!

Then there’s this: in the unlikely event we have to pay something to the other party, thanks to ERISA in no event will we have to actually make them whole, as we would if justice and fairness were involved here.

So ERISA says to the DICs of the world, go ahead and breach! The cost of making the other party whole (i.e. the artificially low remedy ERISA allows, discounted further because there is likely to be no liability at all thanks to the “discretion” scam) almost has to be less than the cost of, you know, living up to your contractual obligations.

Therefore, under an “efficient breach” approach, not only do the DICs breach contracts with no fear of any meaningful consequence, they do so with the affirmative blessing of the law.

Meanwhile, real people go without. But providing them (as the insurance contract promises) with medical care, or disability benefits, isn’t “efficient,” according to ERISA.