As we have seen one of the many problems with ERISA is that we pretend insurance companies are something other than what they really are. What they are is private corporations seeking to maximize shareholder value by turning a profit. Nothing wrong with that, at all. But along with that perfectly legitimate status usually goes corresponding responsibilities, including having to defend in court against claims of breach of contract, and having to make aggrieved parties whole when a court determines a contract has been breached.
What they are not is a trustee. Trustees are supposed to put the interests of the trust beneficiaries ahead of everything else, including the trustee’s own interest. Trustees are not supposed to allow a profit motive, or a desire to maximize shareholder value, or any other consideration, to affect their judgment in exercising their discretionary powers under a trust instrument.
But, of course, we all too often treat insurance companies as if they were trustees, which renders insurance contracts unduly difficult to enforce in court and malignantly affects the behavior of insurance companies.
So how did we get here?
First we need to consider “standards of review.” That’s a phrase which refers to the amount of scrutiny, or the amount of skepticism, a court will apply when considering the decision of some other entity. It’s generally a critical consideration, and very often is in itself determinative of the outcome of a judicial dispute.
In broad strokes, and as relevant here, there are two “standards of review” in play. First is “de novo” review – that’s when a court essentially makes its own independent decision about a question, and the fact that someone else previously made a decision on the same question doesn’t matter at all – it’s as if that first decision never happened, and the court just goes ahead and decides the question based on its own evaluation of the evidence and its own good judgment.
Then there’s deferential review, usually called either “abuse of discretion” or “arbitrary and capricious” review. In this sort of review that previous decision matters a lot. A court will not make its own independent decision on the question, but instead will look to see if there’s any good reason to overturn the decision that other party already made. If the party contesting the decision can’t come up with a damn good reason to overturn it, then the court will simply default to the previous decision, even if it would have decided the matter differently left to its own devices.
Here’s an example. Say you’ve lost a case before a trial court, and you decide to take it up on appeal. Generally, the court of appeal will apply different standards of review based on what sort of question it is looking at.
If you are saying, for example, that the trial court made mistakes in the way it evaluated the evidence – it believed the testimony of Smith and you think Smith was lying, say – then the court of appeal will apply a deferential standard of review to that question. The trial court, after all, was the one which actually heard the testimony in question and had the opportunity to observe Smith testifying. Indeed a primary function of trial courts is to determine which of two competing versions of the facts is the right one. So a court of appeal is not going to reverse a trial court’s evaluation of the evidence unless it is very clear the trial court committed a gross error, that the trial court’s conclusion was absurd or ridiculous. And that is the case even if the court of appeal would have evaluated the evidence differently given the opportunity. That’s deferential review.
Now let’s say your argument to the court of appeal is that the trial court erroneously interpreted some legal principle which affected the outcome of the case. You’re not haggling over the facts, but you’re saying the trial court applied the law incorrectly. Now the court of appeal is going to apply de novo review: it is going to make its own decision about what the proper legal principles are, and if it disagrees with the trial court, it will reverse the trial court’s decision. The court of appeal’s job is to figure out what the proper legal principles are, and it is doesn’t need to have heard the witnesses testify or make its own factual findings in order to do so. So all it takes for a reversal to happen is that the court of appeal decides the trial court was incorrect – that’s all, just incorrect. And that is the case even if the trial court’‘s legal interpretation, albeit incorrect according to the court of appeal, was perfectly reasonable and understandable.
So here’s the analogy: if you could appeal an umpire’s call in a baseball game, the Court of Baseball Appeals isn’t likely to reverse a decision that a particular pitch was in the strike zone: you aren’t going to get far saying that pitch was a ball, not a strike. That’s because the umpire is the one who actually saw the pitch, and it’s his job to decide whether it was within the strike zone or not. But if the umpire decides that it takes four strikes instead of three to constitute a strikeout, now you are going to get a reversal just by convincing the Court of Baseball Appeals that the umpire got the rules themselves wrong, and the umpire’s own decision gets no weight in that decision.
When we continue we’ll take a look at a couple of things. First, to even think about a “standard of review” when you’re considering whether an insurance company breached its contract is a mismatch from the get-go. Second, to pretend an insurance company is the sort of entity which ought to ever have its claim denials subject to deferential review is crazy. But that’s exactly what we do.
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