How We Got Here – the “Abuse of Discretion” Scam, Part II

Earlier we started a discussion about the “abuse of discretion” scam. In a nutshell, the so-called “standard of review” a court employs in evaluating an insurance company’s decision to deny your claim is very often, in and of itself, outcome-determinative. Given that a great many insurance company denials are, shall we say, questionable, if the court uses a de novo analysis you’ve got a good chance of winning, and thereby securing the very stingy remedies ERISA allows to aggrieved claimants. But if the court uses a deferential analysis, then it becomes much more difficult – it is no exaggeration to say often impossible – to get that denial turned around by a judge.

Who in their right minds would design a judicial system this way?

To answer that we need to consider a Supreme Court case called Firestone Tire & Rubber Co. v. Bruch. If you’d like to look up the case the citation is 489 U.S. 101 (1989). In Firestone the Court considered what the “standard of review” ought to be for claims under ERISA. Right from the get-go the insurance industry won a big victory there, as talking about a “standard of review” instead of, say, a “burden of proof” implies we are looking at the decision of some sort of impartial administrative agency instead of an insurance company alleged to have breached its contract. We’ll address that problem in a future post.

Anyway, the Firestone Court observed that ERISA is based to a large extent on trust law, which it undeniably is. That’s because when ERISA was enacted its primary focus was on pension plans, not things like health insurance policies, and pension plans do actually, sorta kinda, resemble trusts: the employer sets aside a pile of money to fund retired employees’ pension benefits.

And trust law, as we have seen, does indeed treat the decisions of a trustee with deference if the trust instrument confers discretion on the trustee. So the Firestone Court just went ahead and applied the general rule of trust law: if a trustee is not granted discretion in a trust instrument, then a court considers the decision de novo. If the trust instrument does confer discretion on the trustee, then a court has to find an abuse of discretion before it can rule against the trustee.

Now, the Supreme Court apparently thought it was issuing a decision generally favorable to claimants. Firestone argued that, never mind what the terms of the benefit plan in question might say, denials of benefits under ERISA should always be analyzed under an “abuse of discretion” standard (ERISA defendants are nothing if not brazen in making incredibly self-serving arguments). This the Supreme Court rejected, because “adopting Firestone's reading of ERISA would require us to impose a standard of review that would afford less protection to employees and their beneficiaries than they enjoyed before ERISA was enacted,” and God knows we don’t want to be doing that. So the Supreme Court said the general rule is de novo analysis, and only in those rare circumstances where the plan sponsor decides it wants the insurance company to have discretionary authority will deferential analysis be used.

Well, once Firestone came out it took about five minutes before insurance companies started putting language in their insurance policies by which they granted discretion to themselves – the employer purchasing the policy had no role in creating this language, and in the vast majority of cases didn’t even know it was there.

And the courts, regrettably, gave effect to this self-conferred “discretion.”

That’s the start of how we got to this state of affairs. More soon about the implications.

They aren’t pretty.