Let's get scholarly: A good summary of the academic case against ERISA -- "denying benefits is all potential economic gain with no downside risk."

I don't know Andrew Stumpff, but I sure do like his recent piece which is soon to published in the St. Thomas Law Review and which you can download now from SSRN.

The paper, entitled "Darkness at Noon," is a pretty succinct discussion of ERISA and its malignant effects on American workers. Go read the whole thing; here's a taste (with some gratuitous self-serving links inserted by yours truly):

Imagine a participant whose employer has denied the participant's claim for plan benefits. Together with the Firestone decision, the exhaustion of administrative remedies requirement presents the participant with the following prospect, if she wants to reverse the denial: First the participant must appeal the denial to the employer itself or the the employer's agent, according to procedures and under a deadline prescribed by the employer itself. The employer, let us remind ourselves, is a party whose economic interest is directly adverse to that of the participant, and who has already ruled against her. If the appeal results in continued denial of the claim, the participant will finally gain access to the courts; but the courts will reverse the employer's denial only if the denial was "arbitrary and capricious." All this inferred by courts from -- nowhere expressly provided by -- a statute whose motivation was to protect plan participants.

Meanwhile, with no possibility for consequential or punitive damages, the employer will have had very little disincentive to deny benefits in the first place. If the employer decides not to pay, the worst potential consequence (from the employer's perspective) is that a court might later disagree, in which case all the employer will have to do is pay the claimed amount. From the employer's perspective, denying benefits is all potential economic gain with no downside risk. Furthermore the parties' positions are unequal: The employer is likely in a much stronger position to bear the cost of litigation than the employee (and will also likely have more economic incentive to do so, given the possibility of similar claims by other participants).

In sum, the employer's calculus in deciding whether to pay benefits under an ERISA plan is now roughly the following: On the one hand, pay the benefits. On the other hand, don't, with as consequence only the remote chance the participant will decide to incur the time, cost and effort to exhaust his administrative appeals to the employer or its agent, and then take the case to court; and that the denial will be eventually judicially reversed as "arbitrary and capricious" -- in which case the employer will merely have to pay what it would have owed in any event.

What's striking is not just that this can hardly be viewed as a regime "protective of plan participants." What's striking is that this regime is distinctly less protective that would have been the case under ordinary principles of common law, and that it was established by judges in the name of a law expressly intended to expand participant protection beyond those available under common law.

I think the whole thing stinks even more if you substitute the words "insurance company" for "employer" in the foregoing, which is all too often the case. Then even the meager argument supporting ERISA -- that it encourages employers to create employee benefit plans in the first place -- withers on the vine.

Hat tips to Carol Cachey and Brian King.