The high and mighty fiduciary duty: a response to Judge Fernandez

There's a Ninth Circuit case familiar to all ERISA litigators: Kearney v. Standard Insurance Company. Indeed it's quite interesting if you're an ERISA litigator; otherwise not so much.

I bring it up today to focus on a dissent in that case, written by Judge Ferdinand Fernandez, who is among other things very very smart, so I am being either brave or foolhardy because I am about to disagree with him. His Kearney dissent touches on one of the most basic dilemmas about ERISA insurers: why should we treat them as something they are not -- impartial trustees -- instead of what they are -- insurance companies looking out for their own bottom line?

Judge Fernandez thinks I am all worked up over very little:

While I see no particular point in disputing the majority's determination that this case must be remanded to the district court, I do not concur with its rationale, reasoning or result. Hence I dissent because, as I see it, the keystone of the approach favored of the majority is undue caution about treating administrator authority under an ERISA plan different from insurance company authority in the non-ERISA insurance world. However, because that keystone is defective, the whole arch of the opinion must collapse. There are two major fractures in that most important voussoir.

The first fracture exists because there is no need for such great caution. This case does not involve a mere contract; it involves an ERISA plan. The difference is exceedingly important and imposes both benefits and burdens upon any entity which is acting as an administrator of a plan. For Standard, and for all other similarly situated companies, the fiduciary nature of the duties can be a double-edged sword to say the least.

The double-edged sword Judge Fernandez percieves is that, whereas insurers under state law are allowed to pursue their own selfish interests so long as they keep to the terms of the contract, under ERISA it's different:

When it comes to ERISA, however, we cannot simply apply the same premises, even when an insurance company is involved. The whole arrangement is quite different when a company undertakes to act as a plan administrator. It, then, is not a mere contracting party; it is a fiduciary. See 29 U.S.C. §§ 1002(16)(A), 1002(21)(A). In effect, the entity creating the plan is a trustor, the administering company is a trustee, and the claimant is a beneficiary of that trust. Therefore, even though it does insure a benefit, an insurance company must act as a fiduciary must act. That actually imposes a higher duty upon it than it would undertake were it in a mere contractual relationship. It cannot simply act as a self-interested party that need only avoid violating the legal floor created by the covenant of good faith and fair dealing. It must reach much higher; it must act with the very punctilio of fairness. 1102*1102 See 29 U.S.C. § 1104(a)(1) ("[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries. . . ."); NLRB v. Amax Coal Co., 453 U.S. 322, 329, 101 S.Ct. 2789, 2794, 69 L.Ed.2d 672 (1981) ("[A] trustee bears an unwavering duty of complete loyalty to the beneficiary of the trust, to the exclusion of the interests of all other parties."); Blau v. Del Monte Corp., 748 F.2d 1348, 1353 (9th Cir.1984) ("The administrator of an employee welfare benefit plan . . . has no discretion . . . to flout the . . . fiduciary obligations imposed by ERISA, or to deny benefits in contravention of the plan's plain terms."); Restatement (Second) of Trusts § 170(1)(1959) ("The trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary."); Restatement (Second) of Trusts § 183 (1959) ("When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them."); cf. Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996) (The administrator's "duties are the `highest known to the law.'").

And, adds Judge Fernandez, the principles of trust law are there to protect us:

...while it might seem a bit jarring to interpret ordinary contract language in a way that confers discretion, where one party must depend on the mere good faith of the other, it is not at all surprising to find discretionary language in an ERISA plan, where the beneficiary can insist on fiduciary behavior. In the former case, the conferral of discretion may seem downright scary; in the latter, the principles of trust law act as an anodyne for undue fears. It is true that when there is discretion courts will only review the administrator's actions for an abuse of that discretion. See Restatement (Second) of Trusts § 187 (1959). However, the high principles and standards of trust law do protect the beneficiary. No fiduciary, not even an insurance company, can draw much comfort from the fact that discretion is conferred upon it, if it acts in a lax, conflicted, arbitrary, capricious, or abusive manner toward the beneficiary.

The problem with this is that these high standards of behavior we supposedly expect from ERISA insurers have no teeth. Under ordinary insurance law an insurer may -- conceptually -- have a greater ability to look out for its own selfish interests, but if it does cross the line there can be hell to pay. If an ERISA insurer acts as Judge Fernandez supposes -- in a lax, conflicted, arbitrary, capricious, or abusive manner -- we may well wag our finger, but there are no real-world, meaningful consequences imposed on it. It's just business as usual.

Judge Fernandez would be quite correct, IMO, if there were consequences.

Or even the possibility of consequences.








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A claimant speaks -- Part 2 (turns out he reads too)

Wendell Potter, former mouthpiece for the insurance industry, let his conscience be his guide, and became one of our heroes. Mr. Potter has now authored a must-read book, Deadly Spin. Our contributor-claimant read the book and, with our thanks, offers this review:

Deadly Spin: A Review

After reading Wendell Potter's book, “Deadly Spin”, I am struck at how hard it is to suppress my anger and resentment towards the man and focus on the message. This may be proof of its accuracy. There is no other way to put it. Wendell Potter willingly led an evil life. We all have to make choices about how far we are willing to go to earn our living and pay our mortgages.

The book does a solid job of explaining the problems with our for profit insurance system. It could be characterized as required reading for anyone with or without health insurance. Mr. Potter describes the problems of the system and lack of regulation. I felt he did not write enough about his “soul searching” and decision to leave Cigna. He devotes two pages and a few sentences about alcohol which could easily be expanded. I think it is important for society to understand the mind-set of those who believe they deserve power and profits at the expense of others.

I hope he is a changed person. We all deserve a chance to redeem ourselves. Welcome back to humanity, Wendell. I hope you make a difference.

I found the value of this book in its ability to educate the layperson on the tricks, tactics and manipulation techniques of the PR industry. The book provides a guide to alert the consumer when PR is negatively influencing, manipulating them.

(Disclaimer- this is a review intended to present many of the ideas in the book. As such, ideas and concepts come directly from the book. )

PR- A definition

Believe it or not, the PR industry has a Code of Ethics! It has a perverse value system but worth learning in order to recognize when you are being influenced by someone’s agenda.

Wendell Potter defines PR as "the management function that establishes and maintains mutually beneficial relationships between an organization and the public on whom its success or failure depends.” That definition emphasizes the two-way nature of PR. It is in direct opposition to the one-way communication that characterizes both propaganda and advertising. While it’s a nice definition, it’s deliberately misleading.

PR- In Action
Mr. Potter writes that good PR is intentionally subtle and hard to spot. It's about controlling what is said and thought about the client. PR firms know how and where to place their message to reach their target audiences.

In a high stakes fight, PR firms routinely create subversive front groups. They attack and discredit opponents, spread false information, lie, distort the truth and instill fear. In fact, PR firms can be so effective that they have convinced a large segment of the population to vote contrary to their own best interests. Those among us who suffer the most are voting to continue the very system, which hurts them.

The Tools of PR Industry

Knowledge remains power. If we learn to recognize the tactics and dirty tricks, we can fight back. The following is a list of tactics regularly used by the PR industry. It's worth committing them to memory. They will alert you to the fact you are being manipulated!

1. Fear

Organizations with the most to lose are most likely to resort to fear mongering. Their information may mention the loss of jobs, a threat to public health, or general decline in social values, standard of living, or individual rights. It may also vilify a specific cause or even a specific person in order to create the desired point of view.

2. Glittering generalities

This approach arouses strong positive emotions by using words and phrases like "democracy," "patriotism," "American way of life." The tactic is used to either support a cause or destroy an individuals or groups reputation.

3. Testimonials

Celebrities or recognized “experts” are frequently recruited and hired to provide testimonials about a product, cause, company, organization, or candidate.

4. Name-calling

Blatant insults are a proven, effective public-relations tool. The goal is to associate the target of the insults with a negative for unpopular cause or person. Defending against name-calling can be difficult. Negative terms tend to stick, even if they are undeserved.

5. Plain folks

Any time a business executive or politician or other individual poses with rank-and-file employees or customers, he or she is claiming to be "of the people". Being identified with"" plain folks is both good business and good politics. Do you really a billionaire is just like you and I?

6. Euphemisms

PR practitioners often select words that obscure the real meaning of actions or concepts. The tactic is sometimes called to "doublespeak"," Weasel words," or "Spin." For instance, an employee may be "transitioned" rather than fired and a lie may be called a "misunderstanding or misinterpretation."

7. Bandwagon

The bandwagon message is that everyone else is doing or supporting the process. And, you should, too. Opinion polls are created to show a large percentage of people are on the bandwagon, but polls are carefully designed and managed. Polls are shaped in advance by structuring questions to elicit specific responses.

8. Transfer

Similar to testimonials, the transfer of approach involves using the approval of a respected individual or organization. This can be used as a device by which a PR campaign can utilize the authority, sanction, and prestige of something we respect and revere in order to influence our opinion. They can also include trusted members of society such as teachers, firefighters or activists.


Protecting Yourself: How to recognize SPIN

The book gives some sound advice on how to spot the SPIN and telltale signs of a PR firm.

1) If the message sounds too good to be true, it is. Some examples include: The oil company that wants to reduce dependence on oil. The Health insurance company that wants to keep you healthy or the finance company that wants to help you make money. This is a sign of PR at work.

2) In public debate recognize when PR firm is reframing the debate in order to shift the focus away from their client. They will use misleading information to redirect blame or create controversy.

3) Recognize the affect of PR in advertising. Be wary of any ad that promotes the virtues of a corporation and its contribution to society. This includes advertising that carries a message that a company or industry is making your life better. Be wary of the use of philanthropy to counter negative publicity and questionable behavior.

4) Recognize the affect of PR firms and the use of third-party front groups. For example, the Center for Consumer Freedom is funded by tobacco companies to "protect the rights" of people to smoke in restaurants. Front groups are used to avoid revealing their funding sources. To verify true purpose of a third-party group use Sourcewatch.

Lastly, don’t forget to check out Center for Media and Democracy for validating information.

The Problem, redux

Around the first day of each month I'll be posting a reprise of the first post on this blog, which contains an overview of the Problem. It'll be updated and edited as we go along. But I'd like to have a summary of the Problem available frequently, hence the monthly repeat and update. So off we go...

ERISA is the Employee Retirement Income Security Act, and it is codified in Title 29 of the United States Code, starting with section 1001. It's federal law, enacted in 1974, and it was supposed to protect employees' rights in connection with their pension plans and welfare benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.

Way, way to the contrary.

This blog is dedicated to the ERISA problem.

What is that problem? It mainly concerns those welfare benefit plans (ERISA is actually not a bad law with respect to pension plans). Pension plans is what they had in mind when they enacted it -- welfare benefit plans were an afterthought.

And it shows. If your insurance company wrongfully denies your claim, you might figure you can always take them to court. You can do that (usually), but when you get there you'll find things don't make any sense:

If you get your insurance coverage through your employment, then in virtually every case ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place). But, having gutted state law relating to insurance disputes, it fails to provide any reasonable substitute. The remedies it provides (i.e. what you get if you win a lawsuit) are very, very stingy, and in the vast majority of cases a successful claimant is not made whole; not even close. And ERISA severely compromises your ability to secure even the scant remedies it does provide.

1. Remedies. ERISA limits the recovery you might get to the benefits which should have been provided in the first place, and an award on account of attorney fees in the court’s discretion. Example: you have your disability benefits wrongfully denied. As a result, you have no income, your credit rating is trashed, you lose your home and you are driven into bankruptcy. You file your ERISA suit and against the odds, you win. What do you get? The benefits they should have been paying you back when it might have done you some good. That's all (you might -- might -- get something on account of your attorney fees too).

The trashed credit, the lost home, the bankruptcy, the ruined life? Bupkis. ERISA does not allow for any recovery on account of these sorts of consequential damages -- none. And this applies even if the insurance company committed outright fraud when it denied your claim. I find it quite difficult to understand why the insurance industry, uniquely among all industries in America, needs to have immunity from liability for fraud if it is to offer its services at a reasonable price. Anyway, this concern goes beyond making people whole; it also directly impacts the behavior of insurance companies.

As of now we have a situation where the law tells insurers they face no meaningful consequences if they deny care improperly or even commit outright fraud. As one federal judge has commented, "if an HMO wrongly denies a participant's claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all." Insurance companies, of course, are not charities, but corporations; their boards are subject to a fiduciary duty to maximize shareholder value. If it is possible to accomplish this by mistreating insureds, and ERISA says there is no meaningful consequence for that, then it follows that's what insurers will do.


2. Procedure. In ERISA litigation, courts have determined among other things that there is no right to a jury; that discovery (the pre-trial process where you obtain the other side's documents, take depositions and such) is to be significantly abridged; that the evidence which may be introduced at trial is generally limited to that which the insurer unilaterally decided to include within its claim file; and that, when the policy contains language vesting "discretion" in the insurer, if you prove the insurance company was wrong -- you lose. In order to win, you must prove the denial was "arbitrary and capricious" -- that is to say, ridiculous, absurd, unintelligible, crazy. And lo and behold, the insurance companies grant themselves "discretion" when they write their policies. In this way we treat insurance companies as if they were federal judges. But Learned Hand they are not.

The Republicans are gearing up to take a shot at repealing Obamacare. If that happens, then the least we could do is to ensure that those people who are fortunate enough to have insurance at least have some meaningful ability to enforce insurers' promises in court.

But never mind Obamacare; ERISA matters a lot anyway. If you get your insurance through your employment, then -- thanks to ERISA -- consider yourself to be uninsured. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for what it says it will, what you have doesn't qualify. What you have is a piece of paper saying some company will pay your claim if it feels like it. You don't have insurance at all -- you only think you do.