Friday, April 29, 2011

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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