The rising judicial chorus goes to Washington: Senate Finance Committee to consider disability insurers’ conduct under ERISA [UPDATED]

Next week, the Senate Finance Committee is going to consider the manner in which ERISA affects the behavior of disability insurance companies. Since at least a few Senators will be paying at least some attention to the issue, this is a good time to make some noise. You can learn how to submit your comments for the record in the Senate hearings here.

A few witnesses have already submitted written testimony ahead of time. One of them is United States District Court Senior Judge William M. Acker, Jr., of the Northern District of Alabama. Judge Acker’s testimony focuses on the “discretion” scam, in which insurers confer upon themselves “discretion” in their insurance policies and then use that as a shield to keep judges from reversing their improper claim denials. A few highlights from Judge Acker:

I am not saying that the courts, including the Supreme Court, have not tried to make sense of ERISA, and to make it workable, but in truth, the situation is worse in 2010 than it was in 1998, and getting worse every day.

The language [Congress] chose in 1974, if it had not, over time, been altered or obliterated by the courts, would provide for de novo consideration by a court of all denials of ERISA benefits. ERISA’s Section 502(a)(1)(B) straightforwardly provides that any beneficiary of a plan governed by ERISA can bring a “civil action ... to recover benefits due him under the terms of his plan”. Rule 2 of the Federal Rules of Procedure provides: “There is one form of action – the civil action”. This language recognizes nothing less than an independent consideration by the court, a “trial on the merits”. The procedure concocted by the courts in the years since 1974, now called “judicial review”, based on an examination of the administrative record, while giving deference to the conflicted decision-maker who has already denied the claim, simply does not fit the scheme that Congress contemplated.

ERISA jurisprudence will stay as messed up as it is, unless Congress reworks it. The courts have not rescued ERISA, and cannot be expected to do so. The most important legislative change that I implore you to make is to make it clear that when Congress says “civil action”, as it did in 1974, it means what it said, “civil action” and not “judicial review”.

Here’s Judge Acker’s testimony in its entirety; it is definitely worth a read:

Testimony by Judge William Acker to Senate Finance Committee re ERISA


You'll be able to access the testimony of other witnesses here.

It is never a bad time to do so, but now is a particularly good time to make some noise to your Congressional representatives.

UPDATE (9/28/2010): You can watch the hearing in its entirety here.

The states fight back – a little

As we’ve discussed previously one of the biggest problems with ERISA is that it prevents the states from providing suitable protections for people who have “insurance” through their employers.

The ERISA prohibition of state regulation is not across-the-board, however. ERISA does preserve some state regulatory authority (in fact a lot of us think it was intended to preserve all state authority when it came to insurance companies, but that got mucked up in the judicial interpretation process over the years). One of the recurring battles in ERISAworld is whether some particular state regulation can survive ERISA and actually, you know, regulate insurers.

Now, in the most important area – the consequences an insurance company faces if it defrauds you or kills you – the states remain powerless to improve on ERISA’s ridiculously stingy approach. But the states do retain some ability to regulate the content of insurance policies sold within their borders, and that’s where a lot of these arguments arise.

Yesterday the Ninth Circuit issued Standard Insurance Company v. Morrison, a case about whether Montana could prohibit so-called “discretionary clauses” in insurance policies. These clauses are what insurance companies use to shield themselves from any but the most cursory and deferential judicial scrutiny of their benefits denials, and to pretend they are something they are not, like courts or administrative agencies. Yesterday the Ninth Circuit said Montana could indeed prohibit these provisions.

As we’ve discussed previously "discretionary authority," which leads to the weak judicial scrutiny the insurers are so fond of, is supposed to come from someone who sets up a trust, and wants the trustee to have such powers. It is not something the trustee just unilaterally confers on itself – except of course in ERISAworld where insurance companies stick this language into the insurance policies for their own benefit, and without so much as checking with the putative “trustor,” i.e. the employer purchasing the policy for its employees.

If you want some corroboration about how pernicious these provisions are, just consider what Montana and some other states have done to try and prohibit them. Montana’s Insurance Commissioner banned them (and the Ninth Circuit said yesterday he had the authority to do so) by invoking his authority to disapprove “any inconsistent, ambiguous or misleading clauses or exceptions and conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract” (you can find that in the trial court decision in the Morrison case, which is at 537 F.Supp.2d 1142 (D.Montana 2008)), a long way of saying he can disapprove language which renders the coverage supposedly provided by the policy a big fat lie.

Montana is not alone. California, for example, has disapproved “grants of administrative discretion in insurance policies and ERISA plan documents” because they “render insurance contracts ‘illusory’ and ‘unsound insurance,’” (Mitchell v. Aetna Life Ins. Co., 359 F.Supp.2d 880 (C.D.Cal. 2005)) and so has Michigan, concluding discretionary clauses “unreasonably reduce the risk purported to be assumed in the general coverage of the policy.” (American Council of Life Insurers v. Watters, 536 F.Supp.2d 811 (W.D.Mich. 2008)). All in all, as of now sixteen states have taken similar actions.

The National Association of Insurance Commissioners, a, um, national association of insurance commissioners of the various states, has also weighed in, issuing the Discretionary Clauses Model Act, which it urges the states to adopt, in 2002. The “NAIC membership believed that discretionary clauses were inconsistent with basic consumer rights," (page 9 of the linked brief) and issued the Model Act “to assure that health insurance benefits and disability income protection coverage are contractually guaranteed, and to avoid the conflict of interest that occurs when the carrier responsible for providing benefits has discretionary authority to decide what benefits are due” (page 11).

The insurance industry, of course, is not willing to give up their little cash cow without a fight. Let’s see what MetLife, a big ERISA insurer, has come up with – if the states can ban discretionary clauses in insurance policies, we’ll just stick them somewhere else:

To date no court has held that state insurance laws can regulate the employer’s plan documents, like the federally mandated summary plan description (SPD) or master plan document, if it has one. ... As a result of the battle over discretionary clauses, an ERISA plan sponsor who wants plan determinations to receive deferential judicial review may be unable to purchase an insurance policy containing a discretionary clause. ... Plan sponsors who want deferential judicial review should include a discretionary clause in their SPDs or other formal plan documents.

Wanna bet MetLife won’t volunteer to draft an employer’s SPD? I’ll take that bet.

The upshot of all this is that the states, as of now, do retain some ability to ameliorate the absurd effects of these pernicious “discretionary” provisions. That may not last forever; as we’ve seen the insurance industry will fight tooth and nail not to lose this unfair advantage. If your state has not yet addressed this problem then it’s time to call your legislators and get them on the stick.

A basic primer on "de novo" versus "abuse of discretion" judicial analysis

We are exploring the “discretion” scam which infects ERISA law, and how it unduly stacks the deck in favor of insurance companies when you take them to court. I thought an illustration of how big a difference it makes might be useful here, so join me in a review of two recent cases from United States Circuit Courts of Appeal: the Seventh Circuit’s Krolnik v. Prudential Insurance Company of America, which is reported at 570 F.3d 841 (7th Cir. 2009), and the Eleventh Circuit’s Doyle v. Liberty Life Insurance Company of Boston, which is reported at 542 F.3d 1352 (11th Cir. 2008).

One of the big problems with ERISA exemplified by these cases is that the whole concept of a “standard of review,” which is what courts apply to decide whether to overturn the decision of some other body, is a complete mismatch when you’re talking about an insurance company denying your claim. Traditionally the “other body” is one of two things. They are either a lower court or administrative agency, which, say what you want about them, are at least conceptually impartial and have no direct, personal stake in the decision they are rendering. Or they are a trustee vested by a trustor with discretion to bring to bear their own judgment in making decisions about how trust assets are to be distributed. A classic trustee is also impartial, but sometimes trustees have conflicts of interest, which is legal as long as the trustor was OK with it, and which is taken into account by courts. More about that in a later post.

An insurance company, on the other hand, is a party to the insurance contract in question, which is accused of breaching that contract. In a breach of contract case, the court is supposed to decide for itself whether one of the parties is in breach, not have a thumb on the scale in favor of the breaching party as if it were itself a lower court which has already endorsed the decision it made.

Krolnik discusses “de novo” review, where the court does not grant “deference” to the insurance company, and describes the problem with “standards of review” as applied to an insurance company:

Then there is a dispute about whether Krolnik can work even with all of his physical and mental problems. Some physicians say yes, others no. If judicial review were deferential, then Prudential’s decision would be sustained easily. But the court must make an independent decision. To do this, the finder of fact must weigh all of the medical evidence. ... If a paper record contains a material dispute, a trial is essential. And at trial Krolnik would be free to offer medical evidence of his own and cross-examine the physicians who produced the reports that underlie Prudential’s decision. ....

All in all, it would be best for judges and lawyers to stop thinking about “de novo review” – with the implication that the judge is “reviewing” someone else’s action – and start thinking about independent decision....

So that’s how at least one court thinks a so-called “de novo review” should proceed: it’s not a “review” at all, in the sense that some other impartial body has made a decision; it’s a wholly independent decision by a judge in the first instance.

But of course that’s not how ERISA generally works. For a flavor of that, let’s take a look at Doyle, in which the Eleventh Circuit described how so-called “abuse of discretion review” works. In pertinent part:

(1) Apply the de novo standard to determine whether the claim administrator’s benefits-denial decision is “wrong" (i.e. the court disagrees with the administrator’s decision); if it is not, then end the inquiry and affirm the decision.

OK, so the Eleventh Circuit asks whether the insurance company was wrong to deny benefits. If the insurance company was right, it wins. Fair enough. But does it lose if it was wrong? You would think so, but not necessarily:

(2) If the administrator’s decision is in fact “de novo wrong,” then determine whether he was vested with discretion in reviewing claims, if not, end judicial inquiry and reverse the decision.

Well, at least as long as the insurance company was not “vested with discretion,” then if it is wrong it loses. So far so good. But as we have seen insurance companies almost always vest themselves with discretion when they write their ERISA policies, so we go to the next stage, which is where things get screwy:

(3) If the administrator’s decision is “de novo wrong” and he was vested with discretion in reviewing claims, then determine whether “reasonable” grounds supported it (hence, review his decision under the more deferential arbitrary and capricious standard).

Wait ... what was that? If the decision was wrong then do what? After paying some lip service to the effect of a conflict on interest on the insurance company’s part (more on that later), the Eleventh Circuit goes on to say a decision which was, you know, wrong is nonetheless to be upheld if it was “reasonable.”

And when we get to a discussion a bit later on of what it takes to be considered reasonable “reasonable,” your head might really explode.

And you may very well have a very difficult time getting your insurance company to pay for the repair work.

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.

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

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.

Discretion and Its Many Abuses – Part III

Yesterday we took a look at some of the factors which help keep trustees, with all their discretionary powers, in line. First, a classic trustee has no personal interest in his decisions. Second, he is held to the “highest duty known to law” – a fiduciary duty. Third, he cannot unilaterally assume his discretionary powers; they must be conferred on him by the trustor.

Now, under ERISA we very often pretend insurance companies are trustees, and we give their decisions to approve or deny claims the same sort of deference we give to decisions by trustees. Does that make any sense?

Well, no. There are very material differences between trustees and insurance companies.

First, insurance companies have an obvious and profound conflict of interest when they decide whether to approve an insurance claim. The money involved is not in some trust, but in the insurance company’s own bank account. That’s a big conflict of interest, and I’ll do a post soon about how that is handled.

Second, insurers are supposedly subject to fiduciary duties under the ERISA statute. But, remember they get to be Goofus while we all have to be Gallant. And indeed, although the label “fiduciary” is applied to ERISA insurers, the conduct ERISA allows is way, way short of anything a real fiduciary would even think about trying to do.

Finally, insurance companies routinely confer discretion on themselves by just putting a couple of lines of boilerplate into the insurance policies they peddle. The employer who buys the policy for its employees is supposed to be the trustor here, and yet the insurance company, the supposed “trustee,” is the source of the language giving it all that power to ruin lives.

As we continue we’ll have more occasion to explore the manners in which these supposed “fiduciaries,” these supposed “trustees,” act for their own benefit above all else, which is the antithesis of a fiduciary’s job. As the Eleventh Circuit Court of Appeals has observed, “it is difficult to understand why any plan would give discretionary authority to an insurance company from whom had been purchased a fixed-premium policy. ... The basis for the deferential standard of review in the first place was the trust nature of most ERISA plans. ... The insurance company here could hardly be regarded as a trustee for the insured.” The case is Moon v. American Home Assur. Co., and the citation is 888 F.2d 86 (11th Cir. 1989). You can look it up.

Discretion and Its Many Abuses – Part II

Yesterday I discussed some basics about how trusts and trustees operate. Trustees have a lot of power when the trust instrument gives them discretion to apply their own judgment about what’s the best thing to do with trust property, so much power that a judge will defer to the trustee’s judgment unless an “abuse of discretion” can be proven.

Think about that – a judge in a courtroom, whose job it is to, well, judge things, will defer to the judgment of someone else. If he disagrees with the trustee’s judgment, the judge is to actually disregard his own judgment about what is best under the circumstances in favor of the trustee’s – again, unless the judge can be persuaded the trustee’s decision was so crazy that an abuse of discretion has occurred.

Now with all that power the trust instruments can give them, you might think there should be some built-in safeguards so that trustees behave themselves. And, indeed, there are.

First, in a classic trust situation, the trustee does not stand to personally benefit from his decisions. He’s managing money that isn’t his, for the benefit of someone else, and he gets the same fee for his services regardless of what his decisions are. In that way, the trustee is able to bring to bear his own unfettered judgment about what the best thing to do is, and not be influenced by any concerns about personal gain.

Second, the law imposes upon trustees what has been called the highest duty known to the law – a fiduciary duty. That has varying definitions in varying situations, but basically it means the trustee has to put someone’s else’s interests first, ahead of his own or anyone else’s. If you hire a lawyer, for example, the lawyer has a fiduciary duty to you regarding the representation: your interests come first, including at the expense of your lawyer’s own interests. The same thing applies to a trustee: the trust beneficiary’s best interests is all that is supposed to matter, and the trustee is supposed to disregard anything other than that in making his discretionary judgments.

Third, the trustee only has all this power in the first place because someone else – the trustor or settlor of the trust – wanted him to. The trustor is the person who originally created the trust, contributed some money or other property to the trust, and authored or approved the terms of the trust instrument, including the terms giving the trustee all that power. In other words, when your rich-and-dead parents funded a trust fund for you, they were the ones who decided to confer all that discretionary power in the trustee – the trustee didn’t just unilaterally assume that power.

Now, under ERISA your health insurance company is all too often treated as if it is a trustee, and the insurance company’s decisions are all too often given the same sort of deference. But as you might gather from the foregoing, there are some very significant differences between an insurance company and a classic trustee. Next we’ll take a look at whether it makes any sense to overlook those differences and pretend an insurance company is a trustee. Here’s some foreshadowing: it doesn’t.

Discretion and Its Many Abuses – Part I

Here’s a pleasant thought experiment: imagine you are a trust-fund baby. Very rich (and dearly departed) parents have provided for you with a generous trust fund. You are set for life!

The trust fund, however, is not just a pile of money you can play with at your whim. In fact, the whole point of a trust fund is that your parents didn’t give you the money at all, they gave it to a trustee whom they have directed to manage and distribute the funds for your benefit. The trustee’s directions are set forth in a document – the trust instrument – which tells the trustee how to go about his job.

The trust instrument might, for example, instruct the trustee to never touch the principal and to apply interest income to your educational and medical expenses, and that’s all. So, if you want some of the money to buy a fancy new car, the answer will be no, because the trustee has his marching orders, and he can’t write you that check.

Many trust instruments, though, give the trustee discretion: they direct the trustee to use his own good judgment to manage the funds for your benefit. Now, if you want that new car, the trustee will decide whether you get it based on his own judgment about what’s best, not on any explicit terms in the trust instrument. That’s the way your rich-and-dead parents wanted it to be.

Let’s say the trustee says no, and you decide to sue - you want the damn money for that car! You are going to have a difficult time winning that one.

That’s because rich-and-dead made the decision (back when they were rich-and-alive) to leave it up to the trustee – that’s the point of giving the trustee discretion in the first place. So a judge would say, I personally might not have made the same decision, but rich-and-dead wanted the trustee’s judgment, not mine, to be the one that counted.

Therefore getting a judge to merely disagree with the trustee’s decision won’t get you that car – you have to show the trustee was not just incorrect but that he somehow went beyond the bounds of reason in making his decision, so that even though he is the one with the discretion his decision can’t be upheld. In other words, sure rich-and-dead conferred upon him discretion, but here his decision was so out-of-bounds, so crazy, that we can say he abused that discretion. That’s what you have to prove to get that car.

I’ll post further on this later this week, but for now just know this: under ERISA, insurance companies are very, very often treated like trustees, not like insurance companies. As I’ll discuss further, that is what’s crazy.