by Jackson Lewis

The United States Supreme Court has preserved the legal standard governing how courts review the discretionary claims denials of insurance companies which would otherwise pay the benefits out of their own assets and, therefore, have an interest in denying the benefit. However, the Court may have effectively eroded the discretion of claim decisionmakers because it held that lower courts should consider the conflict of interest in making their decisions, but left the courts to their own devices in determining how they should go about doing it. Metropolitan Life Ins. Co. v. Glenn, No. 06-923 (June 19, 2008). This decision will significantly complicate the claims determination process of a large number of plans and, among other things, potentially open the door to costly discovery and extensive judicial review of whether an actual conflict of interest affected any part of the claims denial.

The Employment Retirement Income Security Act of 1974 (ERISA) governs employee benefit plans, such as long-term disability, medical and retirement plans. ERISA's provisions allow a participant or beneficiary to sue a plan administrator on the grounds that the administrator wrongly determined whether benefits should be paid or provided.

Under current law, a court will usually defer to the administrator's decision if the plan document says that the plan administrator has discretionary authority to interpret a plan's language in determining whether a participant or beneficiary will receive a benefit. This is the so-called deferential abuse of discretion standard. The court usually will not upset an exercise of that discretion, unless the administrator abused that discretion, for example, by letting a conflict of interest improperly affect its decision.

In Metropolitan Life Ins. Co. v. Glenn, the United States Supreme Court decided a major issue that had split the federal courts: how courts should deal with a participant's dispute over benefits with an insurer, if the insurer who would otherwise have to pay the benefit from its own assets uses its discretion to interpret the plan to deny a participant or beneficiary the benefit. This decision, therefore, affects profoundly how courts will apply the abuse of discretion standard.

The Glenn Court held that although these "dual-role" plan administrators operate under a conflict of interest when making benefit determinations, federal courts nevertheless should apply a deferential abuse of discretion standard when reviewing these discretionary benefit decisions. Writing for the majority, Justice Breyer advised that the conflict should only be weighed as a factor in determining whether there is an abuse of discretion" and the conflict's significance would 'depend on the circumstances of the particular case.'"

Before Glenn, the circuit courts had adopted various approaches to determine whether an insurer that both reviewed and paid claims had a conflict which would justify a more stringent review of its discretionary decisionmaking. These ranged from ignoring the conflict entirely, if the decision was "reasonable," to engaging in a complex, multi-step analysis of the circumstances. The decision in Glenn attempts to resolve this split by holding that "dual-role" plan administrators do operate under a conflict of interest and that courts must consider this conflict when reviewing discretionary benefit determinations.

However, the Glenn Court did not provide definitive guidance on how a reviewing court should analyze benefit denial claims in the presence of a conflict. The Court side-stepped a significant opportunity to set forth a uniform standard on how much weight the conflict should receive, what factors should be considered and what, if any, discovery would be permissible into the factors. Indeed, Chief Justice Roberts's concurrence and Justice Scalia's dissent sharply criticized the Glenn majority for adopting an imprecise and uncertain "totality of the circumstances" test. Further, the Chief Justice warned that the majority's case-by-case approach would undermine the goals of ERISA by failing to provide for uniform and predictable standards for employee benefit matters.

If the Chief Justice's prediction proves correct, the Court's decision in Glenn may increase the cost of employee benefits litigation and introduce greater uncertainty in the outcome. This is especially true if reviewing courts purport to scrutinize an insurer's decisions under the guise of an abuse of discretion standard, but in fact accord no deference to the administrator's decision (called a "de novo" standard) against the backdrop of a presumed conflict of interest.

In addition, the combination-of-factors method adopted by the Glenn majority likely will cause further divisiveness among the lower courts on the level of deference they should accord plan administrators' decisions and the factors which may be relevant. Another effect of the Glenn decision may be to raise litigation costs through significant discovery into the decisional processes to see whether the conflict affected the decision.

Finally, while Glenn dealt with an insurer which has a potential conflict, Justice Breyer's discussion stated that all employers that maintain self-funded plans and also make benefit decisions should be subject to the same review by the courts. While this discussion, strictly speaking, was not part of the "law" made by this case, it is possible that lower courts will rely on it as a basis for inquiry into the decisions for self-funded plans.

Glenn, therefore, raises many unresolved issues which may affect millions of discretionary benefit decisions, made each year by insurers and employers. And once the inevitable confusion and conflicts arise, the Supreme Court may be forced to confront the same issue it sidestepped in Glenn: how courts should weigh and analyze the conflict issue.