THE LOOKING GLASS LOGIC OF ERISA
(FIRESTONE V. BRUCH)
When the Exception Becomes the Rule and the Rule
Becomes the Exception, What Good is the Rule?
By: Michael A. McKuin
Revised: July 2015
"First there is a mountain. Then there is no mountain. Then there is." Donovan Leitch, "There Is A Mountain"
In any ERISA-governed dispute over benefits, involving a health or long term disability claim denial, the Court may adopt one of two possible standards of review: either a de novo standard or a deferential standard. The outcome of a case often depends upon which standard is applied. Under de novo review, the Court looks at the claim much as it would any other contract dispute. There is no presumption of correctness of a Plan's decision denying a claim. Deferential review is more restricted. The Court's focus is upon whether the Plan's final decision was "arbitrary, capricious or an abuse of discretion".
Plan attorneys almost always argue the deferential standard applies. Claimants’ attorneys usually argue the opposite. Much of ERISA litigation involves this technical debate over the standard of review, making even the simplest benefit dispute ridiculously complex.
In Firestone Tire & Rubber Co. v. Bruch 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989), the United States Supreme Court held that de novo review is to be presumed. The Court held that a "denial of benefits challenged under [29 U.S.C.] § 1132(a)(1)(B) is to be reviewed under a de novo standard . . ." This is the so-called "default de novo" rule. The reason for the rule is simple, as explained by the Court itself. The deferential standard of review "would afford less protection to employees and their beneficiaries than they enjoyed before ERISA was enacted." Thus, to apply that standard in ERISA benefit cases would impose a result that Congress could not have intended in light of ERISA's very stated purpose of "promot[ing] the interest of employees and their beneficiaries." Id. at 113-14.
If the Firestone Court had just stopped right there, all would have been well and good in the world. But unfortunately it didn't stop. Bound and determined to apply trust law principles to what had historically been a contract law relationship between insurer and insured, the Court went further, carving out one of the most notorious loopholes in the history of American jurisprudence. The Supreme Court held that a District Court is to review ERISA claims de novo, "unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan." Id at 115. Those 24 little words may not seem like much to the uninitiated, but they have inflicted untold hardship on millions of Americans. They comprise the so-called "Firestone exception" to the default de novo rule.
As you might expect, as soon as Firestone was decided, benefit plans scurried to insert language into plan documents, giving plan fiduciaries "discretion" to determine issues of eligibility and to interpret the plans. The sole reason for doing this, of course, was to take advantage of the Firestone exception loophole, so that health or long term disability claim denials would shielded by the deferential standard of review.
Now bear in mind, this is the very result that the Supreme Court itself said was contrary to the intent of Congress in passing the law in the first place. And yet, it was the most profound result of the Court's decision. Although the Court clearly said that Congress intended that courts review ERISA-governed claim denials, de novo, the effect of the Court’s decision in Firestone was to impose the deferential standard of review on the widest scale imaginable. This is a perfect example of the "looking glass" logic of ERISA.
Although it’s true that in ERISA practice today the exception has practically swallowed the rule, it isn’t true in all cases. There are still some ways to get around Firestone exception. (And even if you’re stuck with deferential review, there are still some very viable “conflict of interest” issues that come into play. See article: Abatie v. Alta Health & Life Ins. Co. (The New "Non-Sliding", Sliding, Scale for Reviewing Decisions of Conflicted ERISA Fiduciaries).
Quality of Language
The type or quality of the language required to vest the necessary degree of discretion in an ERISA fiduciary has been the focal point of several federal appellate decisions. One of my personal favorites is the Seventh Circuit's opinion in Herzberger v. Standard Insurance Company 205 F.3d 327 (7th Cir., 2000). Herzberger suggested (perhaps tongue in cheek) that plans include the following language, in order to fall within the Firestone exception: "Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them." In other words, "We’ll pay your claim if we feel like it. If we don't, we won't." To this writer's knowledge, no ERISA-governed health or long term disability plan has ever adopted the language suggested in Herzberger. If they did, how many policies do you think they would sell? Insurance companies peddling health or long term disability coverage, want to avail themselves of the deferential standard of review, should you ever sue them. But they don’t want this fact to be so obvious to you that you might reject their product, when you're shopping for insurance.
Sometimes, the plan language granting discretion is obscure or ambiguous (and this is clearly by design). But where that is the case, the Ninth Circuit has held it will not suffice. In Bogue v. Ampex Corp., 976 F.2d 1319, 1325 (9th Cir. 1992) and in Kearney v. Standard Insurance Co., 175 F.3d 1084 (9th Cir. 1999), the Ninth Circuit held that such discretion must be "unambiguously retained" in the plan documents. If it isn't, the standard of review is to be de novo, pursuant to Firestone rule. In Sandy v. Reliance 222 F.3d 1202 (9th Cir., 2000), the Court citing Harry Potter, stated:
"Neither the parties nor the courts should have to divine whether discretion is
conferred. It either is, in so many words, or it isn't. For sure, there is no magic to
the words 'discretion' or 'authority'-- but we're not at Hogwarts. Therefore, it should
be clear: unless plan documents unambiguously say in sum or substance that the
Plan Administrator or fiduciary has authority, power, or discretion to determine
eligibility or to construe the terms of the Plan, the standard of review will be de
Therefore, in order to defeat the Firestone exception and deferential review, the first place to look is at the plan language itself. Is discretion to decide issues of eligibility or to interpret the plan clearly and unambiguously retained? If it isn't, an argument can be made for de novo review.
Delegation of Discretion Factors
The "administrator" referenced by the Firestone court is the plan administrator (as distinguished from a mere claims administrator, hired by the Plan). Nothing in Firestone even remotely suggests that the Firestone exception would apply to decisions of a third-party, non-fiduciary claims administrator. When one considers the trust law principles upon which the Firestone decision was based, no other interpretation is possible. See: Baker v. Big Star Division of Grand Union Co. 893 F.2d 288, 291 (11th Cir. 1989) ("Any entity or person found not to be an ERISA ‘fiduciary’ cannot be an ‘administrator’ with discretionary authority’ subject to the arbitrary and capricious standard." Id at 291). cf. Madden v. ITT Long Term Disability Plan 914 F.2d 1279, 1283-85 (9th Cir. 1990), cert. denied 498 U.S. 1087 (1991) (where administrator’s discretionary authority is delegated to an ERISA fiduciary, abuse of discretion standard is applied to the fiduciary’s decision).
ERISA itself provides for a "full and fair review by the appropriate named fiduciary" 29 USC § 1133(2). The "appropriate named fiduciary" may be the Plan Administrator or any other party designated by the Plan Administrator, provided that such Plan Administrator or other party is named in the plan instrument or is identified pursuant to a procedure set forth in the Plan as the person who reviews and makes decisions on claim denials. 29 USC § 1105(c)(1) clearly provides that: "The instrument under which a plan is maintained may expressly provide for procedures . . . (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan." 29 USC § 1105(c)(1). See also: 29 CFR 2509.75-8 (FR-12).
"In accordance with the logic and reasoning of Firestone, we hold that where: (1) the ERISA plan expressly gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan and (2) pursuant to ERISA, 29 U.S.C. @ 1105(c)(1) (1988), a named fiduciary properly designates another fiduciary, delegating its discretionary authority, the 'arbitrary and capricious' standard of review for ERISA claims brought under @ 1132(a)(1)(B) applies to the designated ERISA-fiduciary as well as to the named fiduciary." Madden, supra at 1283-1284).
Therefore, a "named fiduciary" may delegate its fiduciary responsibilities to a third party, (even to a claims administrator), but it may do so only if the written plan instrument expressly provides procedures for doing so; and there must be an actual designation of that third party, by the named fiduciary, as being a person, empowered to carry out fiduciary responsibilities under the Plan. An alleged de facto fiduciary status is not
enough to preserve the deferential standard under the Firestone exception to the de novo rule. There must
be an actual exercise of discretionary authority by the named or designated fiduciary. If that fiduciary fails to act, then there is no decision of any fiduciary to defer to. "In the case of third-party administrative services, the deferential standard of review may not apply to claim review procedures after the initial review if the administrative services contract (does) not confer discretionary powers on the (claims) administrator." Polk, ERISA Practice & Litigation, WestGroup, 1993, 1999 Sect. 11:54 P. 157. Nelson v. EG & G Energy Measurements Group, Inc. 37 F.3d 1384, 1389 (9th Cir. 1994). ("Thus, because we do not have an interpretation of the Plan by the Administrative Committee, to whom such authority was granted by the Plan, there is no appropriate exercise of discretion to which to defer. The Plan does not permit the exercise of discretion by an employee who happens to be involved in the administration of the Plan . . . Therefore, under the provisions of Firestone, we interpret the terms of the Plan de novo . . .").
Very frequently, claims review decisions are made by claims administrators and a close examination of the plan documents may reveal that no discretionary authority has been conferred upon that claims administrator. The plan documents may not even set forth any procedure for delegating discretion. In those instances, it can certainly be argued that the standard of review should be de novo.
State Laws Banning Discretionary Clauses
Recently, states, such as California, have enacted statutes, banning clauses in life and disability policies (as well as contracts, certificates, or other agreements), which grant insurance companies discretion to determine eligibility for benefits or to interpret plans. (See: Insurance Code Section 10110.6). In California, this would apply to all such policies issued or renewed on or after January 1, 2012 and it applies to all such policies, which insure California residents, regardless of where the policies were “issued”. It will be interesting to see how those bans play out over the long run. See article: Discretionary Bans and ERISA’s The Savings Clause.
ERISA Disability Lawyer