It has been said that ERISA sounds in both contract law and trust law. I have an enormous problem with that concept. If contract law applies, then enforceable obligations are imposed (that is, after all, the essence of contract law). So how it is that under ERISA, policy benefits often cannot be enforced? On the other hand, if trust law applies, then a whole host of legal relationships arise. For example, under trust law, there must be a "grantor" (or "settler") of the "trust". In an ERISA benefit plan, who's that? Under trust law, there must be an "instrument" clearly setting forth the intentions of the grantor. In an ERISA benefit plan, where's that? Under trust law, there must be an independent "trustee", responsible for carrying out the wishes of the grantor. This trustee is required by law to place the interests of the "beneficiary" above that of his own. In an ERISA benefit plan, where do we find that person? Under trust law, there is usually a fund held in trust for the benefit of the beneficiaries. In an ERISA benefit plan, where's the money?
Perhaps the courts have indeed answered these troubling questions. For example, in Lang v. LTD Plan 125 F.3d 794 (9th Cir 1997) and Brown v. Blue Cross & Blue Shield of Alabama, Inc., 898 F.2d 1556, 1564 (11th Cir. 1990) the courts have, in essence, held that that "true" trust law doesn't really apply in the ERISA context. As the 9th Circuit stated in Lang: "Brown explained that plans such as this one, funded by insurers and also administered by them, are not true trusts. . . See Brown, 898 F.2d at 1567." Lang, supra at 798. So, instead of "true trust" law, do we now have a new species of law (one I was never taught in law school) that applies in ERISA cases? Do we call it "non-true" trust law? If that sounds a little awkward, I suppose we could just as easily call it "false trust", "non-trust", "half trust", or "anti-trust" law (Oops, that last one's taken). Or how about "no-kinda trust at all" law. This sort of invites a Jonnie Cochranesqe philosophical query such as: "If I'm not a true lawyer, then what am I?" or "If I put on a knit hat, do I become someone else?" How can something simultaneously "be" and "not be"? That is the Shakespearean question. And in my mind, that is the fundamental absurdity of ERISA, in that it relegates the most basic concepts of contract law and trust law to the status of mere fiction.
If one can rape the English language in this manner, then it's easy to intellectually rape the ERISA statute, as the U.S. Supreme Court did in Firestone Tire & Rubber Co. v. Bruch 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989), where the Court first held that the default standard of review in ERISA benefit cases is de novo. The Court correctly reasoned that to find otherwise would be to afford plan participants less protection than they enjoyed, before ERISA was enacted and certainly Congress could never have intended that. But then, applying a century-old trust law principle, the Court created an exception to the default rule that practically swallowed the rule itself. And in so doing, the Supreme Court did exactly what it said Congress did not intend to do. It left plan participants with far less protection than they had before ERISA’s enactment.
The trust law concept, relied upon by the Supreme Court is one that says Courts will defer to the discretionary powers that can be given to a trustee or fiduciary under terms of a trust instrument. Accordingly, the 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."
The day after Firestone was decided, insurance companies scurried to amend their policies, so as to give themselves discretion to determine such eligibility issues and to interpret the plans. This enabled them to take advantage of the Firestone exception loophole, so that their benefit denials would be accorded deferential review, if a lawsuit were filed.
Not only has this exception practically destroyed the rule, but in fact, now some 26 years since Firestone was decided, we have come so far full circle that the "exception" to the rule is now considered to be a protection guaranteed to insurance companies.
Nowhere was this made clearer than in the aftermath of the Ninth Circuit’s decision in Regula v. Delta Family Care
Disability Plan, 266 F.3d 1130 (9th Cir, 2001), where the Ninth Circuit imported what was known at that time as the "Treating Physician (TP) Rule" from Social Security disability law into ERISA disability law. (Social Security regulations have since abolished that rule). In essence, what that meant was that the opinion of a treating physician regarding a claimant's disability, was to be accorded far greater weight than that of an examining physician or a mere reviewing physician.
The Regula decision made sense and in fact prior to that decision, many courts had already followed that course in ERISA LTD cases, irrespective of the Treating Physician Rule. See e.g.: Monroe v. Pacific Telesis Group, 971 F. Supp. 1310, 1315, (CD Cal, 1997); Donaho v. FMC Corporation 74 F.3d 894, 901 (8th Cir.,1996); Pierce v. American Waterworks Company, Inc. 683 F. Supp. 996, 1001 (WD, Penn., 1988); Isabel v. Hartford 1999 U.S. Dist. LEXIS 824 (CD, Cal., 1999) at *7-8; Newcomb v. Standard Insurance Co. 187 F.3d 1004 (9th Cir. 1999).
As one might guess, the insurance industry hit the ceiling. A challenge was immediately launched against the Regula decision to the U.S. Supreme Court. The American Benefits Council (ABC), the ERISA Industry Committee (ERIC) and the National Association of Manufacturers (NAM), along with the Michigan Manufacturers Association (MMA), all urged rejection of the TP Rule.
What lay at the center of their argument was a logical fallacy of the worst sort. Their primary argument was that the TP Rule undermined "ERISA's grant of discretionary authority to plan administrators." (Their words – not mine). There's just one small problem with that -- ERISA doesn't grant any discretion of any kind to anybody. The
idea that these folks believed it did is what lay at the rotten core of their argument. To quote again from an article, it said that the TP Rule "cannot be squared with ERISA's principles of discretion and deference". Once again, ERISA has no such "principles". These so-called "employer groups" (who are really minions of the insurance industry) expressed a profound belief that ERISA was enacted for THEIR protection, not the protection of employees -- and that somehow ERISA itself bestowed discretion upon THEM. It doesn't. But the sad fact is that courts often buy into this analysis, which is what screws ERISA claimants every day in courts throughout this
Perhaps this twisted logic and legal perversity could be stomached if one is talking about a plan that is entirely self-funded by the employer. But most employers of insured plans play no such role. They simply purchase insurance from an insurance company for their employees. In those cases, (for ERISA trust law purposes) it is the insurance company that essentially acts in the capacity of a grantor or settlor of the "trust", as asinine as that may
seem. It is also that same insurance company that confers discretion upon itself – discretion that the insurance company can exercise over the plan "beneficiaries" – beneficiaries that have no relationship whatsoever to the insurance company, except that of consumer/buyer and seller of insurance.
Any way one looks at it, this makes absolutely no sense. The simple fact is that trust law cannot peacefully co-exist in a relationship where there are contractual obligations owed by the trust fiduciaries to the trust beneficiaries that run counter to the terms of the trust itself. Indeed, how can one have a contractual obligation under a policy to pay benefits and simultaneously have the discretion (under trust law principles) to not pay? If anyone reading this article is brilliant enough to answer that question, intelligently, email your answer to me and I'll send you a six-pack of Guinness.
The basic flaw is in ERISA itself. Trust law principles may make sense, when applied to pension plan administration, but they make no sense when applied to what are called "welfare benefits", especially when those "welfare benefits" are clearly defined by contract.
There is one other problem with this analytical construct. Even in the self-funded plan context, if an employer is to be analogized to a settlor (or grantor) of a trust, then applying trust law principles, that settlor gives up control over the trust assets. Discretion may be vested in an independent trustee to carry out the settlor's wishes, but the settlor doesn't retain discretion (except perhaps limited discretion to revoke the trust entirely, if the trust is "revocable").
Yet another logical absurdity arises in the context of defining what is and what is not an ERISA "plan". If we apply trust law principles, the establishment of a trust is something that is declared by the settler (or grantor). It is an expression of the settlor's intent. Aside from certain kinds of "constructive trusts" (which are irrelevant to this discussion), you can’t have a trust, unless the settler / grantor intends for there to be a trust. Not so, in the world of ERISA. Even if an employer has no desire or intent to form an ERISA "plan" (i.e. create a trust), Courts will nevertheless find a plan, unless some very stringent requirements are met and the "Plan" falls under what are called the "safe harbor" regulations. Under what are known as the "Dillingham" factors, it doesn’t take much to form an ERISA plan or to find the existence of an ERISA plan, even where no such plan is wanted by anyone (except the insurance company). In fact, if the employer pays the premiums to the insurance company, that will likely be enough to fall outside the safe harbor regulation and then presto you automatically have an ERISA "plan". Under the Dillingham test, all you need in order for the Court to "find" an ERISA plan is "intended benefits or intended beneficiaries". That’s pretty easy to do. (See: Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc)). This is true even if the Employer never intended there to be an ERISA plan and even if the Employees had no understanding whatsoever that they were participants in an ERISA plan. The employees may never be told that they have lost valuable state law rights by becoming participants in such a plan. In other words, an insurance company, who simply sells insurance to an employer group, can unilaterally establish and maintain a plan on behalf of the employer, without the employer (or employees) even knowing about it. Go figure.
PARADOXICAL PERPLEXITY OR CONSPICUOUS INSINCERITY
The Illusory Nature of ERISA-Governed Health
and Disability Benefits
By: Michael A. McKuin
Revised: August 2015
ERISA Disability Lawyer