Disclaimer:
The law and legal rules are subject to continual
revision
and change. This article is dated February,
2004. No attempt has been made to update
this article
to reflect pertinent changes or developments
in the law, if any, since that date.
In Fought v. UNUM Life
Insurance Company of America, the Tenth Circuit
announced a new standard to give less deference
to decisions made by ERISA plan administrators
who have a conflict of interest when they
both decide and pay out benefit claims. The
Court announced “We thus modify our
traditional arbitrary and capricious analysis
in these cases to require support for the
administrator’s decision to deny coverage
by a preponderance of the evidence, rather
than the traditional requirement of substantial
evidence”. Applying this standard,
the Court reversed a lower court’s
decision, finding that a long-term disability
benefit plan administrator had impermissibly
denied benefits to a participant who was
disabled because of a severe staph infection
following her elective heart surgery. ERISA
itself does not provide for two different
standards, but many courts have given less
deference to decisions where there is a conflict
in interest.
In March of 1999, Shirley
Fought underwent elective heart surgery.
Prior to Ms. Fought’s enrollment in
the plan, she had been diagnosed and treated
for coronary heart disease. The surgeons
discovered that she had a narrow sternum,
and used a special procedure to close the
surgical wound. Three weeks later, her incision
reopened, she contracted a severe, drug-resistant
staph infection in the wound and was placed
in intensive care. She underwent numerous
procedures and was put on a ventilator and
nutritional support. In September of 1999,
UNUM Insurance Company denied Ms. Fought
coverage for long-term disability benefits
on the ground that Ms. Fought’s pre-existing
heart condition contributed to the condition
for which she was claiming disability. The
plan’s pre-existing condition clause
excluded coverage for “any disabilities
caused by, contributed to by, or resulting
from your . . . pre-existing condition.” She
appealed UNUM’s decision. Three doctors
certified that the staph infection was neither
a pre-existing condition nor related to her
pre-existing coronary artery disease. UNUM
affirmed its prior denial because the staph
infection was the result of surgery for a
pre-existing heart condition.
The U.S. District Court
for the District of New Mexico found that
UNUM’s denial of benefits was not arbitrary
and capricious. The Tenth Circuit Court of
Appeals reversed the District Court, saying
that less deference should have been accorded
UNUM’s denial of benefits. UNUM conceded
it had a conflict because it both administered
the benefit and was the source of funds for
benefit payments. The more appropriate standard
of review involves a two-tiered approach
to be used when there is a conflict of interest,
because the existence of a conflict of interest
is a factor in determining if there is an
arbitrary and capricious decision. First,
the burden is on the administrator to justify
the reasonableness of its decision, pursuant
to the arbitrary and capricious standard
of review. Second, where a sufficiently serious
conflict of interest exists, the denial of
coverage will be reversed if the participant
shows by a preponderance of the evidence
that the denial is not warranted: the participant
need not show the decision was arbitrary
and capricious. In Ms. Fought’s case,
the third party insurer acted as plan administrator
and denied coverage for which it would be
required to pay; this was a sufficiently
severe conflict of interest to trigger the
second approach. Using this standard, the
Court found UNUM’s expansive reading
of the pre-existing condition exclusion “may
be overbroad”. The Court stated that
the exclusion could not merely require that
the pre-existing condition be one in a series
of factors that contributes to the disabling
condition, but must be substantially or directly
attributable to the pre-existing condition.
The Court stated that “the chain of
non-proximate causation that UNUM asserts
in her case is attenuated to the point of
absurdity. The staph infection was a separate
and distinct injury, not a manifestation
of Ms. Fought’s underlying coronary
disease. UNUM operated under a more severe
conflict than that facing other plan administrators
because UNUM is not subject to countervailing
pressures that work in favor of participants.
UNUM does not care about employee morale,
retention of skilled employees, or countering
demands for wage increases.
What can plans do in light
of this decision? Two options exist when
the plan administrator is both reviewing
and which is also the insurer paying claims.
If the plan administrator chooses to retain
these powers, the plan administrator should
conduct its analysis and documentation expecting
the decision to be reviewed with little deference.
In addition, the employee benefit plan and
summary plan description wording should be
very specific in key areas such as in what
is and is not precluded as a pre-existing
condition, perhaps with examples each way.
Alternately, the administrator could modify
claims and appeal procedures to involve one
or more parties free from such conflicts.
The Employee Benefit Security Administration
claim regulations require that, for a group
health plan to provide full and fair review
of a benefit appeal, the appeal procedures
provide for a review that does not afford
deference to the initial adverse benefit
determination, conducted by a fiduciary who
neither made the initial adverse determination
nor is a subordinate of that individual.
This regulation reflects a imilar concerns
that claims should be reviewed by an independent
party. Plans wishing to preserve the “arbitrary
and capricious” standard can implement
procedures where an independent reviewer
reviews the case. This will of course likely
result in more reversals upon appeal but
would have three advantages. First, should
the matter go to court, the arbitrary and
capricious standard would be preserved. Second,
the record before the court should be limited
to the record before the appeals fiduciary.
And last, the total cost for claim/appeal/litigation
would be materially reduced because of the
limitation on the record and the standard
of review.
This case is important,
as it announces a new standard that will
apply to ERISA plan administrators in New
Mexico. The case can be found at http://www.kscourts.org/ca10/cases/2004/02/02-2176.htm.
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