In September of this year, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court decision upholding 
Unum
Life Insurance Co.'s ("Unum") calculation of a participant's disability benefits, finding that the district court did not properly weigh the inherent conflict of interest present in Unum's dual status as the entity responsible for both paying and calculating benefits. See Stephan v. UNUM Life Insurance Co. of America, 9th Cir., No. 10-16840 (Sept. 12, 2012). The case addressed two interesting issues: (1) the "conflict of interest" analysis and the weight to be given such conflicts by district court's reviewing benefits determinations; and (2) the "fiduciary exception" to the attorney-client privilege.
Unum Life Insurance Co.'s ("Unum") calculation of a participant's disability benefits, finding that the district court did not properly weigh the inherent conflict of interest present in Unum's dual status as the entity responsible for both paying and calculating benefits. See Stephan v. UNUM Life Insurance Co. of America, 9th Cir., No. 10-16840 (Sept. 12, 2012). The case addressed two interesting issues: (1) the "conflict of interest" analysis and the weight to be given such conflicts by district court's reviewing benefits determinations; and (2) the "fiduciary exception" to the attorney-client privilege.
With regard to the former issue, the Ninth Circuit found that the U.S. District Court for the Northern District of California correctly determined that Unum's actions should be reviewed for an abuse of discretion but that the district court failed to fully consider Unum's conflict of interest. The Court of Appeals remanded the case to the district court and instructed it to weigh the evidence in the light most favorable to the participant, to consider evidence outside the administrative record, and to consider the “public record" of Unum's history of biased decision making. With regard to the latter issue, the Ninth Circuit also ruled that the fiduciary exception to attorney-client privilege applied to insurance companies acting as fiduciaries of plans governed by the Employee Retirement Income Security Act, an issue of first impression in the Circuit.
fiduciary exception to attorney-client privilege applied to insurance companies acting as fiduciaries of plans governed by the Employee Retirement Income Security Act, an issue of first impression in the Circuit.
By way of background, three months after he accepted a management position at Thomas Weisel Partners, Mark Stephan sustained injuries in a bicycle accident that rendered him a quadriplegic. Stephan applied for long-term disability benefits from a Unum plan that provided disabled employees with 60 percent of their monthly earnings, up to a maximum of $20,000. Unum calculated Stephan's monthly benefit at $10,000 based on his annual salary of $200,000. Stephan appealed Unum's determination, arguing that the calculation should included both his $200,000 salary and the $300,000 annual bonus that TWP guaranteed in his offer of employment. Unum rejected his appeal based on its finding that Stephan only worked for TWP for four months and did not receive a bonus during that period, and its conclusion that TWP “went outside their own employment agreement” when it paid Stephan's guaranteed bonus four months after he stopped working. Stephan sued Unum to recover additional disability benefits, and the United States District Court for the Northern District of California determined that Unum did not abuse its discretion in calculating his benefits The district court found that, because Unum both determined benefits eligibility and paid claims out of its own pocket, it operated under a conflict of interest that must be weighed as a factor in determining whether an abuse of discretion occurred. However, the district court found that, although a conflict of interest existed, there was little evidence of malice, self-dealing, or a pattern of disproportionately denying claims to support a finding that Unum abused its discretion.
Unum plan that provided disabled employees with 60 percent of their monthly earnings, up to a maximum of $20,000. Unum calculated Stephan's monthly benefit at $10,000 based on his annual salary of $200,000. Stephan appealed Unum's determination, arguing that the calculation should included both his $200,000 salary and the $300,000 annual bonus that TWP guaranteed in his offer of employment. Unum rejected his appeal based on its finding that Stephan only worked for TWP for four months and did not receive a bonus during that period, and its conclusion that TWP “went outside their own employment agreement” when it paid Stephan's guaranteed bonus four months after he stopped working. Stephan sued Unum to recover additional disability benefits, and the United States District Court for the Northern District of California determined that Unum did not abuse its discretion in calculating his benefits The district court found that, because Unum both determined benefits eligibility and paid claims out of its own pocket, it operated under a conflict of interest that must be weighed as a factor in determining whether an abuse of discretion occurred. However, the district court found that, although a conflict of interest existed, there was little evidence of malice, self-dealing, or a pattern of disproportionately denying claims to support a finding that Unum abused its discretion.
On appeal, the Ninth Circuit ruled that the district court correctly concluded that, because Unum “both decides who gets benefits and pays for them,” it must consider this structural conflict of interest in determining whether Unum abused its discretion and that the significance of this conflict “depends upon the likelihood that the conflict impacted the administrator's decision making.” However, according to the Court of Appeals, the district court improperly weighed this factor in its analysis in several ways. First, the district court should have applied traditional principles of summary judgment in weighing the conflict, including viewing the evidence in the light most favorable to the non moving party—Stephan—and admitting evidence outside the administrative record. Second, because the district court limited its review to information contained in the administrative record, it failed to consider other relevant evidence about Unum's history of biased decision making, the Ninth Circuit concluded.
Unum “both decides who gets benefits and pays for them,” it must consider this structural conflict of interest in determining whether Unum abused its discretion and that the significance of this conflict “depends upon the likelihood that the conflict impacted the administrator's decision making.” However, according to the Court of Appeals, the district court improperly weighed this factor in its analysis in several ways. First, the district court should have applied traditional principles of summary judgment in weighing the conflict, including viewing the evidence in the light most favorable to the non moving party—Stephan—and admitting evidence outside the administrative record. Second, because the district court limited its review to information contained in the administrative record, it failed to consider other relevant evidence about Unum's history of biased decision making, the Ninth Circuit concluded.
The Ninth Circuit also held that the fiduciary exception to attorney–client privilege—which generally provides that ERISA fiduciaries cannot assert attorney-client privilege with regard to legal advice and they receive in their capacity as ERISA fiduciaries—applies to insurance companies as well as employers, finding that the policy behind the fiduciary exception applies equally to employers and insurers serving as ERISA fiduciaries. While the district court concluded that the fiduciary exception did not apply to the instant case because the documents Stephan sought to admit were created after an adversarial relationship had begun, the Ninth Circuit disagreed and found that the documents in question “offer advice solely on how the Plan ought to be interpreted” and “do not address any potential civil or criminal liability Unum might face” and thus should have been admitted. The Ninth Circuit held that, for purposes of the fiduciary exception, the relationship between the parties does not become adversarial until after the final adverse benefit determination, and that documents prepared prior to that time are presumed admissible.
fiduciary exception to attorney–client privilege—which generally provides that ERISA fiduciaries cannot assert attorney-client privilege with regard to legal advice and they receive in their capacity as ERISA fiduciaries—applies to insurance companies as well as employers, finding that the policy behind the fiduciary exception applies equally to employers and insurers serving as ERISA fiduciaries. While the district court concluded that the fiduciary exception did not apply to the instant case because the documents Stephan sought to admit were created after an adversarial relationship had begun, the Ninth Circuit disagreed and found that the documents in question “offer advice solely on how the Plan ought to be interpreted” and “do not address any potential civil or criminal liability Unum might face” and thus should have been admitted. The Ninth Circuit held that, for purposes of the fiduciary exception, the relationship between the parties does not become adversarial until after the final adverse benefit determination, and that documents prepared prior to that time are presumed admissible.
Finally, the Ninth Circuit said that “numerous courts” have commented previously on Unum's history of “erroneous and arbitrary benefit denials, bad faith contract misinterpretations, and other unscrupulous tactics.”In affirming Unum's determination, the district court held that Stephan had not sufficiently demonstrated Unum's history of biased claims administration, the Ninth Circuit said. On remand, the Ninth Circuit instructed the district court to “take into account the public record of Unum's history of biased decision making as well as any evidence of such history Stephan produces.” The Ninth Circuit also described several aspects of Unum's decision making that the district court could find indicative of bias.
