The Employee Retirement Income Security Act of 1974 (“ERISA”) establishes qualification requirements for retirement and welfare benefit plans. It also governs disputes relating to claims for benefits under such plans. However, judicial review of benefits claim disputes may be subject to two standards of review because of the U.S. Supreme Court’s recent decision in Firestone Tire & Rubber Co. v. Bruch.
In Firestone, the Court stated that benefits claims generally should be reviewed under a “de novo” standard, which basically means examining the facts in the same manner as one might review the terms of a contract. In this type of review, neither party is granted deference in applying its interpretation of plan provisions to a benefits claim.
The Court added, however, that because of the trust characteristics of benefit plans, a different form of review may be applied where the “plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” This second form of review is called the “deferential” standard. Under this standard, the interpretation or application of plan provisions by the administrator or other plan fiduciary will control unless it is shown to be “arbitrary, capricious or an abuse of discretion.”
Following the Firestone decision, most plan sponsors sought to incorporate plan provisions that gave discretionary authority to the administrator and other fiduciaries, so as to qualify for application of the deferential standard of review. Use of this standard requires proving a benefits claim and, as the Court itself acknowledged in Firestone, “afford[s] less protection to employees and their beneficiaries than they enjoyed before ERISA was enacted.” As a result, claimants now seek to avoid application of the deferential standard and courts are willing to limit its application in many situations.
Courts will reject the deferential standard where the grant of authority to the administrator or fiduciary is unclear or ambiguous. The standard also may be rejected where there is a conflict of interest. For example, a plan fiduciary, such as an insurance company, may have a dual role as a benefits funding source and as benefit’s administrator which results in a conflict of interest because decisions made as administrator, relating to the availability of benefits, may affect the amount of funding the fiduciary is required to provide on behalf of the plan.
Inconsistent application of plan provisions also may result in a court’s rejection of the deferential standard, as may a failure to comply with ERISA notice and procedural requirements. Rejection of the deferential standard also may occur where the administrator or fiduciary has delegated benefits decision-making authority to clerical or ministerial personnel, since such personnel do not serve in a fiduciary capacity.
Arguments regarding the appropriate standard of review applicable to a benefits claim generally may be perceived by parties as merely technical or procedural in nature, but the applicable standard used is critical since the party that prevails on the review standard issue will most likely be the party that obtains a favorable decision.
We have substantial ERISA plan experience. If you are a claimant, or a plan sponsor or fiduciary, seeking the protections provided by either form of review, please contact us for further information.