The Eleventh Circuit Court of Appeals, which oversees federal appeals for Alabama, Georgia and Florida, reversed a federal district court in Florida and ruled in favor of an insurer and against a policyholder. This case, Goldfarb v. Reliance Insurance Company illustrates the unfairness of ERISA when compared with the usual laws governing the interpretation of insurance policy, but the end result can be explained by the unique circumstances.
The case arose out of tragedy. Dr. Goldfarb was insured under a $500,000 accidental death policy of which his sons were beneficiaries. An avid mountain climber in extremely good physical condition, he traveled to remote locations and climbed difficult mountains. Unfortunately, in a remote location in Pakistan, he met his end, when he went against the advice of his hiking guide and friend and attempted to scale a dangerous peak. His body was observed by helicopter but could not be recovered.
When his sons made a claim with Reliance, Reliance denied the claim saying that the sons could not show that the death was accidental. The insurance company did not contend, however, that the death was by suicide. Unfortunately, the policy was an ERISA policy that contained language giving the insurance company the discretion to interpret its plan language. However, the district court found in favor of the Goldfarbs and found that Reliance had arbitrarily and capriciously denied the claim.
In reversing the trial court, the Eleventh Circuit relied on two anti-policyholder features of ERISA: (1) the insurance company gets the last word on what its policy means and (2) the insurance company can only be reversed if its reasoning has no reasonable basis, even if it is wrong. As to the first, under the laws of most states, an insurance policy is considered a “contract of adhesion” because it is drafted by the insurance company without any ability of the policyholder to change its terms. As a result, under state law, any vague or ambiguous terms are interpreted in favor of the policyholder. Not so under ERISA as illustrated by Goldfarb. The court noted that the policy did not define accident and was therefore, vague. However, rather than providing a definition of accident favorable to the policyholder (typically “accidental” under state law policies means not expected or intended by the insured) the court looked to federal common law and defined accidental as “whether a reasonable person, with background and characteristics similar to the insured, would have viewed [injury or death] as highly likely to occur as a result of the insured’s intentional conduct.” Under this definition, the Eleventh Circuit ruled that Reliance could have found that Dr. Goldfarb’s death was “highly likely to occur” and had a reasonable basis?
Shouldn’t Dr. Goldfarb’s intent have been a question for the jury? The answer is no. The courts have held that policyholders do not have the right to a jury trial under ERISA. Rather, the Eleventh Circuit was allowed to determine that Dr. Goldfarb should have seen that his own death was highly likely to occur?
The second anti-policyholder aspect of Goldfarb relates to the standard of review by the court. In the case of an insurance policy governed by ERISA, the courts hold that if an insurer inserts language in its policy saying that it has the discretion to interpret its policy then a court cannot overturn that decision as long as the insurance company has a “reasonable basis” for the decision, even if the court finds that the decision is wrong. The court can only consider evidence that was before the insurer at the time of denial, a standard which severely restricts discovery (and the ability to find the truth) in ERISA cases. In a non-ERISA case a policyholder has a right to have a court and jury determine whether the insurer should have paid the claim.
“Wait,” you ask, “if the insurer is paying the insurance claim out of their own money, don’t they have a conflict of interest and an incentive to deny claims?” The answer of course, is yes, they do have a natural bias. Under the laws of states like Alabama, Texas and Washington, the insurers’ duty of good faith gives some protection to policyholders and holds insurance companies accountable if they make claims decisions on the basis of economic factors rather than the merits of the claim. In ERISA cases, the courts typically protected against this clear conflict of interest by holding insurance companies who were paying claims from their own funds to a higher standard. In fact, the Eleventh Circuit stated in Brown v. Blue Cross and Blue Shield in 1990:
Because an insurance company pays out to beneficiaries from its own assets rather than the assets of a trust, its fiduciary role lies in perpetual conflict with its profit-making role as a business…. We conclude, then, as has one district judge in an opinion since Firestone, that a ‘strong conflict of interest [exists] when the fiduciary making a discretionary decision is also the insurance company responsible for paying the claims....’
In that case, the Eleventh Circuit decided that insurers who made claims decisions and paid the funds out of their own money (instead of the employers) would be subjected to a heightened standard of review.
The courts refer to this type of conflict where an insurer both pays and makes claims decisions as a “structural conflict.” In Blankenship v. Metropolitan Life Insurance Company, the Eleventh Circuit discarded its previous heightened standard of review and somewhat incredible stated “the presence of a structural conflict of interest—an unremarkable fact in today’s marketplace—constitutes no license, in itself, for a court to enforce its own preferred de novo ruling about a benefits decision.” In other words, the court concluded that because this type of conflict occurred frequently, it wasn’t that big of a deal (shouldn’t that make it a bigger deal?). Based on this reasoning, it abolished the heightened standard of review applicable when this very clear conflict of interest exists and held that the insurance company’s decision was “entitled to deference” even if was wrong. In reaching this holding, the appeals court cited to a United States Supreme Court case, Metropolitan Life Insurance Company v. Glenn, but did not cite to the binding part of that opinion. Rather, it referenced the concurrence of Chief Justice Roberts, which was not the law. By doing so, the Eleventh Circuit normalized biased decision making and turned a blind eye to the type of conduct that would otherwise be considered bad faith. As a result, in an ERISA case, especially in the Eleventh Circuit, insurers have an incentive to commit bad faith.
Fast forward to Goldfarb. Relying on Blankenship, the court held that Reliance’s obvious conflict barely merited consideration saying:
We must account for this structural conflict of interest in our decision making, but we give it little weight. We have recognized that such structural conflicts are a common feature of ERISA plans, and their existence does not mean that we abandon all deference to the plan administrator’s decision making.
Given Blankenship and the unusual circumstances, this decision is not that surprising. However, it does illustrate the ways that ERISA and the courts’ interpretation of it disfavor policyholders. As always, if you have an insurance claim or a question about one, don’t hesitate to reach out to us.
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