Judges must approach medical disability and health insurance disputes with a skeptical eye when they involve insurance companies that both evaluate and pay employee claims.
In a 6 to 3 decision announced Thursday, the US Supreme Court ruled that benefit denials by such companies must be examined with caution when circumstances suggest a high likelihood that financial considerations affected a benefits decision.
The court added that an apparent conflict of interest is only one of many factors that a reviewing judge must consider.
The ruling is important because it offers guidance to federal judges presiding over lawsuits challenging medical disability and health insurance determinations in group policies.
"When judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is one," writes Justice Stephen Breyer in the majority opinion.
A federal judge upheld the denial of benefits, but the Sixth US Circuit Court of Appeals reversed that finding, ruling that the judge had not fully considered the impact of MetLife's potential conflict of interest in both administering the plan and deciding which claims to pay and which to deny.
Justice Breyer said the appeals court followed the correct "combination-of-factors method of review." He said judges should examine the record for potentially inconsistent positions taken by a company, and whether the company gave due weight to the entire record or favored certain reports while downplaying others.
Three justices dissented. Justice Antonin Scalia wrote that the court was giving too much weight to an appearance of conflict. He said that under the law of trusts "[A] fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision." He adds, "There is no evidence of that here."
In passing the Employee Retirement Income Security Act of 1974 (ERISA), Congress authorized insurance companies to both evaluate and pay claims. ERISA also authorizes employees to file a lawsuit in federal court challenging an unfair denial of benefits.
But ERISA doesn't set a clear standard for judges who are called upon to decide disputes over benefits.
In 1989, the Supreme Court ruled that judges hearing such lawsuits must apply a more rigorous standard of review in cases in which the plan administrator served as both the evaluator and payer of claims.
But the court did not explain what constitutes a conflict of interest or how federal judges should weigh such a conflict while considering a particular case.
Thursday's decision stems from the case of Wanda Glenn, a sales manager at a Sears store from 1986 to 2000. In 2000, her physician diagnosed a severe heart condition. He advised that she no longer work. She applied for disability benefits under Sears' plan, administered by MetLife.
On the basis of the diagnosis and the physician's recommendation, MetLife found that Ms. Glenn was totally disabled and began paying benefits. With the help of MetLife, she also applied for and obtained disability payments from the Social Security Administration.
After two years, the MetLife policy required a new assessment of whether Glenn could perform any job or was still totally disabled. Her physician had repeatedly verified the severity of her condition, but at one point he checked a box on an evaluation form indicating that Glenn was able to work in a "sedentary physical exertion level occupation."
Three months later, contrary to the checked box, Glenn's physician again stated that he did not believe she could handle any kind of stress at work.
In evaluating Glenn's disability claim, MetLife focused on the checked box and decided to stop making disability payments to her.
Glenn challenged the decision and eventually took MetLife to court.
In siding with Glenn, the Sixth Circuit said MetLife cherry-picked certain aspects of Glenn's medical records, while ignoring others. This selective review, combined with MetLife's conflict of interest in both evaluating and paying claims, rendered the decision arbitrary and capricious, the appeals court found.
In affirming the Sixth Circuit, Justice Breyer said: "All of these serious concerns, taken together with some degree of conflicting interests on MetLife's part, led the court to set aside MetLife's discretionary decision. We can find nothing improper in the way in which the court conducted its review."