Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials Under ERISA
28 Pages Posted: 15 Jul 2006 Last revised: 8 Dec 2015
Date Written: January 15, 2013
When the participant in an ERISA-covered employee benefit plan seeks judicial review of the plan administrator's decision to deny a claimed benefit, should the standard of review be deferential, effectively presuming the correctness of the denial, or should the court examine the merits afresh, applying so-called de novo review? In the prominent ERISA case of Firestone Tire & Rubber Co. v. Bruch (1989), the Supreme Court held that, on account of ERISA's protective purpose, the standard of review should be de novo. However, in an ill-considered aside, the Court assumed (and thus effectively decided) that the employer could alter that standard by inserting terms in the plan requiring deferential review. Even though resolving benefit claims is a fiduciary function under ERISA, and even though plan administrators are commonly officers of the employer (or its insurer) who have a financial interest in denying claims, ERISA plans now routinely require deferential review, and courts routinely obey.
A major scandal in claims administration has come to light in recent years that underscores how dangerous it has been to allow ERISA plans to skew the standard of review towards self-serving decisionmakers. Regulatory authorities and courts have now established that Unum/Provident Corporation, the nation's largest disability insurance carrier, was engaged in a program of deliberate bad faith denial of meritorious claims in both ERISA and non-ERISA markets. This article reviews these events.
The Unum/Provident saga shows convincingly that the Supreme Court underestimated the danger of allowing ERISA plan sponsors to require judicial deference to conflicted plan decisionmakers. This article refutes a line of Seventh Circuit ERISA cases that deprecates the dangers of conflicted plan decisionmaking on supposed law-and-economics principles. The article contrasts a strand of Eleventh Circuit authority that has been able to reduce the harm.
A main theme of this article is that the Supreme Court's misstep in Bruch was premised on a misunderstanding about how trust law bears on ERISA. The Court reasoned that because ERISA is rooted in trust law, and trust law allows the settlor to alter the standard of review, ERISA should allow similar latitude to benefit plan sponsors. That syllogism is flawed. The law of trusts is prevailingly a branch of the law of gifts, which aspires to maximize the donative autonomy of the settlor who creates the trust. In ERISA, by contrast, Congress drew upon trust law principles in support of a regulatory purpose, restricting the autonomy of plan sponsors in order to protect plan participants. Trust law rules that conflict with ERISA's regulatory purpose ought not to be transposed to ERISA. A variety of provisions of ERISA are shown to provide textual support for this view.
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