In the recent case of Cardoza v. United of Omaha Life Insurance Company, 708 F.3d 1196 (10th Cir. 2013), the Tenth Circuit Court of Appeals shed some light on steps ERISA claim administrators can take to minimize the impact of the conflict of interest that arises when an insurer performs the dual roles of administering an ERISA benefits plan and paying benefits under the plan. In Metropolitan Life Ins. Co. v. Glenn, 554 U.S 105 (2008), the U.S. Supreme Court held that the existence of such a conflict does not change the standard a court uses to review a benefits decision; when the plan provides the administrator with discretionary authority to decide claims, the standard of review does not change from abuse of discretion to de novo, but the court still must weigh the existing conflict as “a factor in determining whether there was an abuse of discretion.” Id. at 115. The weight given the conflict should be proportionate to its seriousness, becoming “less important (perhaps to the vanishing point) where the administrator has taken steps to reduce bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.” Id. at 117. Although discovery beyond production of the official “administrative record” compiled during a claims review is generally not permitted in ERISA cases, the language in Glenn implied that some discovery would be appropriate to allow claimants to explore the scope of a conflict of interest. Id. at 117; 123.
Subsequently, in Murphy v. Deloitte & Touche, 619 F.3d 1151 (10th Cir. 2010), the Tenth Circuit confirmed that discovery beyond the administrative record on the merits of an ERISA disability claim is not permissible, but recognized that Glenn opened the door to limited discovery into a dual role conflict. The claimant who seeks such extra-record discovery has the burden to demonstrate necessity and relevance pursuant to Rule 26(b) of the Federal Rules of Civil Procedure. Id. at 1162.
Discovery battles in ERISA cases certainly did not abate after the Glenn and Murphy decisions, on issues such as when discovery on a conflict is appropriate, and what types of information an administrator may have to provide. See, e.g., Todd v. CP Kilco, et al., 2011 WL 838848 (E.D. Oka. Mar. 1, 2011); Tillotson v. Life Ins. Co. of N. Am., 2011 WL 285815 (D. Utah Jan. 28, 2011). The Cardoza case, however, appears an unlikely one to have involved such a dispute. It was not a denial of benefits case, but a seemingly uncomplicated argument about the earnings calculations used to determine the amount of benefits that were admittedly payable. The insurer had produced the administrative record to the claimant, including policy provisions and documents on the calculation of benefits, correspondence, and the decision and review. After receiving the record, the claimant sought what it termed “limited” additional discovery, including 11 depositions as well as voluminous interrogatories and document requests on issues far beyond the nature and extent of the administrator’s conflict. In response to one request, the insurer supplemented the record with an affidavit explaining the claims decision-making process, the compensation system and the set up of the claims department. The claimant continued to demand additional information, which the insurer refused to produce.
The Cardoza case affirms the Tenth Circuit’s commitment to the view held by the majority of circuit courts, that an appellate court’s review of an ERISA benefits decision is generally limited to the administrative record under the abuse of discretion standard, and that only in the unusual case should supplementation of the record be permitted. See, Weber v. GE Group Life Assur. Co., 541 F.3d 1002 (10th Cir. 2008); Fought v. UNUM Life Ins. Co. of Amer., 379 F.3d 998 (10th Cir. 2004); Hall v. Unum Life Ins. Co. of Am., 300 F.3d 1197 (10th Cir. 2002); Chambers v. Family Health Plan Corp., 100 F.3d 818, 823-24 (10th Cir. 1996). However, due to the particular facts in Cardoza, that an employee of the insured initially stated by mistake that no internal guidelines existed relating to the decision (which mistake the insurer immediately rectified upon learning of it), the claimant was permitted to conduct one Rule 30 (b)(6) deposition and limited written discovery, restricted to the conflict and whether the insurer had produced all guidelines applicable to the benefits determination.
In the appeal of the case, the claimant argued to the Tenth Circuit that the dual role conflict adversely affected the administrator’s decision. The Court held, however, that it would “accord the conflict little weight” in determining whether the decision was arbitrary, because the insurer “had taken active steps to reduce potential bias and promote accuracy in its decision making process.” Cardoza, 708 F.3d at 1202. Referring to the affidavit the insurer had submitted early on, the Court found that the facts set forth therein were adequate to address the conflict, as they explained how claims analysts were compensated and that analysts had no access to information on claim reserves or on any effect their claims handling may have had on company finances:
…United of Omaha’s Director of Customer Service in the Clinical Services Department of its Claims Division attested to the following facts, which show the steps United of Omaha took to minimize the conflict of interest: (1) “claims analysts are not allowed access to claim reserve information and are not provided actuarial or financial information regarding their claims handling or the effect of their claims handling on company financial results” and (2) “all claims analysts are physically segregated from the Premium, Sales, Underwriting, and Actuary Departments, as well as quality Auditors.” Additionally, “claims personnel are paid a salary or hourly wage and are not paid any incentive compensation payment or denial of claims” and “any bonus pay is based on company-wide performance.” Thus the record shows United of Omaha has taken active steps to reduce potential bias and to promote accuracy. Cardoza has provided no contrary evidence to the Court.
Obviously, time-consuming and costly discovery attempts by ERISA claimants will continue. Claim administrators would do well, therefore, to heed the steps taken by the insurer and approved by the Tenth Circuit in Cardoza. Insurers should have on hand relevant materials describing claims handling procedures and specific steps they have taken to protect against bias in the decision-making process. This could include information on issues such as how claim handlers are compensated through wages, bonuses or incentives, evaluations of claim handling accuracy, any limits placed on claim handlers’ access to information on claim reserves or how their decisions affect company finances, and even the physical layout and interaction of company employees in different relevant departments. Information can be made available as appropriate and necessary, by including such facts in adverse determination letters sent to claimants, including them in administrative records, or in affidavits of knowledgeable employees.