Companies and administrators of employee benefit plans in the U.S. should take note of a new U.S. Supreme Court case addressing conflicts of interest arising where insurance companies both adjudicate and pay claims.

Facts

Wanda Glenn, a Sears employee, was diagnosed with a heart condition. She subsequently qualified for the initial 24 month benefit under the Sears disability plan which was both administered and insured by MetLife. The insurance company also directed her to a law firm to apply for Social Security disability benefits. The Social Security Commission subsequently granted Glenn permanent disability payments, part of which MetLife received as an offset to its own plan benefits.

After 24 months, Glenn applied for extended benefits under the disability plan, which had a stricter, Social-Security-type standard. Even though the Social Security Commission had concluded that Glenn could do no work, MetLife determined that Glenn was capable of sedentary work, and therefore did not qualify for the extended benefit.

In reaching its conclusion, MetLife emphasized one physician's report at the expense of other, more detailed physician reports indicating a contrary position. Glenn brought suit seeking judicial review of MetLife's denial of benefits.

Decision

In a majority decision, the Supreme Court set aside the denial of benefits by MetLife. The opinion addresses two major issues:

• Whether MetLife had a conflict of interest because it both administered and insured the plan.
• If so, how such conflict should be treated on judicial review.

The Court had previously held that an employer operates under a conflict of interest when it both administers and pays for benefits. In this case, the Court decided that similar entities -- such as an insurance company -- also have conflicting interests when the plan administrator who both evaluates and pays claims makes discretionary benefit determinations.

However, the Court does not provide detailed guidance on how such a conflict of interest affects judicial review of a discretionary benefit determination. Generally, where the plan document gives the plan administrator discretionary authority in determining benefits, the court will uphold the administrator's decision unless the administrator abused its discretion.

The ruling in this case simply states that where a conflict of interest exists, the conflict is to be weighed as a factor in determining whether there is an abuse of discretion. The significance or severity of the conflict as a factor, however, would depend on the circumstances of the particular situation.

Although the Court does not provide guidance on how to weigh the conflict of interest, it does suggest that a plan administrator could protect itself by taking steps to reduce potential bias and to promote accuracy in the benefit claims process.

For example, the Court notes that a conflict of interest could become less significant when the entity, for example, walls off claims administrators from those concerned with firm finances, or provides mechanisms that penalize erroneous decision-making. A plan administrator that has taken such precautions could therefore minimize the effect of the conflict of interest, as the Court says, "perhaps to the vanishing point."