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Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials under ERISA, 101 Nw. U. L. Rev. 1315 (2007)

Abstract

Authoritative evidence has come to light that for a period of some years, stretching from the mid-1990s into the present decade, Unum/Provident Corporation (Unum), the largest American insurer specializing in disability insurance, was engaged in a deliberate program of bad faith denial of meritorious benefit claims. Part I of this Essay reviews what is known of this episode.

The Unum/Provident scandal draws attention to a major failing in how the federal courts have understood their role in reviewing benefit denials under the Employee Retirement Income Security Act of 1974 ("ERISA"). Most disability insurance in the United States (apart from the Social Security program) is employer-provided, and hence ERISA-governed. Many, probably most, of the victims of the Unum/Provident scandal were participants and beneficiaries of ERISA-covered disability insurance plans. As regards Unum's ERISA-govemed policies, Unum's program of bad faith benefit denials was all but invited by an ill-considered passage in an opinion of the United States Supreme Court, Firestone Tire & Rubber Co. v. Bruch, which allows ERISA plan sponsors to impose self-serving terms that severely restrict the ability of a reviewing court to correct a wrongful benefit denial.

Part II of this Essay reviews the Bruch decision. Part III locates Unum's program of bad faith benefit denials in ERISA's landscape of conflicted plan decisionmaking. Most ERISA plan benefit denials are the work of conflicted decisionmakers. ERISA places the plan administrator under a fiduciary duty to act "solely in the interest of the participants and beneficiaries," yet, as the Third Circuit observed of the defendant in Bruch, "every dollar saved by the [plan] administrator on behalf of his employer is a dollar in Firestone's pocket." This Essay directs attention to a prominent line of Seventh Circuit cases in which that court has purported to invoke law-andeconomics principles to minimize or deny the significance of these conflicts of interest. I explain why the Seventh Circuit cases are mistaken, and I point to a contrasting strand of Eleventh Circuit case law that, if more widely followed, could overcome much of the mischief that results from conflict-tainted benefit denials.

Part IV develops the view that the Unum/Provident scandal, by demonstrating the extent of the danger of self-serving plan benefit denials, should cause the Supreme Court to revisit the branch of its decision in Bruch that allows plan drafters to require reviewing courts to defer to self-serving plan decisionmaking. The Court there rested its decision on analogy to "general principles of trust law." The Court reasoned that because ERISA's law of plan administration derives from the law of trusts, and because the settlor of a private trust can require deferential review, an ERISA plan drafter must also be empowered to require deferential review. There is, however, a profound difference of purpose between ordinary trust law and ERISA fiduciary law. Because "[t]he normal private trust is essentially a gift," trust law exhibits great deference to the wishes of the transferor. In ERISA, by contrast, Congress imposed trust law concepts for regulatory purposes, to restrict rather than to promote the autonomy of the employer over its employee benefit plans. This fundamental difference of purpose should lead the Court to restrict the power of an ERISA plan sponsor to alter the standard of judicial review. I point to provisions of ERISA not considered by the Court in Bruch that lend strong textual support to the view that Congress did not mean to empower an ERISA plan sponsor to weaken the standards under which its benefit denial decisions (or those of a hireling) are to be reviewed.

Date of Authorship for this Version

2007

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