In ERISA benefit litigation, the selection of the judicial standard of review is often a hotly contested issue. Insurance carriers push for the abuse-of-discretion standard, arguing that it requires courts to give a significant degree of deference to their decisions to deny benefits. Where possible, claimants argue for the de novo standard, which does not afford deference to the denials of benefits.
In the seminal case of Firestone Tire & Rubber Co v. Bruch, 489 U.S. 101 (1989), the Supreme Court announced that lower courts should review ERISA denials under a de novo standard unless the plan conferred “discretionary authority” on the plan administrator. If discretionary authority is properly conferred, then the courts are to pursue some version of the abuse-of-discretion approach. Litigation has focused on whether plan language grants discretionary authority sufficient to trigger the abuse-of-discretion standard.
Language commonly used by Prudential in its disability policies is no stranger to dispute. The language says that a claimant is entitled to benefits “when Prudential determines” that he or she is eligible. Prudential asserts that this language meets the Firestone test for vesting discretionary authority.
In the recent case of Woods v. Prudential Ins. Co. of America, 2008 U.S. LEXIS 12423 (4th Cir. Jun. 11, 2008), the Fourth Circuit held otherwise. Addressing the “when Prudential determines” language, the Court held that “[a]lthough the Plan’s language vests authority in Prudential, it does not create any discretionary authority, as required by Firestone.” The Court added that “discretionary authority is not conferred ‘by the mere fact that a plan requires a determination of eligibility or entitlement by the administrator.’” (quoting Gallagher v. Reliance Std. Life Ins. Co., 305 F.3d 264 (4th Cir. 2002). The Court continued:
In other words, almost all ERISA plans designate an administrator who, in order to carry out its duties under the plan, must determine whether a participant is eligible for benefits. Yet this authority to make determinations does not carry with it the requisite discretion under Firestone unless the plan so provides. Firestone itself is based on this distinction. That decision, grounded in common law trust principles, drew a contrast between trustees who had no discretion but who, of course, had authority to manage a trust, and trustees who had been granted discretion, in addition to their authority. See, e.g., Firestone, 489 U.S. at 111 ("where discretion is conferred upon the trustee," abuse-of-discretion review is appropriate); id. (abuse-of-discretion review is appropriate when "discretion [is] vested in [trustees] by the instrument under which they act"); see also Haley v. Paul Revere Life Ins. Co., 77 F.3d 84, 88 (4th Cir. 1996) (noting difference between authority/duty to pay benefits and grant of discretion over benefit determinations). This distinction is important because ERISA plans are to be construed "in accordance with the reasonable expectations of the insured" when ambiguous, Gallagher, 305 F.3d at 269, and are to "enable plan beneficiaries to learn their rights and obligations at any time" by "reliance on the face of written plan documents," Blackshear [v. Reliance Std. Life Ins. Co.], 509 F.3d at 643 (internal citations and alteration omitted). A plan which simply conveys authority to an administrator creates the expectation only that such authority will be exercised, not that the administrator will enjoy wide discretion in wielding its authority as well as freedom from searching judicial scrutiny.
In reaching its conclusion, the Fourth Circuit agreed with the Seventh Circuit’s decision in Herzberger v. Standard Ins. Co., 205 F.3d 327, 332 (7th Cir. 2000). There, the Court held:
We hold that the mere fact that a plan requires a determination of eligibility or entitlement by the administrator . . . does not give the employee adequate notice that the plan administrator is to make a judgment largely insulated from judicial review by reason of being discretionary. Obviously a plan will not—could not, consistent with its fiduciary obligation to the other participants—pay benefits without first making a determination that the applicant was entitled to them. The statement of this truism in the plan document implies nothing one way or the other about the scope of judicial review of his determination, any more than our statement that a district court "determined" this or that telegraphs the scope of our judicial review of that determination.
Accordingly, the Fourth Circuit reversed the district court, which had applied a modified abuse of discretion standard, and remanded the case for evaluation under the de novo standard. Read the full opinion here.