Stephan v. Unum Life Ins. Co. of Am.
U.S. Ct. Apps. 9th Cir., Sept. 12, 2012
The ERISA challenge was brought based on the insurer’s calculation of pre-disability benefits. The Court of Appeals agreed with the district court that the applicable standard of review was abuse of discretion and that because the insurer was responsible both for evaluating benefits claims and paying them, it operated under a conflict of interest, which had to be weighed as a factor in determining whether there was an abuse of discretion.
However, the appeals court held that the district court erred in determining what weight ought to be given the conflict.
The court held that the district court on remand may conduct a bench trial to ensure the full bias inquiry necessary to determine the weight to be afforded the conflict of interest.
The court stated that evidence outside the administrative record should be permitted in this context. Importantly, the court stated that this would include internal memoranda between the claim analyst and in-house counsel. This ruling, that the attorney client privilege doesn’t apply to communications before a claims decision is made that are between an insurer acting as an ERISA fiduciary and its attorney, conflicts with a recent decision in the Third Circuit, Wachtel v. Health Net Inc. The Third Circuit in Wachtel, held that the fiduciary exception did not apply because the insurer fiduciaries were administrating claims which are paid from their own assets.
The issue centers on whether the fiduciary exception to the attorney-client privilege should be extended to insurers acting as benefit administrators under ERISA plans. The Ninth Circuit has already previously ruled that the fiduciary exception applied to ERISA trustees and found no basis for distinguishing ERISA fiduciaries from trustees when noth have the obligation to act in the interest of the plan beneficiary. The rationale for adopting the fiduciary exception in the ERISA context is that the fiduciaries have a duty to disclose all information about plan administration to the beneficiaries. The Ninth Circuit limited the exception holding that it applies only to communications before the final administrative appeal.