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CCH® BENEFITS — 7/11/08

Fourth Circuit Addresses Plan Language Necessary To Secure Deferential Standard Of Review

From Spencer's Benefits Reports: Language in a long term disability plan that merely designated who must make benefits determinations and the timing of those determinations was not sufficient to trigger a deferential standard of judicial review of the plan administrator’s denial of LTD benefits. This was the ruling of the Fourth Circuit U.S. Court of Appeals in Woods v. Prudential Insurance Company of America (No. 07-1580).

Patricia Woods worked as a manager for Wendy’s International, Inc., and participated in the company’s LTD plan, which was issued and administered by Prudential Insurance Company of America. After Ms. Woods was injured in an automobile accident, she filed a claim for LTD benefits under the plan. Prudential approved Ms. Woods’ claim and paid her benefits for an initial 12-month period ending in January 2005. Subsequently, Prudential reevaluated Ms. Woods’ claim and denied her further LTD benefits beyond January 2005.

After Prudential denied her appeal, Ms. Woods filed suit against the insurer in the U.S. District Court for the Eastern District of Virginia, seeking reinstatement of her LTD benefits. However, the district court granted summary judgment in favor of Prudential, concluding that (1) the LTD plan vested discretion in Prudential to make benefits determinations; and (2) under a deferential abuse-of-discretion standard, the insurer’s decision had to be upheld. Ms. Woods appealed, and the Fourth Circuit reversed the district court’s ruling.

In rendering its decision, the Fourth Circuit initially cited the U.S. Supreme Court’s 1989 ruling in Firestone Tire & Rubber Co. v. Bruch (489 U.S. 101), in which the Court held that courts must conduct a nondeferential “de novo” review of an ERISA benefits determination unless the plan confers discretionary authority on the plan administrator. The Fourth Circuit then cited its own 2002 decision in Gallagher v. Reliance Standard Life Insurance Co. (305 F.3d 264), in which it held that “if a plan does not clearly grant discretion, the standard of review is de novo.”

Turning to the language of the LTD plan at issue, the Fourth Circuit stated, “We must determine whether the plan confers discretionary authority over benefit determinations on Prudential. While both parties agree that the plan does not do so expressly, Prudential contends that such authority should be implied because the plan specifies that a claimant is eligible for benefits ‘when Prudential determines’ that eligibility exists and that disabilities are ‘determined by Prudential.’ We find Prudential’s argument unpersuasive. Although the plan’s language vests authority in Prudential, it does not create any discretionary authority, as required by Firestone. As we indicated in Gallagher, discretionary authority is not conferred by the mere fact that a plan requires a determination of eligibility or entitlement by the administrator.” (Emphasis in original.)

The Fourth Circuit went on to conclude, “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. This approach makes clear that the plan’s language merely designates who must make benefit determinations and the timing of those determinations. Nothing in the phrases ‘when Prudential determines’ or ‘determined by Prudential’ implies the conferral of discretion, as opposed to mere authority, on Prudential. A contrary conclusion—that the bare assignment of authority to Prudential creates Firestone-type discretion—would lead to an abuse-of-discretion (rather than a de novo) review whenever an administrator is vested with authority to make eligibility determinations. Thus, because an administrator always possesses such authority, Prudential’s argument would lead to an abuse-of-discretion review in nearly every ERISA benefits case, thereby jettisoning Firestone’s distinction between authority and discretionary authority.”

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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