Jones v. PepsiCo, Inc., 2016 WL 2642676 (S.D.N.Y. 2016)
Applying the abuse of discretion standard, a federal court has upheld the denial by a third-party administrator (TPA) of long-term disability benefits despite the claimant’s “strong case that he cannot do any type of work” due to his long history of temporary losses of consciousness. The plan gave the TPA—which was independent of the plan sponsor—discretionary authority to decide claims. Benefits were paid from a trust account or from the plan sponsor’s own funds, and the TPA’s compensation, which was based on the number of plan participants, did not vary depending on whether the TPA approved or denied claims. Therefore, the TPA did not have a structural conflict of interest since it did not have a direct financial interest in the outcome of its decisions. Nevertheless, the claimant argued that a conflict existed as a result of the TPA’s interest in keeping the plan sponsor happy—and its contract intact—by denying claims. The court rejected this argument, finding that the TPA’s professional reputation depends on processing claims accurately and dismissing a contrary case cited by the claimant as an “outlier.”
Having resolved this issue in the plan’s favor, the court next analyzed whether the denial was supported by “substantial evidence.” The TPA had approved benefits for the claimant, a driver, under the plan’s “own occupation” standard, since his condition made driving dangerous. However, the current denial was decided under the “reasonable occupation” standard (which applied after the “own occupation” period expired) based on the TPA’s identification of sedentary office occupations appropriate for the claimant. Citing Supreme Court precedent (see our Checkpoint article), the court decided it lacked the power to overturn the TPA’s decision to credit the opinions of its own experts over the claimant’s treating physicians. Moreover, it was not arbitrary and capricious for the TPA to rely on a paper review where the reviewing experts accepted the clinical findings of the claimant’s treating physicians. Finally, the court refused to view unfavorably an earlier vocational analysis conducted by the TPA (which indicated the claimant could work as a phlebotomist, even though he lacked a necessary certification) since the court’s role is to review the final claims decision, not preliminary denials.
EBIA Comment: The standard of review often influences the outcome of ERISA cases—since the abuse of discretion standard accords significant deference to the plan’s decision—but a claims administrator’s conflict of interest may diminish the level of deference. Consequently, many plan sponsors seek to avoid a conflict by delegating full discretionary authority to a TPA that has no financial interest in the claims decision. But claimants often question whether TPAs are truly independent, since they are hired by a party who is financially liable for approved claims. This decision represents an important acknowledgement of the professionalism of TPAs—whose reputation is on the line each time they decide a claim. For more information, see EBIA’s ERISA manual at Section XXXVI.C (“Standard of Judicial Review Applied to Benefit Decisions Under ERISA Plans”). See also EBIA’s Self-Insured Health Plans manual at Section XXVI.J (“Litigation Issues”).
Contributing Editors: EBIA Staff.