Pinto v. Reliance Std. Life Ins. Co.

Opinions of the United

2000 Decisions States Court of Appeals

for the Third Circuit

5-31-2000

Pinto v. Reliance Std. Life Ins. Co.

Precedential or Non-Precedential:

Docket 99-5028

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Filed May 31, 2000

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 99-5028

MARIA H. PINTO, Appellant

v.

RELIANCE STANDARD LIFE INSURANCE COMPANY

On Appeal From the United States District Court

For the District of New Jersey

(D.C. Civ. No. 96-cv-03508)

District Judge: Honorable Anne E. Thompson

Argued: September 22, 1999

Before: BECKER, Chief Judge, and GARTH, Circuit Judges

and POLLAK, District Judge.*

(Filed: May 31, 2000)

SAMUEL J. HALPERN, ESQUIRE

(ARGUED)

443 Northfield Avenue

West Orange, NJ 07052

Counsel for Appellant

_________________________________________________________________

* Honorable Louis H. Pollak, United States District Judge for the Eastern

District of Pennsylvania, sitting by designation.

STEVEN P. DEL MAURO, ESQUIRE

ROBERT P. LESKO, ESQUIRE

(ARGUED)

Del Mauro, DiGiaimo & Knepper

8 Headquarters Plaza - North Tower

Morristown, NJ 07960

Counsel for Appellee

OPINION OF THE COURT

BECKER, Chief Judge.

This appeal concerns the standard courts should use

when reviewing a denial of a request for benefits under an

ERISA plan by an insurance company which, pursuant to

a contract with an employing company, both determines

eligibility for benefits, and pays those benefits out of its

own funds. This question, and variations thereof, have

bedeviled the federal courts since considered dicta in

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989),

gave opaque direction about how courts should review

discretionary benefits denials by potentially conflicted

ERISA fiduciaries. In Firestone, the Court instructed that

the "arbitrary and capricious" standard was appropriate but

that a conflict of interest should be considered as a "factor"

in applying this standard.

Courts of appeals have taken different approaches to

integrating these seemingly incongruous directions when

reviewing decisions of insurance companies that fund a

plan and are also ERISA plan administrators. Following the

lead of five other such courts, we hold that, when an

insurance company both funds and administers benefits, it

is generally acting under a conflict that warrants a

heightened form of the arbitrary and capricious standard of

review. In reaching this conclusion, we are cognizant of the

previous cases in which we have been highly deferential to

decisions of an employer who funds and administers a

benefit plan, a practice grounded in the belief that the

structural incentives to deny meritorious claims are

generally outweighed by the opposing incentives to grant

2

them--such as the "incentives to avoid the loss of morale

and higher wage demands that could result from denials of

benefits." Nazay v. Miller, 949 F.2d 1323, 1335 (3d Cir.

1991). However, we conclude that these incentives

(assuming their existence) do not apply with the same force

to an insurance company that pays benefits out of its own

coffers. The relationship with the welfare of the

beneficiaries is more attenuated, and there are problems of

imperfect information. In the insurance company-as-

funder-and-administrator context, the fund from which

monies are paid is the same fund from which the insurance

company reaps its profits. This is in contrast to the

actuarially determined benefit funds typically maintained

by employers (especially in the pension area) that usually

cannot be recouped by the employer or directly redound to

its benefit. Our rule is also informed by the understanding

that "smoking gun" direct evidence of purposeful bias is

rare in these cases so that, without more searching review,

benefits decisions will be virtually immunized.

The courts of appeals that have forged the trail in this

area have presented different formulations of the

heightened standard. Some courts, led by the Eleventh

Circuit, have established a standard approaching de novo

review, shifting the burden to the defendant company to

explain its decisions. However, we side with the majority of

courts of appeals, which apply a sliding scale method,

intensifying the degree of scrutiny to match the degree of

the conflict.

In this case, applying a heightened degree of scrutiny

because of the financial conflict, we conclude that there is

a genuine issue of material fact as to whether the

defendant, Reliance Standard Life Insurance Company,

acted arbitrarily and capriciously when it concluded that

the plaintiff, Maria Pinto, an employee of Reliance

Standard's client Rhone-Poulenc Corporation, was not

totally disabled by her cardiac condition and therefore did

not deserve long-term disability benefits. Our heightened

review allows us to take notice of discrete factors

suggesting that a conflict may have influenced the

administrator's decision. First, Reliance Standard's reversal

of its initial decision to grant benefits was itself

3

questionable. Second, its final report credited the evidence

favorable to denial while inadequately explaining why it

rejected the contrary evidence--the same evidence on the

basis of which it had initially determined to award benefits.

Third, while Reliance Standard relies on the fact that two

physicians found Pinto not to be totally disabled while two

others disagreed, one of the doctors on whom Reliance

Standard relied was not a cardiologist but a pulmonologist,

and he found Pinto's condition satisfactory only from his

(pulmonary) vantage point, whereas the disability dispute is

over a condition that is cardiological in nature.

In light of the evidence in the record, we conclude that a

factfinder could find that Reliance Standard's actions were

arbitrary and capricious. Therefore, we will reverse the

grant of summary judgment and remand to the District

Court for further proceedings consistent with this opinion.

I. Facts and Procedural History

Pinto was an accounting clerk for Rhone-Poulenc from

1986 to 1991. In July 1991, she stopped working because

of a heart condition, which was diagnosed as mitral

stenosis and cardiac asthma. After receiving short-term

benefits from Rhone-Poulenc, she applied, in June 1992,

for long-term disability (LTD) benefits from Reliance

Standard, which had contracted to administer and pay LTD

benefits under Rhone-Poulenc's ERISA plan. The policy

provides benefits for individuals who submit "satisfactory

proof " of "Total Disability" to Reliance Standard. In

pertinent part, an employee is "Totally Disabled" when,

"after a Monthly Benefit has been paid for 24 months, an

Insured cannot perform the material duties of any

occupation." It is undisputed that Reliance Standard had

discretion to interpret the plan.

When Pinto applied for LTD benefits, Dr. Alan Bahler, her

treating physician since 1977, sent Reliance Standard a

diagnosis of her condition, which was confirmed by a

cardiac catheterization. He reported that she had mitral

stenosis secondary to rheumatic heart disease, which

brings on shortness of breath, and orthopnea (the inability

to breathe well without sitting erect) with borderline

4

congestive heart failure. Bahler further attested that Pinto

had developed symptoms of mitral valvular dysfunction,

including symptoms of cardiac asthma and early congestive

heart failure, worsening exercise tolerance, and

palpitations. He concluded that "[h]er present condition

precludes her from actively working even at a clerical level

. . . [h]er only viable option at the present time is continued

medical therapy, sedentary life style, and avoidance of high

stress situations that could precipitate her cardiac asthma."

In December 1992 and April and August 1993, Bahler

recertified Pinto's total disability. In the 1993 certification,

Bahler indicated that Pinto could not stand for long, could

not lift ten pound objects, could not be exposed to stress,

and should remain sedentary.

In October 1992, Reliance Standard sent Pinto a letter

granting her application for long term benefits. It advised

her that periodic medical certification would be required,

and requested that she promptly apply for social security

disability benefits. In December 1992, Pinto certified, in

connection with a disability review by Reliance Standard,

that she had not worked in any capacity, and that she

remained under treatment. She noted that she had been

hospitalized for two days in November of that year, when

she had been treated for bronchial asthma and acute

bronchitis. In April 1993, Pinto recertified that she was

disabled and represented that she had recently been

treated by two physicians.

Pinto also applied for Social Security Disability benefits.

In May 1993, the Social Security Administration (SSA)

denied Pinto's application, finding her not disabled. She

forwarded a copy of the determination letter to Reliance

Standard. Reliance Standard strongly encouraged Pinto to

appeal the adverse decision, which she did. In September

1993, SSA denied Pinto's appeal, concluding that her

asthma attacks could be controlled by medication, that her

rheumatic heart disease was stable, and that her shortness

of breath did not preclude work. One month later, Reliance

Standard requested that Dr. Bahler relay to it the specific

limitations that prevented Pinto from being an accounting

clerk. Dr. Bahler responded by referring to his previous

reports.

5

In November 1993, Reliance Standard terminated Pinto's

benefits. Its denial letter cited the SSA denial, and the

language tracked that of the denial.1 It also asserted: "Your

physician has stated that you can perform the duties of a

sedentary occupation within your present physical

limitations and restrictions." Reliance Standard appeared to

read Dr. Bahler's assertion that Pinto needed to maintain a

sedentary lifestyle as a statement that she could perform

sedentary work, and the described limitations to define

absolutely the limits of her potential (i.e., it apparently read

his statement that she could not lift ten pound items to

imply that she could regularly lift less weighty items).

Pinto requested a review of this decision. Dr. Bahler

wrote Reliance Standard in January 1994, explaining

Pinto's medical history and affirming his determination that

Pinto's "only viable option at the present time is continued

medical therapy, sedentary life style, and avoidance of high

stress situations that could precipitate her cardiac asthma.

. . . Pinto is totally and permanently disabled at this time

and therefore is unfit to perform any task or job in the

labor market." Then, in February 1994, the SSA reversed

its earlier denial and awarded her benefits. It determined

that she had a severe cardiac condition and that she was

too disabled to perform any job for which she had the

requisite skills.

_________________________________________________________________

1. The SSA denial stated:

* You have asthma. However, these attacks can be c ontrolled with

prescribed medication.

* You have experienced heart problems. However, fo llowing a

recovery period, you are able to work.

* The evidence shows no other condition which sign ificantly limits

your ability to work.

The Reliance Standard revocation letter stated:

1) if you have asthma it can be controlled by medi cation,

2) your heart condition is stable,

3) your shortness of breath according to the Socia l Security

Administration Denial, the tests show you are still able to work.

6

In the early summer of 1994, Reliance Standard retained

Dr. Martin I. Rosenthal, an internist, who examined Pinto

and reviewed Dr. Bahler's echocardiogram and cardiac

catheterization studies. He recommended pulmonary

testing and, after some initial ambivalence, concluded that

Pinto was not totally disabled. In November (following

Rosenthal's suggestion), Dr. Robert A. Capone, a

pulmonologist, examined Pinto, and initially declined to

decide whether she had a disabling reactive airways disease

because he thought therapeutic intervention might make a

difference. However, when pressed by Reliance Standard in

December (no therapeutic interaction had occurred between

November and December) he indicated that he did not

think that any respiratory condition prohibited her from

working, and, while noting the inadequacy of the available

data, concluded that he did "not believe that there is a

strong likelihood of reactive airways disease."

After Dr. Rosenthal's examination but before Dr.

Capone's, a Reliance Standard staff worker, in an internal

document, recommended reestablishing Pinto's benefits

pending the pulmonary testing. However, Reliance Standard

decided to do the opposite, holding the resumption of

benefits until the pulmonary testing. It is noteworthy that

the same staff worker had similarly recommended a

resumption of benefits in April because she thought

Reliance Standard had misunderstood Dr. Bahler's

assertion that Pinto must be sedentary to mean sedentary

work instead of sedentary lifestyle. In February 1995,

Reliance Standard rejected Pinto's appeal of its earlier

benefits reversal. It wrote her that "Dr. Bahler, Dr.

Rosenthal, and Dr. Capone have all indicated you retain the

physical functional capacity to engage in sedentary work.

The subsequent correlation of this activity level with the

material duties of your occupation substantiated that you

are capable of performing the material duties of your

regular occupation."

In January 1996, Pinto was examined by Dr. Rowland D.

Goodman, II, a heart and chest specialist who shares

offices with Dr. Bahler. Dr. Goodman reviewed her medical

records, examined her, and concluded that she suffered

from rheumatic heart disease with mitral stenosis and that

7

she was totally disabled. Goodman's report was unavailable

to Reliance Standard when making the initial decision, but

was used when making the decision in question here (after

the remand discussed infra).

In July 1996, Pinto filed the present ERISA suit in the

District Court under 29 U.S.C. S 1132(a)(1)(b), which allows

for a beneficiary to sue for "benefits due to him under the

terms of the plan." In January 1997, Reliance Standard

moved for summary judgment on the grounds that the

decision was discretionary, and not arbitrary and

capricious. The District Court agreed and granted the

motion. Pinto appealed. In an unpublished opinion (hence

non-precedential under our Internal Operating Procedures

S 5.3), we vacated the judgment and remanded, see Pinto v.

Reliance Std. Life Ins. Co., 156 F.3d 1225 (Table) (3d Cir.

May 28, 1998) (No. 97-5297), concluding that Reliance

Standard had apparently misinterpreted Dr. Bahler's

diagnosis when it stated that "all" of the physicians who

had examined her determined that Pinto had the

"functional capacity to engage in sedentary work." Given

the disconnect between this interpretation of Dr. Bahler's

diagnosis and his own repeated conclusion that Pinto was

unfit for any work, we stated that

we cannot confidently rule that Reliance's decision was

not arbitrary and capricious. We are unsure whether

Reliance properly reviewed Dr. Bahler's reports or

whether it misinterpreted his conclusions. Moreover,

we do not know whether it would have made the same

decision based solely on Dr. Rosenthal and Dr.

Capone's evaluations. Therefore, these are matters that

will require reconsideration by Reliance.

We also briefly discussed the problem of the standard of

review for situations where an insurer administers benefits

out of its own funds:

We are not convinced that such a dual role presents

the type of conflict of interest that would warrant

discarding the arbitrary and capricious standard, but

in any event under Firestone such a conflict would

merely be a factor in the court's determination whether

there has been an abuse of discretion. . . . We . . .

8

review Reliance's determination under an arbitrary and

capricious standard, taking into account the

circumstances.

Reliance Standard dutifully reconsidered, and affirmed its

earlier denial. In August, an Assistant Manager of Quality

Review, Richard D. Walsh, issued a letter explaining the

rejection. The letter opined that, although Dr. Bahler had

stated that Pinto should not work, the limitations that he

put on her activity would not preclude her from working.

Walsh cited the United States Department of Labor's The

Revised Handbook for Analyzing Jobs as evidence that the

job of accounting clerk is "sedentary." He also cited the

conclusions of Drs. Rosenthal and Capone. As regards Dr.

Goodman's examination, Walsh stated that he had

"provided no new findings, restrictions, or limitations to

substantiate his conclusion," and commented on the fact

that he shares a mailing address with Dr. Bahler, implicitly

suggesting that Goodman's conclusions might be biased by

his association with Dr. Bahler. Walsh did not mention

Pinto's successful appeal of the Social Security denial.

Although there is no record evidence that Reliance

Standard knew of Social Security's reversal, it must have

known of it at least after the case was remanded as it is

mentioned in the previous panel's opinion.

On remand, the District Court again granted summary

judgment for Reliance Standard. Although it purported to

apply the arbitrary and capricious standard "shaped by the

circumstances of the inherent conflict of interest," it

proceeded to explain that "an administrator's decision will

only be overturned if it is without reason, unsupported by

substantial evidence or erroneous as a matter of law." Pinto

v. Reliance Std. Life Ins. Co., No 96-3508 (D.N.J. Dec. 12,

1998). The court concluded that there was not an issue of

material fact as to whether Reliance Standard had acted

arbitrarily and capriciously. Of the rejection of Dr. Bahler's

conclusions in favor of those of its own doctors, the court

stated that "[s]uch a determination based on independent

medical evaluations is not arbitrary and capricious, even

when Reliance Standard's dual role as both insurer and

decisionmaker is taken into account." Id. This appeal

followed. We have jurisdiction pursuant to 28 U.S.C.

S 1291, and our standard of review is plenary.

9

II. Reviewing Conflicted Decisions

A. Firestone

Our analysis of the issue in this case must begin with

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).

Prior to Firestone, courts had adopted different approaches

to the conflict of interest problem under ERISA, many

choosing to vary the degree of deference they gave ERISA

benefits administrators operating under a conflict of

interest. See Brown v. Blue Cross & Blue Shield of Ala., 898

F.2d 1556, 1560 (11th Cir. 1990) (collecting cases).

However, as one court of appeals has stated, "the Supreme

Court [in Firestone] . . . swept the standard of review board

clear." De Nobel v. Vitro Corp., 885 F.2d 1180, 1185 (4th

Cir. 1989).

Firestone began when a group of plaintiffs sued their

employer, who was also the ERISA plan administrator, for

wrongfully terminating welfare and pension benefits. A

panel of this court considered the relevant principles of

trust law, with special attention to the rationales for the

general deference given to impartial trustees, concluding

that those reasons carry little or no force when trustees are

in a position to profit from denying trust benefits. See

Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134, 145 (3d

Cir. 1987). We also considered the incentives and actual

relationship of the parties, and the fact that the benefit

plan was contracted for and its terms subject to

negotiation. Id. We concluded that trust and contract

principles both dictated that our review of the conflicted

benefits denial should be de novo, giving no deference to

either the administrator's or participants' interpretations.

We essentially applied "the principles governing

construction of contracts between parties bargaining at

arms length." Id.

The Supreme Court affirmed the specific holding in that

case--that the administrator's decision should be reviewed

de novo, giving no deference to either party--but used a

significantly different rationale. The Court began by stating

that interpretation of ERISA should be governed by the

common law of trusts, and then grounded the de novo

10

review on the fact that the plan gave the administrator no

discretion to interpret the plan. See Firestone , 489 U.S. at

111. The Court observed that trust principles dictated that

fiduciaries should be given no deference when making non-

discretionary decisions, see 489 U.S. at 111; see also supra

note 2. It then turned to a brief discussion pertinent to this

case, noting that "a deferential standard of review [is]

appropriate when a trustee exercises discretionary powers,"2

but that "if a benefit plan gives discretion to an

administrator or fiduciary who is operating under a conflict

of interest, that conflict must be weighed as a "factor in

determining whether there is an abuse of discretion." Id. at

115 (quoting Restatement (Second) of TrustsS 187, cmt. d

(1959)) (emphasis added). Since Firestone, courts have

struggled to give effect to this delphic statement, and to

determine both what constitutes a conflict of interest and

how a conflict should affect the scrutiny of an

administrator's decision to deny benefits. The next two

Sections discuss these problems as applied to an

independent insurer who is empowered with discretion to

determine who deserves benefits under a plan which it

funds.

B. What Constitutes A Conflict?

Employers typically structure the relationship of ERISA

plan administration, interpretation, and funding in one of

three ways. First, the employer may fund a plan and pay an

independent third party to interpret the plan and make

plan benefits determinations. Second, the employer may

_________________________________________________________________

2. In an article entitled The Supreme Court Flunks Trusts, 1990 S. Ct.

Rev. 207, Professor John H. Langbein argues that the Supreme Court's

correlation of arbitrary and capricious review with discretionary

decisions and de novo review with nondiscretionary decisions has no

foundation in the common law of trusts. See id. at 219. He submits that

in our opinion in Bruch we were "following trust-law tradition in

scrutinizing fiduciary conduct more closely when conflict of interest is

suspected." Id. at 217. Langbein correctly predicted that companies

would quickly redraft their plans to confer unambiguous grants of

discretion so as to garner deferential review, see id. at 221, and also

predicted that the problems of how courts should deal with conflicted

fiduciaries would resurface, see id. at 222.

11

establish a plan, ensure its liquidity, and create an internal

benefits committee vested with the discretion to interpret

the plan's terms and administer benefits. Third, the

employer may pay an independent insurance company to

fund, interpret, and administer a plan. While we have

previously held that the first two arrangements do not, in

themselves, typically constitute the kind of conflict of

interest mentioned in Firestone, see infra Section E, today

we address the third arrangement for the first time,

concluding that it generally presents a conflict and thus

invites a heightened standard of review.3 Our sister circuits

that have examined this issue have fallen into two basic

camps. Most hold that the nature of the relationship

between the funds, the decision, and the beneficiary invites

self-dealing and therefore requires closer scrutiny, but

others allow heightened review only if there is independent

evidence that the conflict infected a particular benefits

denial.

C. Courts of Appeals Holding that the Independent

Insurance Company Administrator is Operating

under an Inherent Conflict

The Eleventh Circuit was the first to conclude that an

insurance company acts under a "strong conflict of

interest" when both administering and paying out benefits

under an ERISA plan. Brown v. Blue Cross & Blue Shield of

Ala., 898 F.2d 1556, 1561 (11th Cir. 1990). It held that

there is

an inherent conflict between the roles assumed by an

insurance company that administers claims under a

policy it issued. . . . Because an insurance company

_________________________________________________________________

3. There may be, of course, variations on each of these arrangements.

For example, an employer may pay out of a fund fixed by actuarial

tables, which the employer only pays into, but cannot withdraw from, or

one from which the employer may withdraw unused assets. An

insurance company that administers funds might charge the employing

company a fixed fee, or the fee could be closely dependent on the

benefits payouts. Any such difference might affect a district court's

assessment of the incentives of an administrator/insurer and therefore

affect the nature of its review.

12

pays out to beneficiaries from its own assets rather

than the assets of a trust, its fiduciary role lies in

perpetual conflict with its profit-making role as a

business. Id. at 1561 (internal quotations omitted). The

Brown court noted that a structural conflict of interest

may unconsciously encourage even a principled

fiduciary to make decisions that are not solely in the

interest of the beneficiary. See id. at 1565. Under this

view, although the arrangement is not illegal or

inappropriate under ERISA, it warrants heightened

scrutiny. "[J]udicial hesitation to inquire into the

fiduciary's motives will leave the beneficiaries

unprotected unless the existence of a substantial

conflicting interest shifts the burden to thefiduciary to

demonstrate that its decision is not infected with self-

interest." Id.

In Doe v. Group Hospitalization & Med. Servs. , 3 F.3d 80

(4th Cir. 1993), the Fourth Circuit, like the Eleventh,

concluded that a "conflict flows inherently from the nature

of the relationship" when an employer contracts with an

insurance company to provide and determine ERISA

benefits. Id. at 86.

Undoubtedly, [Blue Cross's] profit from the insurance

contract depends on whether the claims allowed exceed

the assumed risks. To the extent that Blue Cross has

discretion to avoid paying claims, it thereby promotes

the potential for its own profit. . . . Even the most

careful and sensitive fiduciary in those circumstances

may unconsciously favor its profit interest over the

interests of the plan, leaving beneficiaries less

protected than when the trustee acts without self-

interest and solely for the benefit of the plan.

Id. at 86-87. See also Bedrick v. Travelers Ins. Co., 93 F.3d

149, 154 (4th Cir. 1996) (citing Doe). The Fifth Circuit, in

a recent en banc discussion, also affirmed a commitment to

heightened scrutiny of decisions by an insurer who

administers benefits from its own funds. In Vega v. Nat'l

Life Ins. Serv., Inc., 188 F.3d 287 (5th Cir. 1999), the plan

administrator insurance company was a subsidiary of the

plan insurer (the court treated the interests as aligned), and

while the court recognized that if the company denied

13

meritorious claims, its "reputation may suffer as a result

and others may be less willing to enter into contracts where

the company has discretion to decide claims," id. at 295

n.8, it concluded that these incentives did not outweigh the

strong incentive to self-deal, see id. at 295-98. The Tenth

Circuit and Eighth Circuits have also concluded that when

an insurance company acts as the administrator for

benefits coming from its own funds, the conflict warrants a

more searching review. See Armstrong v. Aetna Life Ins. Co.,

128 F.3d 1263 (8th Cir. 1997); Pitman v. Blue Cross & Blue

Shield of Okla., 24 F.3d 118, 120-22 (10th Cir. 1994) (citing

Doe).

D. Courts of Appeals Holding that the Independent

Insurance Company Structural Relationship Does

not Give Rise to a Conflict That Should Affect

Standard of Review

The Seventh Circuit requires a specific demonstration

that bias affected a decision before modifying the arbitrary

and capricious standard when reviewing the decisions of an

insurance company in this posture. See Mers v. Marriott

Internat'l Group Accidental Death and Dismemberment Plan,

144 F.3d 1014 (7th Cir. 1998). In Mers, the benefit plan

was insured by the American International Group (AIG), an

independent insurer, that also was charged with

interpreting the plan. The Mers court considered, and

rejected, Mers's argument that less deference should be

given to AIG's decision because it was operating under a

conflict of interest. "We presume," it held,"that a fiduciary

is acting neutrally unless a claimant shows by providing

specific evidence of actual bias that there is a significant

conflict." Id. at 1020. Relying on what it styled as law and

economics principles, the court concluded that the

requested payout in that case was slight compared to the

company's bottom line, and that it is in a company's best

long-term interest to award meritorious claims so that

employees and employers will think and speak well of it,

and seek business with it. Id. at 1021. Neutrality, opined

the panel, begets business success, while self-dealing hurts

it. Id. Therefore, a claimant bears the burden of providing

specific evidence of a "significant conflict" (without

14

suggesting what that would entail), or specific evidence of

bias. Id. at 1020.

The Second Circuit, like the Seventh, requires evidence

that a conflict actually infected the decision before it uses

anything but the most deferential review of a fiduciary's

determination. See Whitney v. Empire Blue Cross & Blue

Shield, 106 F.3d 475 (2d Cir. 1997); Sullivan v. LTV

Aerospace & Defense Co., 82 F.3d 1251, 1255-56 (2d Cir.

1996); Pagan v. NYNEX Pension Plan, 52 F.3d 438, 440-44

(2d Cir. 1995). It reasons not from effect but language,

concluding that Firestone simply does not require anything

but arbitrary and capricious review unless the plaintiff

demonstrates how a conflict biased a fiduciary's decision.

See Pagan, 52 F.3d at 440-44. However, it is noteworthy

that a recent panel of the Second Circuit, in an opinion by

Judge Oakes joined by Judges Newman and Winter, has

expressed dissatisfaction with Pagan and Whitney. While

recognizing that it was bound by precedent, it stated that

"[w]e have numerous concerns regarding Pagan, which we

believe reduces Firestone's ruling as to the impact of a

conflict of interest." DeFelice v. American Int'l Life Assur. Co.

of New York, 112 F.3d 61, 66 n. 3 (2d Cir. 1997).

E. Courts of Appeals in Which the Law is Unclear

The Ninth and Sixth Circuits appear to be unsettled on

this issue. The Ninth Circuit sometimes requires something

more than the fact that an insurance company administers

benefits out of its own funds to trigger heightened review.

In Atwood v. Newmont Gold, 45 F.3d 1317, 1322-23 (9th

Cir. 1995), the court explained that the traditional abuse of

discretion standard applies even in conflicted situations

unless there is specific evidence that the conflict infected

the process. In Snow v. Standard Ins. Co., 87 F.3d 327, 331

(9th Cir. 1996), the court followed Atwood when an

insurance company both funded and administered an

ERISA plan, declining to apply heightened review because

there was no evidence that the "formal conflict led to a true

conflict." 87 F.3d at 331. See also Lang v. Long-term

Disability Plan of Sponsor Applied Remote Tech., 125 F.3d

794 (9th Cir. 1997) (only applying heightened review

because there were independent indications that the

15

conflict biased the decisionmaking). On the other hand, in

Tremain v. Bell Indus., Inc., 196 F.3d 970, 976 (9th Cir.

1999), the court stated that "less deferential" arbitrary and

capricious review was in order when the plan administrator

was also the insurer. Cf. Kearney v. Standard Ins. Co., 175

F.3d 1084, 1090 n.2 (9th Cir. 1999) (Because we conclude

that Kearney is entitled to de novo review, which gives no

deference at all to Standard's decision, we do not reach the

question whether he would be entitled to less deferential

review were he entitled only to review for abuse of

discretion.").

The Sixth Circuit's precedent is also unclear. In Miller v.

Metropolitan Life Ins., 925 F.2d 979, 984-85 (6th Cir. 1991),

the court took the insurance company's conflict of interest

into account in the court's review of the insurance

company's decision as an administrator, therefore applying

a heightened arbitrary and capricious standard. On the

other hand, in Yeager v. Reliance Standard, 88 F.3d 376,

381-82 (6th Cir. 1996), the court did not consider the

conflicted role of the insurance company when applying the

arbitrary and capricious standard.

F. The Law of this Circuit

We have not previously addressed the precise issue

involved in this case. There is, however, some cognate

discussion of the standard of review in cases where an

employer both funded and administered a plan. In thefirst

such case, Nazay v. Miller, 949 F.2d 1323 (3d Cir. 1991),

we applied the unmodified arbitrary and capricious

standard in reviewing a denial of benefits. While implicitly

recognizing that there might be a risk of opportunism, we

concluded that this alone did not constitute evidence of a

conflict of interest, in part because the employer"had

incentives to avoid the loss of morale and higher wage

demands that could result from denials of benefits." Id. at

1335. We also commented on the fact that the denial was

individual, instead of class-based, implying that when more

money was at stake--i.e., when a large class of beneficiaries

requested and was denied benefits--the potential conflict

might invite closer scrutiny. See id.

16

In the same year, we decided Kotrosits v. GATX Corp.

Non-contributory Pension Plan for Salaried Employees , 970

F.2d 1165, 1173 (3d Cir. 1992), in which a benefits

committee within a company administered the company's

funded plan. We concluded that the unmodified arbitrary

and capricious review was appropriate in the absence of

specific, tangible evidence that the structural relationship

had tainted the review process. Though we held that a

plaintiff urging that we disregard the grant of discretion in

a plan "has the burden of showing some reason to believe

the exercise of discretion has been tainted," we stated that

this burden could be met "where such a party shows the

kind of conflict of interest that could realistically be

expected to bias the decision makers." Id. at 1173. If such

a conflict were present, we suggested, "[Firestone] counsels

in favor of withholding deference." Id. 4 By way of explaining

why we presumed that the fiduciary was not influenced by

self-interest in Kotrosits, we compared the assets of the

plan (which were substantial) to the potential costs of

paying out to the beneficiaries (which were also substantial,

but less so), and concluded that it was unlikely that the

company would have to replenish the plan. See id. "[T]he

record shows no direct impact on the Plan sponsor and

only a possibility of future indirect consequences to it." Id.

In Abnathya v. Hoffman-LaRoche, Inc., 2 F.3d 40 (3d Cir.

1993), we recognized that "some degree of conflict inevitably

exists where an employer acts as the administrator of its

own employee benefits plan," but held that the conflict in

that case was insufficiently compelling to "require special

attention or a more stringent standard of review under

[Firestone]." Id. at 45 n.5. We noted that the company's

contributions to the fund were fixed such that it"incurs no

direct expense as a result of the allowance of benefits, nor

does it benefit directly from the denial or discontinuation of

benefits." Id. See also Mitchell v. Eastman Kodak, 113 F.3d

433, 437 n.4 (3d Cir. 1997) (following the reasoning and

language of Abnathya).

While Heasley v. Belden & Blake Corp., 2 F.3d 1249 (3d

_________________________________________________________________

4. The Fifth Circuit has taken this as evidence that we follow the

Eleventh Circuit. See Vega, 188 F.3d at 297

17

Cir. 1993) is not directly on point, it demonstrates an

openness to using heightened scrutiny when a party

administers benefits out of its own funds. In Heasley, we

reviewed de novo whether an ERISA plan term

"experimental procedure" applied to a liver transplant. We

recognized that the apparent ambiguity of this term might

be cured if the plan provided for a party to interpret it, but

noted that under such a scheme, the interpretation should

be allocated to an independent party, given the threat of

self-dealing. See id. at 1260-61 n.12. This, we said, followed

the "general and sensible rule that courts scrutinize more

closely decisions by plan administrators acting under a

conflict of interest." Id.

The final opinion that bears mention is our earlier

unpublished (and therefore non-precedential) opinion in

this very case, Pinto v. Reliance Std. Life Ins. Co., 156 F.3d

1225 (Table) (3d Cir. May 28, 1998) (No. 97-5297). In that

opinion we stated as follows:

We are not convinced that such a dual role presents

the type of conflict of interest that would warrant

discarding the arbitrary and capricious standard, but

in any event under Firestone such a conflict would

merely be a factor in the court's determination whether

there has been an abuse of discretion.

An issue similar to that before us here was

considered by our sister circuits in Brown v. Blue Cross

and Blue Shield of Alabama, Inc., 898 F.2d 1556 (11th

Cir. 1990), and Miller v. Metropolitan Life Insurance

Corp., 925 F.2d 979 (6th Cir. 1991). The Miller court,

following Brown, held that in such a circumstance

although the insurance company's "fiduciary role lies

in perpetual conflict with its profit making role as a

business, and the conflict of interest is substantial . . .

the abuse of discretion or arbitrary and capricious

standard still applies, but application of the standard

should be shaped by the circumstances of the inherent

conflict of interest." Miller, 925 F.2d at 984. We too will

apply this standard and review Reliance's

determination under an arbitrary and capricious

standard, taking into account the circumstances.

18

Under the arbitrary and capricious standard, an

administrator's decision will only be overturned if it is

"without reason, unsupported by substantial evidence

or erroneous as a matter of law. . . . the court is not

free to substitute its own judgment for that of the

defendants in determining eligibility for plan benefits."

It is important to recognize that ERISA does not make

the judges the decisionmakers. It merely assures that

the appropriate procedure is followed.

The opinion is somewhat delphic. But the citations to

Miller, see supra Section II.E, infra Section IV, (and also to

Brown, see supra Section II.C, infra Section IV), both of

which consider an insurer making decisions out of its own

funds to be operating under an inherent conflict (in

contrast to citations of cases of a contrary stripe), suggest

that a heightened degree of scrutiny is required in this

situation, an approach essentially the same as that we

adopt in this opinion, but which we refine and clarify. See

Part IV, adopting the "sliding scale" approach endorsed by

a majority of our sister circuits.5

III. Is Heightened Review Required When an

Insurance Company Both Funds and Administers

Benefits?

Informed by our canvass of the jurisprudence, we are

persuaded that heightened scrutiny is required when an

insurance company is both plan administrator and funder.

We find especially persuasive the analysis of the Fourth,

Fifth, Eighth, Tenth and Eleventh Circuits, and their

conclusion that potential self-dealing warrants that

fiduciary insurer's decisions be closely inspected. We do not

denigrate the Seventh Circuit's suggestion that if a carrier

denied clearly meritorious claims on a regular basis and

_________________________________________________________________

5. The purpose of the remand was to permit Reliance Standard to revisit

its denial of benefits, because the panel thought that Reliance Standard

had misunderstood Dr. Bahler's assessment of Pinto's capabilities.

Therefore, the prior panel did not need to precisely assess the structural

relationship, nor determine a method for shaping our arbitrary and

capricious review when there is a conflict. Both issues are now squarely

before us.

19

became notoriously unfriendly to claimants, unions and

employees might protest and demand that their employer

switch to a different insurance plan. Nor do we think that

most insurance companies are unmoved by the importance

of building a strong reputation and competing successfully

for the business of administering plans. An insurance

company "can hardly sell policies if it is too severe in

administering them." Doe v. Travelers Ins. Co., 167 F.3d 53,

57 (1st Cir. 1999). However, ERISA litigation generally

arises only in close cases, and there would seem to be

insufficient incentive for the carrier to treat borderline

cases (unlikely to become causes celebres) with the level of

attentiveness and solicitude that Congress imagined when

it created ERISA "fiduciaries." Rather, insurance carriers

have an active incentive to deny close claims in order to

keep costs down and keep themselves competitive so that

companies will choose to use them as their insurers, an

economic consideration overlooked by the Seventh Circuit.

To amplify, while in a perfect world, employees might

pressure their companies to switch from self-dealing

insurers, there are likely to be problems of imperfect

information and information flow. Employees typically do

not have access to information about claim-denying by

insurance companies, and the relationship between

employees and insurance companies is quite attenuated; so

long as obviously meritorious claims are well-handled, it is

unlikely that an insurance company's business will suffer

because of its client's employees' dissatisfaction.

Additionally, many claims for benefits are made after

individuals have left active employment and are seeking

pension or disability benefits. Details about the handling of

those claims, whether responsible or irresponsible, are

unlikely to seep into the collective knowledge of the still-

active employees. If Pinto's claim is denied, few at Rhone-

Poulenc will learn of it, and Reliance Standard will have

little motive to heed the economic advice of the Seventh

Circuit that "it is a poor business decision to resist paying

meritorious claims for benefits." Mers, 144 F.3d at 1020.

We also observe that the typical employer-funded pension

plan is set up to be actuarially grounded, with the company

making fixed contributions to the pension fund, and a

20

provision requiring that the money paid into the fund may

be used only for maintaining the fund and paying out

pensions. As we explained in Abnathya and Mitchell, the

employer in such a circumstance "incurs no direct expense

as a result of the allowance of benefits, nor does it benefit

directly from the denial or discontinuation of benefits."

Abnathya, 2 F.3d at 45 n.5; Mitchell, 113. F.3d at 437 n.4.

In contrast, although there is nothing in the record

indicating the precise nature of Reliance Standard's

internal structure, the typical insurance company is

structured such that its profits are directly affected by the

claims it pays out and those it denies.6

We recognize that the preceding section involves implicit

assumptions about economic behavior, but such

assumptions have become necessary in the post-Firestone

era as we, and other courts, must somehow determine

when a conflict warrants close scrutiny. Inasmuch as we

are making such assumptions, however, they seem less

exceptional than those of the Seventh Circuit, which, we

believe, has an overly optimistic view of the flow of

information and the sophistication of employees.

Furthermore, while all circuits that have considered these

questions appear to agree that some level of conflict may be

unavoidable and not every conflict will heighten the level of

scrutiny, the Seventh and Second Circuits alone require

evidence of actual self dealing, and hold that the nature of

the relationship itself can never, or almost never, affect the

standard of review. Needless to say, Firestone contains no

such requirement, and its use of the word "conflict" instead

of "direct evidence of bias" counsels against the most stern

reading. As we opined in Kotrosits, the Firestone court

appears, by recognizing the import of a conflict, to have

"implicitly adopted the position . . . that, where the

_________________________________________________________________

6. We do not, of course, pretend to establish an absolute, per se rule,

recognizing that different relationships between the parties could effect

a

different result. Cf. Metropolitan Life Ins. Co. v. Potter, 992 F. Supp.

717

(D.N.J. 1998) ("[A] conflict may arguably be ameliorated where, as here,

the plan is experience-rated because the premiums charged to the

employer are adjusted annually based on claims paid the previous year

and thus the fiduciary's incentive to deny claims to increase profits is

lessened, if not eliminated.").

21

claimant demonstrates that it would be inequitable to defer

to the plan administrator, stricter scrutiny of his decision is

in order." 970 F.2d at 1172. Finally, this is not a scenario

where a "smoking gun" is likely to surface, and direct

evidence of a conflict is rarely likely to appear in any plan

administrator's decision. Our reading, we believe, infuses at

least some meaning into the Firestone regime.

Finally, the unique role of insurance companies within

ERISA supports our position. ERISA generally requires that

assets of a benefits plan be "held in trust by one or more

trustees." 29 U.S.C. S 1103(a). However, this requirement is

excepted for insurance companies; the requirements that

the assets be held in a trust does not apply "to assets of a

plan which consist of insurance contracts or policies issued

by an insurance company qualified to do business in a

State." 29 U.S.C. S 1103(b)(1). Therefore,"[i]nasmuch as

`the basis for the deferential standard for review in the first

place was the trust nature of most ERISA plans,' the most

important reason for deferential review is lacking." Brown v.

Blue Cross and Blue Shield of Ala., 898 F.2d 1556, 1561

(11th Cir. 1990) (quoting Moon v. American Home

Assurance Co., 888 F.2d 86, 89 (11th Cir. 1989)).

Our own case law in the general area, set forth in Section

II.E, supports our conclusion. These opinions are self-

consciously laden with negative pregnants, suggesting that

structural bias could heighten the review. For example, we

noted that the defendants in those cases did not "incur" a

"direct expense as a result of the allowance of benefits," or

"benefit directly from the denial or discontinuation of

benefits," Abnathya, 2 F.3d at 45 n.5; Mitchell, 113 F.3d at

437 n.4, implying that a company that did profit directly

would be subject to a more stringent standard. Likewise,

the most deferential review was appropriate when the

employer had "incentives to avoid the loss of morale and

higher wage demands that could result from denials of

benefits," Nazay, 949 F.2d at 1335, and there was only a

"possibility of future indirect consequences to it," Kotrostis,

970 F.2d at 1173. By negative implication, a heightened

standard of review would appear to be appropriate when a

plan funder like an insurance company "incurs a direct

expense," the consequences to it are direct and

22

contemporary, and, while it has incentives to maintain good

business relationships, it lacks the incentive to"avoid the

loss of morale and higher wage demands that result from a

denial of benefits." We are also supported by the fact that

the great bulk of district courts in this Circuit have

interpreted this precedent as mandating heightened

scrutiny when the insurance company is the insurer and

makes determinations.7

For all the foregoing reasons, we believe that a higher

standard of review is required when reviewing benefits

denials of insurance companies paying ERISA benefits out

of their own funds.

IV. What Standard of Review?

The question remains, then, what should be the higher

standard of review? This secondary question is distinct

from the first: even those courts that find that there is no

conflict in the insurance company context have struggled

with how to incorporate a conflict--when theyfind one--

_________________________________________________________________

7. See Nolen v. Paul Revere Life Ins. Co., 32 F. Supp. 2d 211, 216 (E.D.

Pa. 1998) (the dual role requires a heightened standard); Morris v. Paul

Revere Ins. Group, 986 F. Supp. 872, 881-82 (D.N.J. 1997) (same); Rizzo

v. Paul Revere Ins. Group, 925 F. Supp. 302, 309 (D.N.J. 1996) (same),

aff 'd, 111 F.3d 127 (3d Cir. 1997); Nave v. Fortis Bens. Ins. Co., No.

98-

3960, 1999 U.S. Dist. LEXIS 13382 (E.D.Pa. Aug. 25, 1999) ("Fortis's

dual role as the Plan's claims administrator and as the insurance

company which insures the benefits provided under the Plan certainly

creates a genuine or substantial conflict of interest."); Landau v.

Reliance

Std. Life Ins. Co., No. 98-903, 1999 U.S. Dist. LEXIS 3673 (E.D. Pa. Jan.

13, 1999) (following Brown); Sciarra v. Reliance Standard Life Ins. Co.,

No. 97-1363, 1998 U.S. Dist. LEXIS 13786 (E.D. Pa. Aug. 26, 1998)

("[Defendant's] dual role as administrator and insurer of its own plan

creates a conflict between its providing benefits to claimants and its own

financial status"); Perri v. Reliance Standard Life Ins. Co., No. 97-1369,

1997 U.S. Dist. LEXIS 12741 (E.D. Pa. Aug. 19, 1997) ("Reliance

Standard's dual role as administrator and insurer of its own plan creates

a conflict between its providing benefits to claimants and its own

financial status."); cf. Marques v. Reliance Std. Life Ins. Co., 1999 U.S.

Dist. LEXIS 17406 (E.D. Pa. Nov. 1, 1999) ("[T]his Court finds it hard to

believe that there is not a conflict of interest when the defendant makes

benefit decisions and pays for benefits out of its own assets.").

23

into the framework of arbitrary and capricious review

mandated by Firestone. In Kotrosits v. GATX Corp. Non-

contributory Pension Plan for Salaried Employees, 970 F.2d

1165, 1173 (3d Cir. 1992) we stated that had a conflict

existed, Firestone "counsels in favor of withholding

deference." This suggests de novo review. On the other

hand, in Abnathya v. Hoffman-LaRoche, Inc., 2 F.3d 40, 45

n.5 (3d Cir. 1993) we suggested that the circumstances

might require "special attention or a more stringent

standard of review under Firestone." Again, we turn to the

other circuits, where we find three methods of dealing with

a conflict: burden shifting, de novo review, and the sliding

scale.

We begin with Brown v. Blue Cross & Blue Shield of Ala.,

898 F.2d 1556 (11th Cir. 1990), in which the Eleventh

Circuit turned to the common law of trusts to determine

the appropriate method for reviewing the conflicted

discretionary decisions of an insurance company. See 898

F.2d at 1564. It concluded that while an uninterested

fiduciary should receive a great deal of deference, common

law trust cases dictated that the highly conflicted one

should not; even potentially conflicted decisions were

closely scrutinized, in part to protect the particular

beneficiaries in a given case, and in part "to discourage

arrangements where a conflict arises." Id. at 1565. The

court determined that a beneficiary need only show a

substantial structural conflict of interest in order to shift

the burden to the fiduciary to demonstrate that the conflict

did not infect a benefits denial. See id. at 1566. It

announced the following rule:

[W]hen a plan beneficiary demonstrates a substantial

conflict of interest on the part of the fiduciary

responsible for benefits determinations, the burden

shifts to the fiduciary to prove that its interpretation of

plan provision committed to its discretion was not

tainted by self-interest. That is, a wrong but apparently

reasonable interpretation is arbitrary and capricious if

it advances the conflicting interest of the fiduciary at

the expense of the affected beneficiary or beneficiaries

unless the fiduciary justifies the interpretation on the

ground of its benefit to the class of all participants and

beneficiaries.

24

Id. at 1566-67.

To be sure, as a preliminary matter, the court mustfirst

determine that the fiduciary's decision was " `wrong' from

the perspective of de novo review." Id. at 1567 n.12. But

once shifted, the task of justifying the interpretation is by

no means insurmountable. If the fiduciary can demonstrate

a routine practice or give other plausible justifications--

such as the interests of other beneficiaries--deference may

be granted. "Even a conflicted fiduciary should receive

deference when it demonstrates that it is exercising

discretion among choices which reasonably may be

considered to be in the interests of the participants and

beneficiaries." Brown, 898 F.2d at 1568. The kind of

justification that is given as an example is an assertion,

supported by evidence, that an insurance company's

"interpretation of its policy is calculated to maximize the

benefits available to plan participants and beneficiaries at

a cost that the plan sponsor can afford (or will pay)." Id.

The legitimacy of such an assertion should be ascertained

by looking to, among other things, the consistency of the

practice, the reasonableness of the "reading" (in that case,

interpreting a term), and the internal consistency of the

plan with the proferred reading. See id.

The essence of the Eleventh Circuit's approach is that the

fiduciary should be accorded deference, but only when

deciding between options which are all in the best interest

of the beneficiary or beneficiaries. Insurance companies,

unlike the typical trustees, may be viewed with some

skepticism because of the primacy of their profit-making

function. Therefore, given the structural conflict, the

administrator of an insurance company funding an ERISA

plan has the burden of proving that beneficiary interests

motivated a decision which would be "wrong" under de

novo review. See id. A version of the Brown approach has

been followed by several panels of the Ninth Circuit. See,

e.g., Atwood v. Newmont Gold Co., Inc., 45 F.3d 1317, 1322

(9th Cir. 1995) (given material probative evidence of a

conflict, the burden is shifted to the denying company to

give a legitimate justification for a denial).

The Second Circuit, while stringent in requiring

particular evidence that a conflict infected the

25

decisionmaking process, uses de novo review once it credits

such evidence. See Sullivan v. LTV Aerospace & Defense

Co., 82 F.3d 1251, 1255-56 (2d Cir. 1996). Unlike the

Eleventh Circuit, the test outlined in Sullivan does not

include burden shifting. "If the court finds that the

administrator was in fact influenced by the conflict of

interest, the deference otherwise accorded the

administrator's decision drops away and the court

interprets the plan de novo." Id.

Other courts have rejected the shifting burden and

either/or models, and instead use a sliding scale approach,

according different degrees of deference depending on the

apparent seriousness of the conflict. According to the

Fourth Circuit, "the fiduciary decision will be entitled to

some deference, but this deference will be lessened to the

degree necessary to neutralize any untoward influence

resulting from the conflict." Doe v. Group Hospitalization &

Medical Services, 3 F.3d 80, 87 (4th Cir. 1993). Despite this

divergence from the Eleventh Circuit's burden shifting, we

read the Doe court as engaging in a highly demanding

exercise when it applies this sliding scale, "review[ing] the

merits of the interpretation to determine whether it is

consistent with an exercise of discretion by a fiduciary

acting free of the interests that conflict with those of the

beneficiaries." Id.

The Fourth Circuit's sliding scale approach has been

adopted by several other courts. See Vega v. National Life

Ins. Service, Inc., 188 F.3d 287, 296 (5th Cir. 1999) (en

banc) (using the sliding scale approach); Chambers v.

Family Health Plan Corp., 100 F.3d 818 (10th Cir. 1996)

("[T]he arbitrary and capricious standard is sufficiently

flexible to allow a reviewing court to adjust for the

circumstances alleged, such as trustee bias in favor of a

third-party or self-dealing by the trustee."); Miller v.

Metropolitan Life Ins. Co., 925 F.2d 979, 984 (6th Cir. 1991)

(the arbitrary and capricious standard is "shaped" by the

circumstances when there is a conflict of interest). Despite

a feint in the direction of adopting the Brown approach, see

Armstrong v. Aetna Life Ins. Co., 128 F.3d 1263, 1265 (8th

Cir. 1997) (holding that the "perpetual conflict" which exists

when an insurer administers benefits from its own plan

26

warrants a de novo standard of review), the Eighth Circuit

has settled on the sliding scale. See Woo v. Deluxe Corp.,

144 F. 3d 1157, 1165 (8th Cir. 1998) (explicitly adopting

sliding scale). The First Circuit uses something like the

sliding scale, testing a decision by measuring its

"reasonableness" in the context it was made, which

necessarily includes an awareness of the effects of the

decision on the parties. Doe v. Travelers Ins. Co., 167 F.3d

53, 57 (1st Cir. 1999). Reasonableness, notes that court,

"has substantial bite itself." Id.

We adopt the approach of the sliding scale cases. That

approach allows each case to be examined on its facts. The

court may take into account the sophistication of the

parties, the information accessible to the parties, and the

exact financial arrangement between the insurer and the

company. For example, a court can consider whether the

insurance contract is fixed for a term of years or changes

annually, and whether the fee paid by the company is

modified if there are especially large outlays of capital by

the insurer.

Another factor to be considered is the current status of

the fiduciary. Our previous cases, discussed supra Section

II.F, which hold that an employer fiduciary is not conflicted

generally assume that the company is stable and will act as

a repeat player: The presumed desire to maintain employee

satisfaction is based on this premise. When companies are

breaking up, or laying off a significant percentage of their

employees, or moving all their operations, these incentives

diminish significantly. See Langbein, supra note 2, at 216

("The employer's reputational interest is not likely to be

effective when the long term relationship between the firm

and the workers is dissolving, as in a plant closing or in a

corporate restructuring.").

Furthermore, the sliding scale approach better adheres to

Firestone's dictate that a conflict should be considered as a

"factor" in applying the arbitrary and capricious standard.

489 U.S. at 115. Following Firestone to the Restatement of

Trusts would counsel that a conflict of interest requires

tighter review, but not necessarily a shifted burden, when

the fiduciary is conflicted. "In the determination of the

question whether the trustee in the exercise of a power is

27

acting from an improper motive the fact that the trustee

has an interest conflicting with that of the beneficiary is to

be considered." Restatement (Second) of Trusts S 187, cmt.

g (emphasis added). Comment (d) lists several factors,

including conflict of financial interest, to examine whether

there is an abuse of discretion, stating that the factors

"may be relevant" and including "the existence or

nonexistence of an interest in the trustee conflicting with

that of the beneficiaries." We think the best way to

"consider" these potentially relevant factors (in this case,

the structural conflict of interest) is to use them to heighten

our degree of scrutiny, without actually shifting the burden

away from the plaintiff.

We acknowledge that there is something intellectually

unsatisfying, or at least discomfiting, in describing our

review as a "heightened arbitrary and capricious" standard.

The locution is somewhat awkward. The routine legal

meaning of an "arbitrary and capricious" decision is that

used, quite understandably, by the district court: a decision

"without reason, unsupported by substantial evidence or

erroneous as a matter of law." Once the conflict becomes a

"factor" however, it is not clear how the process required by

the typical arbitrary and capricious review changes. Does

there simply need to be more evidence supporting a

decision, regardless of whether that evidence was relied

upon?

This is unsatisfying. Rather, once "factors" are

introduced, arbitrary and capricious stops sounding like

arbitrary and capricious and more like some form of

intermediate scrutiny, which has no analogue in thisfield.

As we have seen, other courts have reconciled the sliding

scale and the "arbitrary and capricious" language from

Firestone by essentially reformulating the arbitrary and

capricious standard for ERISA law, concluding that"the

arbitrary and capricious standard may be a range, not a

point. . . [it is] more penetrating the greater is the suspicion

of partiality, less penetrating the smaller that suspicion is."

Wildbur v. ARCO Chem. Co., 974 F.2d 631, 638 (5th Cir.

1992) (quoting Van Boxel v. Journal Co. Employees' Pension

Trust, 836 F.2d 1048, 1052-53 (7th Cir. 1987)); Lowry v.

Bankers Life & Casualty Retirement Plan, 871 F.2d 522,

525 n. 6 (5th Cir. 1989) (same).

28

While we also find this explanation wanting, we can find

no better method to reconcile Firestone's dual commands

than to apply the arbitrary and capricious standard, and

integrate conflicts as factors in applying that standard,

approximately calibrating the intensity of our review to the

intensity of the conflict. While the approach of Professor

Langbein, see supra note 2, and of the Eleventh Circuit

would seem more compatible with the basic principles of

trust law, and hence a better "fit", only the Supreme Court

can undo the legacy of Firestone. In sum, we adopt the

sliding scale approach, and, accordingly, will expect district

courts to consider the nature and degree of apparent

conflicts with a view to shaping their arbitrary and

capricious review of the benefits determinations of

discretionary decisionmakers.

V. Application

Were we to apply extremely deferential arbitrary and

capricious review, we would likely affirm the judgment of

the district court, because there is some credible evidence

which an administrator could have relied upon to conclude

that Maria Pinto was not totally disabled. Two doctors, one

of whom is a specialist in cardiology, stated that they did

not believe that she was totally disabled. Therefore,

Reliance Standard's decision was not "without reason,

unsupported by substantial evidence or erroneous as a

matter of law." Abnathya, 2 F.3d at 45 (quoting Adamo v.

Anchor Hocking Corp., 720 F.Supp. 491, 500 (W.D.Pa.

1989)). On the other hand, were we to apply de novo

review, we would probably conclude that Reliance Standard

made the incorrect determination, because Pinto presented

credible evidence from her long-time treating cardiologist

that she was totally disabled for cardiological reasons,

evidence which was affirmed by another cardiologist, and

only one other cardiologist, who had much less opportunity

to perform tests and examine her than her own doctor,

concluded that she was not. According deference to neither

side, Pinto's case seems stronger.

However, applying a heightened arbitrary and capricious

review, we are deferential, but not absolutely deferential.

Like the Fifth Circuit, "[t]he greater the evidence of conflict

29

on the part of the administrator, the less deferential our

abuse of discretion standard." Vega, 188 F.3d at 297.

Therefore, we look not only at the result--whether it is

supported by reason--but at the process by which the

result was achieved. In so doing, we note several problems.

First, Reliance Standard reversed its own initial

determination that Pinto was totally disabled without

receiving any additional medical information. The only thing

that changed between Reliance Standard's initial

acceptance and its subsequent denial was that Pinto

notified Reliance Standard that her SSA application had

been rejected (a determination that SSA subsequently

abandoned). The SSA's rejection of Pinto appears to have

triggered Reliance Standard's investigation into Pinto's

disability, suggesting that Reliance Standard places

significant trust in the SSA process, yet the SSA's

subsequent reversal had no such effect. Inconsistent

treatment of the same facts was viewed with suspicion by

the Brown court. See 898 F.2d at 1569 ("That [the

insurance company] would reach opposing conclusions on

the basis of the same evidence seriously challenges the

assumptions upon which deference is accorded to[its]

interpretation of the plan.").

Second, looking at the final decision, we see a selectivity

that appears self-serving in the administrator's use of Dr.

Bahler's expertise. Reliance Standard used some of Dr.

Bahler's specific limitations to explain its rejection, but it

did not accept (or satisfactorily explain its rejection of) his

conclusion that she was totally disabled. The Fifth Circuit

addressed a similar circumstance, where the administrator

credited one part of the advice of a treating doctor, but not

his other advice. That court held that this was

unacceptable in the context. See Salley v. E.I. DuPont de

Nemours & Co., 966 F.2d 1011, 1015 (5th Cir. 1992). This

inconsistent treatment of the same authority in two

separate instances (the SSA, Dr. Bahler) raises the

likelihood of self-dealing. Applying the sliding scale to this

case, our review is ratcheted upward by these suspicious

events.

Finally, when a staff worker reviewing the files

recommended that Pinto be reestablished pending further

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testing, her suggestion was rejected, and Reliance Standard

decided to do the opposite: suspend the resumption of

benefits. Although this in itself does not prove bias, it lends

further support to the view that whenever it was at a

crossroads, Reliance Standard chose the decision

disfavorable to Pinto. The default position was that benefits

were not granted.

Taking all of these procedural anomalies into account, we

find ourselves on the far end of the arbitrary and capricious

"range," and we examine the facts before the administrator

with a high degree of skepticism.8

Reliance Standard relies heavily on the "two-to-two"

argument, arguing that because there are two doctors on

either side of the Pinto disability debate, a decision to credit

either side cannot be arbitrary and capricious. However,

neither of the doctors retained by Reliance Standard had

the same contact with Pinto that Dr. Bahler did. Dr.

Rosenthal read Dr. Bahler's reports, examined Pinto, and

talked with her, but this examination, however professional,

does not compare with the eighteen years of interaction

between Dr. Bahler and Pinto. The essence of Dr. Bahler's

conclusion was that Pinto's condition was "labile"; that is,

her condition could severely worsen under stress or activity

("high stress situations . . . could precipitate her cardiac

asthma."). Although she might be able to persist in an

occupation for some time, and she had basic motor skills,

the risk of work was too great. Reliance Standard gave no

explanation for its rejection of this aspect of Dr. Bahler's

assessment.

Moreover, while Reliance Standard relies on Dr. Capone,

Dr. Capone is a pulmonologist; he could only, and did only,

assess whether she had pulmonary problems. The

pulmonary examination was at Dr. Rosenthal's suggestion,

_________________________________________________________________

8. Our focus on process should not be read to require an additional duty

to conduct a good faith, reasonable investigation. That is, we are not

holding that Reliance Standard had a duty to gather more information,

merely that the decision might have been arbitrary and capricious given

the information available. Compare Vega, 188 F.3d at 188 (rejecting

claim that administrator had an affirmative duty to conduct good faith

and reasonable investigation).

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but neither Pinto nor Dr. Bahler have suggested that the

source of her disability was pulmonary. That Dr. Capone

concluded that she was not disabled by respiratory disease

should not discredit Dr. Bahler. Moreover, Dr. Capone

originally suggested that in order to decide whether Pinto

was disabled, she would first need to undergo therapy to

see if it made a difference. She never underwent therapy,

but despite his initial reluctance--and after being pressed--

he concluded that she was not totally disabled. If Reliance

Standard was as accommodating with Dr. Bahler's

conclusions as it was with Dr. Capone's, it would likely

have granted Pinto benefits.

For these reasons, a factfinder could conclude that

Reliance Standard's decision to credit its doctors over Drs.

Bahler and Goodman was the result of self-dealing instead

of the result of a trustee carefully exercising itsfiduciary

duties to grant Pinto the benefits due her under the

insurance plan. Summary judgment was therefore

inappropriate, for there is a genuine issue of material fact

as to whether Reliance Standard acted arbitrarily and

capriciously. The judgment of the District Court will be

reversed, and the case remanded for further proceedings

consistent with this opinion. There is sufficient evidence at

this stage to merit a penetrating review of the decision

under the heightened standard. The decision was close

enough that such a review may result in a determination

that it was arbitrary and capricious. On remand, the

District Court may take evidence regarding the conflict of

interest, and ways in which the conflict may have

influenced the decision, and then determine whether,

considering the conflict, the decision was "arbitrary and

capricious" in the sense described in Section IV.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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