Herzberger v. Standard Insurance

• Decision Date: 23 February 2000
• Docket Number: No. 99-1944,N,99-1944
• Parties: (7th Cir. 2000) Carolyn Herzberger, Plaintiff-Appellant, v. Standard Insurance Company, Defendant-Appellee. Beverly A. Johnson, Plaintiff-Appellant, v. Prudential Insurance Company of America, Defendant-Appellee. o. 99-3116
• Court: U.S. Court of Appeals — Seventh Circuit

Page 327

205 F.3d 327 (7th Cir. 2000)

Carolyn Herzberger, Plaintiff-Appellant, v. Standard Insurance Company, Defendant-Appellee.

Beverly A. Johnson, Plaintiff-Appellant, v. Prudential Insurance Company of America, Defendant-Appellee.

No. 99-1944, No. 99-3116

In the United States Court of Appeals For the Seventh Circuit

Argued January 12, 2000

Decided February 23, 2000

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 2203--Harry D. Leinenweber, Judge.

Appeal from the United States District Court for the Western District of Wisconsin. No. 98 C 750--Barbara B. Crabb, Judge. [Copyrighted Material Omitted] Before Posner, Chief Judge, and Coffey and Ripple, Circuit Judges.

Posner, Chief Judge.

We have consolidated for decision two appeals that raise the same issue regarding the scope of judicial review of decisions by administrators of ERISA welfare or pension plans to deny benefits sought by participants in or beneficiaries of such plans. The issue is whether language in plan documents to the effect that benefits shall be paid when the plan administrator upon proof (or satisfactory proof) determines that the applicant is entitled to them confers upon the administrator a power of discretionary judgment, so that a court can set it aside only if it was "arbitrary and capricious," that is, unreasonable, and not merely incorrect, which is the question for the court when review is plenary ("de novo"). The cases directly on point say "no," ruling that the language in the plan documents must confer discretion in clearer terms. Kinstler v. First Reliance Standard Life Ins. Co., 181 F.3d 243, 251-52 (2d Cir. 1999); Kearney v. Standard Ins. Co., 175 F.3d 1084, 1089-90 (9th Cir. 1999) (en banc); Brown v. Seitz Foods, Inc. Disability Benefit Plan, 140 F.3d 1198, 1200 (8th Cir. 1998); Bounds v. Bell Atlantic Enterprises Flexible Long-Term Disability Plan, 32 F.3d 337, 339 (8th Cir. 1994); Haley v. Paul Revere Life Ins. Co., 77 F.3d 84, 87-89 (4th Cir. 1996). Some of our cases, however, may seem to come close to answering "yes." Ramsey v. Hercules Inc., 77 F.3d 199, 205-06 (7th Cir. 1996); Patterson v. Caterpillar, Inc., 70 F.3d 503, 505 (7th Cir. 1995); Donato v. Metropolitan Life Ins. Co, 19 F.3d 375, 379-80 (7th Cir. 1994); Bali v. Blue Cross & Blue Shield Ass'n, 873 F.2d 1043, 1047 (7th Cir. 1989). The Patterson case comes closest, holding (as does Perez v. Aetna Life Ins. Co., 150 F.3d 550, 555-58 (6th Cir. 1998) (en banc), which involved the same language), that discretion is conferred by providing in the plan just that the benefits decision shall be based on such proof as shall be "required" by the plan administrator. Perez explains that this phraseology implies that the administrator shall determine how much proof is enough, which the court thought a subjective standard. Another of our cases, Perlman v. Swiss Bank Corp. Comprehensive Disability Protection Plan, 195 F.3d 975 (7th Cir. 1999), involved a plan that conditioned benefits on satisfactory proof, but though we reviewed the denial of benefits under the deferential standard, the majority and dissenting opinions assumed rather than decided that it was the proper standard to use. See id. at 980; id. at 985. The proper standard was simply not an issue.

It is highly desirable to have a uniform national rule. Many employers have branches in more than one state and transfer employees from state to state with some frequency. An employee so transferred will remain under the same ERISA plan; but if courts in different states interpret identical plan language differently, the employee's rights under his plan (rights that as a practical matter include the right of judicial review) may change with every transfer-- and usually without his knowing it. Maybe all the holdings can be reconciled; but there is at least a superficial tension, a difference in tone and emphasis, between our cases and Perez, on the one hand, and the cases in the other circuits on the other hand, with our cases seeming more inclined to interpret ambiguous language in favor of an inference that it grants discretion to the plan administrator. We write today to clarify our position and reduce the tension. Because we are endeavoring to state a general rule with which aspects of some of our decisions may be inconsistent, we circulated this opinion in advance ofpublication to all the judges of the court in regular active service, pursuant to 7th Cir. R. 40(e); none voted to hear the case en banc.

An ERISA plan is a contract, e.g., Anstett v. Eagle-Picher Industries, Inc., 203 F.3d 501, 503 (7th Cir. Feb. 8, 2000); Mathews v. Sears Pension Plan, 144 F.3d 461, 465 (7th Cir. 1998); Haley v. Paul Revere Life Ins. Co., supra, 77 F.3d at 88, and the meaning of a contract is ordinarily decided by the court, rather than by a party to the contract, let alone the party that drafted it. It is true that the courts treat an ERISA plan as a special kind of contract, in order to confer greater protection on one of the parties, namely the participant or beneficiary, than on the other, the plan administrator (they do this by invoking their understanding of trust law); and obviously this particular weighting favors, in doubtful cases, a presumption of full judicial review at the behest of the favored party. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989); see also Van Boxel v. Journal Company Employees' Pension Trust, 836 F.2d 1048, 1052 (7th Cir. 1987). The Bruch case makes plenary review the default rule, that is, the rule to govern when the plan documents contain no indication of the scope of judicial review; and it is a natural and modest extension of Bruch, or perhaps merely a spelling out of an implication of it, to construe uncertain language concerning the scope of judicial review as favoring plenary review as well.

The same result would follow as a matter of ordinary contract law, with no ERISA thumb on the scales. See John H. Langbein, "The Supreme Court Flunks Trusts," 1990 Supreme Ct. Rev. 207, 223- 26. It is true that a contract can vary from the norm by including language which indicates that one of the parties is to have discretion to interpret and apply the contract. Typically this is done by providing that performance must be to the promisee's "satisfaction." Even so, unless it's a contract involving "matters which are dependent upon the personal feelings, taste or judgment of the" promisee, Muka v. Estate of Muka, 517 N.E.2d 673, 677 (Ill. App. 1987), as in a contract to paint a portrait, "the party to be satisfied must base his determination on grounds which are reasonable and just." Id.; see also Morin Bldg. Products Co. v. Baystone Construction, Inc., 717 F.2d 413, 415 (7th Cir. 1983); Wolff v. Smith, 25 N.E.2d 399, 401-03 (Ill. App. 1940); Gibson v. Cranage, 39 Mich. 49 (1878). The standard is an objective one and the scope of judicial review is the same as it is with respect to any other alleged breach of contract.

An ERISA plan can likewise specify that the administrator has discretion in interpreting or applying it (and we're about to suggest language to make such specification plain and unequivocal), but the conferral of discretion is not to be assumed. Especially not when we consider the importance of the fringe benefits covered by ERISA plans to modern employees. See Langbein, supra, at 208. An employee's decision with regard to the purchase of medical insurance and the provision of resources for retirement will often depend critically on his understanding of his rights under his em ployer's ERISA plan. The very existence of "rights" under such plans depends on the degree of discretion lodged in the administrator. The broader that discretion, the less solid an entitlement the employee has and the more important it may be to him, therefore, to supplement his ERISA plan with other forms of insurance. In these circumstances, the employer should have to make clear whether a plan confers solid rights or merely the "right" to appeal to the discretion of the plan's administrator.

We should do what we can to clarify the rights and duties of the parties to ERISA plans. Judges are quick to say what is prohibited, but perhaps too slow to say what is permitted and by doing so dispel legal risk. We have therefore drafted, and commend to employers, the following "safe harbor" language for inclusion in ERISA plans: "Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them." Cf. Bartlett v. Heibl, 128 F.3d 497, 501- 02 (7th Cir. 1997). An ERISA plan that contains such language will not be open to being characterized as entitling the applicant for benefits to plenary judicial review of a decision turning him down. Cozzie v. Metropolitan Life Ins. Co., 140 F.3d 1104, 1107 (7th Cir. 1998); Hightshue v. AIG Life Ins. Co., 135 F.3d 1144, 1147 (7th Cir. 1998); Anderson v. Operative Plasterers' & Cement Masons' Int'l Ass'n Local No. 12 Pension & Welfare Plans, 991 F.2d 356, 358 (7th Cir. 1993); Terry v. Bayer Corp., 145 F.3d 28, 37 (1st Cir. 1998). Equally clearly, the presumption of plenary review is not rebutted by the plan's stating merely that benefits will be paid only if the plan administrator determines they are due, or only if the applicant submits satisfactory proof of his entitlement to them.

If only because the courts have consistently held that there are no "magic words" determining the scope ofjudicial review of decisions to deny benefits, e.g., Mers v. Marriott Int'l Group Accidental Death & Dismemberment Plan, 144 F.3d 1014, 1020 (7th Cir. 1998); Sisters of the Third Order of St. Francis v. Swedish-American Group Health Benefit Trust, 901 F.2d 1369, 1371 (7th Cir. 1990); Kinstler v. First Reliance Standard Life Ins. Co., supra, 181 F.3d at 251, we forbear...