Pinto v. Reliance Standard Life Ins.

• Decision Date: 22 September 1999
• Citation: 214 F.3d 377
• Parties: (3rd Cir. 2000) MARIA H. PINTO, Appellant v. RELIANCE STANDARD LIFE INSURANCE COMPANY NO. 99-5028 Argued:
• Court: U.S. Court of Appeals — Third Circuit

Page 377

214 F.3d 377 (3rd Cir. 2000)

MARIA H. PINTO, Appellant v. RELIANCE STANDARD LIFE INSURANCE COMPANY

NO. 99-5028

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: September 22, 1999

Filed May 31, 2000

As Amended June 2, and July 19, 2000

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

Counsel for Appellant: SAMUEL J. HALPERN, ESQUIRE (ARGUED) 443 Northfield Avenue West Orange, NJ 07052

Counsel for Appellee: STEVEN P. DEL MAURO, ESQUIRE ROBERT P. LESKO, ESQUIRE (ARGUED) Del Mauro, DiGiaimo & Knepper 8 Headquarters Plaza North Tower Morristown, NJ 07960

Before: BECKER, Chief Judge, and GARTH, Circuit Judges and POLLAK, District Judge.^*

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 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 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 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.

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...