The Employee Retirement Income Security Act judicial standard of review applied by a court in a denial-of-benefits claim is often the decisive factor in determining the outcome of the litigation.
A July 2 ruling from the U.S. Court of Appeals for the Eleventh Circuit provides a clear illustration of how the application of an arbitrary and capricious standard of judicial review — alternatively referred to as an “abuse of discretion” standard of review — resulted in an appellate court snatching victory from the plaintiffs and handing the win to the insurance company.
The arbitrary and capricious standard of review alters the court’s review from one where the parties are treated equally, and the evidence is weighed by the court, to a review that merely examines the “reasonableness” of the plan administrator’s decision. As a consequence of the latter, claimants face a steep uphill battle in qualifying for benefits.
The case of Goldfarb v. Reliance Standard Life Insurance Co.[1] involved a claim for accidental death insurance benefits that was brought following the death of the named insured, Dr. Alexander Goldfarb-Rumyantzev. He died while mountain climbing in Pakistan.
In analyzing whether Goldfarb’s death was “accidental,” the court determined that Reliance Standard’s rationale for denying the claim as reasonable. Thus, a judgment entered in the plaintiffs’ favor, which had awarded them $500,000 in accidental death insurance benefits, was overturned.
The court recounted that Goldfarb, who was an “experienced mountain climber in excellent physical condition,” lost his life while attempting to climb a mountain peak in Pakistan. When Goldfarb reached the peak’s base camp, his climbing partner reconnoitered the conditions on the mountain and warned him that it would be too dangerous to climb the mountain due to hidden crevasses and slippery black ice.
Although Goldfarb seemingly agreed not to attempt the ascent, he telephoned his climbing partner the next morning to tell him he was proceeding with the climb. Goldfarb was never heard from again, nor was his body recovered. It was presumed that he had likely fallen to his death.
At the time of his death, Goldfarb, who was a senior medical director at a pharmaceutical company, had $500,000 in ERISA-governed group accidental death insurance coverage through a policy issued to his employer. The policy did not define the word “accident,” but it did provide that benefits were payable for loss of life due to an “injury,” which the policy circularly defined as an “accidental bodily injury to an Insured that is caused directly and independently of all other causes by accidental means.”
The court further pointed out that the policy granted Reliance Standard discretion to determine whether a loss was covered, which meant that so long as the insurance company’s decision was reasonable it would be upheld, “even if the evidence before the administrator would support a contrary decision.”[2]
Both the U.S. District Court for the Southern District of Florida and the Eleventh Circuit applied the seminal accidental death insurance ruling Wickman v. Northwestern National Insurance Co.[3] — issued in 1990 by the U.S. Court of Appeals for the First Circuit — to analyze the case, although the reviewing court came to a different conclusion than the one reached by the district court.
According to Wickman, to determine whether an insured’s death was accidental, the court first looks to the insured’s subjective expectations as to the likelihood of injury from engaging in the conduct that caused the loss.
If those expectations are unknown, the court then performs “an objective analysis of the insured’s expectations,” which looks at “whether a reasonable person, with background and characteristics similar to the insured, would have viewed [injury or death] as highly likely to occur as a result of the insured’s intentional conduct.”[4] If so, the death is not considered an accident, and no benefits would be payable.
Examining the facts presented, the Eleventh Circuit found that Reliance Standard reasonably concluded that despite Goldfarb’s extensive experience in mountain climbing and his excellent physical condition, from an objective standpoint, serious injury or death was likely to occur because Goldfarb ignored his climbing partner’s warnings and even further increased his risk by attempting a solo ascent with limited supplies.
The court acknowledged, though, “that [other] decision makers applying Wickman de novo may not have come to the same conclusion. Such a decision maker could conclude that a reasonable mountain climber would not have judged injury or death as ‘highly likely to occur’ in these circumstances.”[5] Nonetheless, the court explained that based on “the arbitrary-and-capricious standard, it does not matter whether the evidence in this case could support the ‘contrary decision’ that Dr. Goldfarb’s death was an accident.”
The court further pointed out that the plaintiffs had the burden of proving Goldfarb’s death was accidental, and it was not Reliance Standard’s burden to prove otherwise, even though the cause of death was undetermined. The court also rejected the plaintiffs’ argument that the absence of a policy exclusion for mountain climbing meant that Goldfarb’s death should have been covered unless it could be proven that he intended to commit suicide or that his death was due to natural causes.[6]
Finally, although the court recognized that Reliance Standard acted under a structural conflict of interest since it was both the payor and the party responsible for determining eligibility to receive benefits, the court found the conflict did not taint the decision and was not a basis to uphold the lower court’s ruling.
Regardless of one’s personal view of Goldfarb’s conduct, this decision starkly illustrates the difference between de novo judicial review and the arbitrary and capricious standard of judicial review in ERISA denial-of-benefits cases. Goldfarb’s beneficiaries convinced the district court that the insured’s death was accidental, and the court of appeals acknowledged the potential for a different outcome had the standard of review been de novo.
Although the U.S. Supreme Court condoned ERISA’s deferential standard of review in its 1989 Firestone Tire & Rubber Co. v. Bruch ruling,[7] it did so by applying trust law, rather than contract law, which the Solicitor General urged the court to use as the framework for deciding ERISA benefit cases.[8]
Under contract law, the court interprets the contract without giving deference to either party’s position. However, as the U.S. Court of Appeals for the Seventh Circuit observed in Herzberger v. Standard Insurance Co. in 2000, with respect to the arbitrary and capricious standard of review: “The very existence of ‘rights’ under [ERISA-governed employee benefit] plans depends on the degree of discretion lodged in the administrator. The broader that discretion, the less solid an entitlement the employee has.”[9]
Since some states preclude discretion-granting language in ERISA-governed life insurance policies,[10] perhaps there needs to be a reexamination of whether discretionary clauses in welfare benefit plans, such as health, life and disability insurance policies, are consistent with ERISA’s overriding goal of protecting benefit plan participants and their beneficiaries.[11]
Reliance Standard could easily have protected itself against this loss by excluding coverage for inherently hazardous activities, such as mountain climbing. Accidental death insurance offers protection not only for situations where a fatal accident is caused by a third party, but also provides coverage in situations where the insured may have exercised poor judgment.
Due to the outcome-determinative standard of judicial review applied by the court, this case should serve as a wake-up call to employers, encouraging them to select benefit plans without discretion-granting language.
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
This article was first published by Law 360 on July 12,2024.
[1] Goldfarb v. Reliance Standard Life Insurance Company, 2024 U.S. App. LEXIS 16181, 2024 WL 3271012 (11th Cir. July 2, 2024).
[2] Citing Jett v. Blue Cross & Blue Shield of Ala., Inc., 890 F.2d 1137, 1140 (11th Cir. 1989).
[3] Wickman v. Northwestern National Insurance Co., 908 F.2d 1077 (1st Cir. 1990).
[4] Id. at 1088.
[5] Id.
[6] The district court had found: “The policy in question did not have an exclusion for ‘mountain climbing’ as an unacceptable risk. The insured’s decision to conduct an activity not excluded as a covered risk in the policy does not lead a reasonable person to conclude that this death was not an ‘accident.'” 2023 U.S. Dist. LEXIS 1177 *4 (S.D. Fla. January 3, 2023).
[7] Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).
[9] Herzberger v. Standard Insurance Company, 205 F.3d 327, 331 (7th Cir. 1999).
[10] See, e.g., Cal. Ins. Code § 10110.6(a).
[11] 29 U.S.C. § 1001(b).
