BERZON, Circuit Judge:
In August 2007, just three months after he had begun a new job at Thomas Weisel Partners ("TWP"), Plaintiff-Appellant Mark Stephan ("Stephan") had a bicycling accident that resulted in a spinal cord injury, rendering him quadriplegic and thus permanently disabled. Stephan was insured under TWP's long-term disability insurance plan, underwritten and administered by Defendant-Appellee Unum Life Insurance Company ("Unum"). Stephan disputes Unum's calculation of his pre-disability earnings, upon which his disability benefits were based. In calculating his earnings, Unum included only Stephan's monthly salary but not his annual bonus. Stephan's earnings, and therefore his disability benefits, would be considerably higher if the bonus were included.
The central issue in this appeal is whether the bonus should have been counted. The district court reviewed Unum's decision and upheld Unum's benefit determination. The court also denied Stephan's motion to compel discovery of a series of internal memoranda created by Unum's in-house counsel regarding Stephan's claim. Stephan appeals from each of the district court's rulings.
We agree with the district court that the applicable standard of review is abuse of discretion. The district court also correctly held that because Unum was responsible both for evaluating benefits claims and paying them, it operated under a conflict of interest, which "`must be weighed as a factor in determining whether there is an abuse of discretion'" (quoting Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 113, 128 S.Ct. 2343, 171 L.Ed.2d 299 (2008)). However, in determining what weight ought to be given the conflict, the district court erred in three ways: First, it failed to apply the traditional rules of summary judgment to its analysis of whether and to what extent a conflict of interest impacted Unum's benefits determination. Second, it incorrectly held that certain internal memoranda between Unum's claims analyst and its in-house counsel were not discoverable. Finally, it did not take into account substantial evidence that Unum's conflict of interest "infiltrated the entire decisionmaking process" and therefore ought to be accorded "significant weight." Montour v. Hartford Life & Accident Ins. Co., 588 F.3d 623, 634 (9th Cir.2009).
We remand to the district court to reconsider the impact of Unum's conflict of interest; correspondingly, what weight to accord the conflict in determining whether Unum abused its discretion; and ultimately whether Unum did indeed abuse its discretion in failing to include Stephan's bonus in his predisability earnings.
The long-term disability insurance policy ("the Plan") issued by Unum to TWP, Stephan's employer, "provide[d] financial protection" for TWP employees should they become disabled, by ensuring that
On April 18, 2007, TWP offered Stephan a position as Managing Director in its Institutional Sales department. Stephan's offer letter stated, in relevant part:
When he accepted his new position, Stephan became insured under TWP's policy, underwritten by Unum.
Four months later, Stephan suffered a severe spinal cord injury in a bicycling accident, as a result of which he became quadriplegic. Shortly thereafter, he applied for disability benefits under the Plan. On December 3, 2007, Unum sent Stephan a letter stating that his disability claim had been approved and specifying that Stephan would receive disability benefits of $10,000 per month. Unum based this amount on Stephan's annual salary of $200,000 per year. Later that month, TWP paid Stephan the $300,000 bonus promised in his offer letter.
Stephan appealed Unum's benefits determination, arguing that his benefits should have been based not on his annual salary of $200,000 per year but on an annual income of $500,000 — his base salary plus the annual bonus guaranteed to him in his offer letter. In support of his appeal, Stephan pointed to the disability claim form submitted by TWP Human Resources, which stated that Stephan's annual earnings were $500,000; the insurance premiums TWP paid Unum based on that rate of compensation; and Stephan's offer letter guaranteeing him a bonus of $300,000. Stephan also attached several additional documents to his appeal: He provided Unum a memo from TWP explaining that "in each month prior to the date of [Stephan's] disability, TWP recorded compensation expense, associated with the cash component of [his] guaranteed bonus payment"; another memo from TWP explaining how the company calculated its insurance premiums; and a letter from accountant and former Unum Director of Financial Assessment, Carol Poulin, analyzing Stephan's claim and finding that "Mr. Stephan's monthly income," on which his disability benefits should be based, "consists of both his pro-rated salary and pro-rated guaranteed bonus."
Unum rejected Stephan's appeal, maintaining "that the original basic monthly earnings calculation was correct." The letter from Unum rejecting Stephan's appeal observed:
Further, Unum stated that it did
Unum noted that contrary to Stephan's claim that TWP paid insurance premiums on a salary of $500,000, Unum's "premium billing department confirmed that premiums for[Stephan's disability] coverage were based on earnings of $100,000; not his salary at the time of disability and not including any bonus." Finally, Unum rejected the analysis of accountant Carol Poulin. Poulin, Unum stated, did "not take into account the fact that [Stephan's] bonus[was] contingent on a level of performance over the 12 months of employment, which [Stephan] did not complete." "Accordingly," Unum continued, "we have determined that his analysis and conclusions are flawed."
This case was initially filed in the Superior Court of California and then removed by Unum to federal court. The district court resolved it in three stages.
First, the court ruled on the parties' cross-motions for summary adjudication regarding the standard of review to be applied to the case. Because the Plan contained a provision delegating discretionary authority over its interpretation to Unum, the court held that the proper standard of review was abuse of discretion. The court rejected Stephan's contention that the discretionary provision was void either because of a settlement agreement between Unum and the State of California or because it was in violation of California public policy.
In addition, the district court's initial decision held that, absent attorney-client privilege, certain memoranda between Unum's in-house counsel and the claims analyst responsible for Stephan's claim were discoverable, because they might help demonstrate whether and to what extent Unum was operating under a conflict of interest. The court withheld any determination, however, on whether the attorney-client privilege protects these documents pending briefing on the applicability to the documents of the fiduciary exception to attorney-client privilege.
Second, after the parties briefed the issue, the district court ruled on the discoverability of these memoranda. Although the court assumed without deciding that the fiduciary exception to attorney-client privilege generally applies to wholly-insured ERISA plans such as TWP's, it held that the exception did not apply in this case, because "the interests of plaintiff and defendant had sufficiently diverged at the time the disputed memoranda were created." Therefore, it held, Unum need not produce the documents.
Finally, on cross-motions for summary judgment on the merits, the district court ruled that "Unum's conflict of interest did not weigh heavily upon its decision-making process in this case," and more generally, that Unum had not abused its discretion in excluding Stephan's bonus from its calculation of the monthly earnings upon which it based its disability payments. The court therefore granted Unum's motion for summary judgment, and denied Stephan's. This appeal followed.
ERISA benefit determinations are reviewed de novo, unless the benefit plan provides otherwise. Glenn, 554 U.S. at 111, 128 S.Ct. 2343. "Where the plan... grant[s] the administrator or fiduciary discretionary authority to determine eligibility for benefits, trust principles make a deferential standard of review appropriate." Id. (internal quotation marks, citations, and alteration omitted).
Cal. Ins.Code § 10291.5(b) provides that the California Insurance Commissioner "shall not approve any disability policy for insurance or delivery in" California that does not meet certain requirements. In particular, § 10291.5(b)(1) prohibits the Commissioner from approving a policy
The Insurance Code provides not only that the Commissioner may deny approval to policies that do not meet this standard, but also that
Id. § 10291.5(f). Finally, the Code states that any insurance policy issued
Id. § 10291.5(k).
On February 27, 2004, the Commissioner issued a notice that it intended to withdraw approval of several insurance forms, including the form upon which TWP's long-term disability policy was written, because they contained discretionary authority provisions. Such provisions, the Commissioner explained, "render [a policy] `fraudulent or unsound insurance' within the meaning of [California] Insurance Code § 10291.5" because they make insurance payments "contingent on the unfettered discretion of the insurer, thereby ... rendering the contract potentially illusory." The notice stated that the withdrawal
Unum requested such a hearing. After the hearing, the administrative hearing officer issued a proposed decision upholding the Commissioner's notice of withdrawal. The decision stated that the discretionary provisions included in the policies at issue "create[] a legal ambiguity and [are] likely to mislead the insured," in violation of Cal. Ins.Code § 10291.5. "In eliminating discretionary clauses in disability insurance policies," the decision reasoned, "the Commissioner is fulfilling the statute's direction that he is to assure that all insurance policies can be readily understood and interpreted." The Commissioner adopted the opinion, stating that it would take effect on April 22, 2005 "unless the affected insurers agree in writing before that date to amend all insurance product forms to delete all discretionary clauses or other language having the same legal effect."
Unum filed a writ of mandate with the San Francisco Superior Court challenging the Commissioner's notice and his order adopting the hearing decision. On October 1, 2005, Unum and the California Department of Insurance reached a settlement agreement, the California Settlement Agreement ("CSA"). Pursuant to the CSA, Unum withdrew its writ of mandate and agreed to make various changes to its insurance forms.
The CSA requires Unum to
The Agreement defines "California Contract" as "a policy of disability income insurance ... which is subject to the jurisdiction of and approved by the Department [of Insurance]." Section V of the CSA provides that
Whereas the CSA provisions relating to discretionary authority apply to "policies sold after the CSA Effective Date," the CSA requires that other changes, such as, for example, exclusions for pre-existing conditions, "be made in all new policies" as well as all "in-force policies upon renewal after the CSA Effective Date." Thus, by its terms, the CSA distinguishes between changes, like the prohibition on discretionary authority provisions, that apply only to
Stephan argues that the policy under which he was insured was a new policy, issued after the CSA Effective Date, and that therefore its discretionary authority provision is void. We disagree.
Unum first issued the relevant disability insurance policy to TWP in 1999, years before the effective date of the CSA. TWP renewed the policy annually. Between 1999 and 2007, the Plan was amended six times. The 2007 amendment stated that it "form[ed] a part of Group Policy No. 537429 001," the policy originally issued to TWP in 1999. It also stated that "[t]he entire policy is replaced by the policy attached to this amendment." The attached policy was the same as the previous version, issued in 2006, with the exception of a few changes to provisions that insurance companies are explicitly permitted to amend upon renewal without seeking permission of the Commissioner.
Stephan contends that because the 2007 amendment stated that it "replaced" the previous policy, the 2007 contract cannot be understood as a renewal but must be viewed as an entirely new policy. Unum responds that the language does not indicate an intent to create a new policy, but rather was included simply to avoid confusion: Rather than requiring policyholders to read both the policy and any amendments, Unum inserted the amendments into the text of the policy, such that all policy information was contained in a single document. Reviewing the 2007 contract as a whole, we agree with Unum's characterization and hold that the policy under which Stephan was insured constituted a renewal within the meaning of the CSA.
First, as noted, any changes between the 2006 and 2007 policies were minimal and permitted under California law.
Second, the language of the amendment itself indicates that the policy to which it is attached is a renewal. The amendment states that "[t]he policy's terms and provisions will apply other than as stated in this amendment." Were the 2007 policy entirely new and not a renewal, this language would make little sense, as the reference to "the policy" would have no meaning. Furthermore, the repeated use of the word "amendment" in the 2007 contract indicates that it did not constitute a new policy, but rather a continuation of the old policy with minimal, permitted changes.
The amendment also states that "[t]his amendment forms a part of Group Policy No. 537429 001 issued to the Policy holder:
The CSA refers to "existing California contracts" as those "issued prior to the Order of the Commissioner" (emphasis added). The retention of the 1999 effective date on the amended policy is the strongest indicator that the policy was issued in 1999, prior to the CSA.
Overall, then, the language and structure of the 2007 contract, taken together, indicate that the original 1999 policy remained in effect. In support of his position to the contrary, Stephan relies on cases holding that "[t]he renewal of a policy is a new contract of insurance" (citing Borders v. Great Falls Yosemite Ins. Co., 72 Cal.App.3d 86, 94, 140 Cal.Rptr. 33 (1977)). But the cases Stephan cites are context-specific and inapplicable to the question at issue here. As we noted above, the CSA explicitly differentiates between new policies and renewals. If all renewals constituted new policies under the CSA, the CSA's differentiation between the two would be meaningless. Stephan's reliance on cases where no such distinction was made is therefore misplaced.
Because the language and structure of the 2007 policy clearly indicates that it is a renewal of the existing policy, initially effective June 11, 1999, its discretionary authority provisions are unaffected by the CSA.
Stephan's alternative position is that in 2007, the inclusion of discretionary provisions in insurance polices violated California law and that any such provisions in the Plan are therefore void. This argument is also unavailing.
Under California law, "insurance policies are governed by the statutory and decisional law in force at the time the policy is issued. Such provisions are read into each policy thereunder, and become a part of the contract with full binding effect upon each party." Interins. Exch. of the Auto. Club of S. Cal. v. Ohio Cas. Ins. Co., 58 Cal.2d 142, 148, 23 Cal.Rptr. 592, 373 P.2d 640 (1962) (internal quotation marks omitted). This principle governs not only new policies but also renewals: Each renewal incorporates any changes in the law that occurred prior to the renewal. See Modglin v. State Farm Mut. Auto. Ins. Co., 273 Cal.App.2d 693, 700, 78 Cal.Rptr. 355 (1969); Steven Plitt, Daniel Maldonado & Joshua D. Rogers, Couch on Insurance § 29:43 (3d ed.2010). So, even though the 2007 policy under which Stephan was insured was a renewal, it was nevertheless subject to any relevant California law in place at the time it was issued. The law in effect at the time of renewal of a policy governs the policy even if that law is subsequently changed or repealed. See Interins. Exch. of the Auto. Club, 58 Cal.2d at 148-49, 23 Cal.Rptr. 592, 373 P.2d 640.
In 2007, there was no California statute explicitly prohibiting discretionary provisions. Stephan relies on Cal. Ins.Code § 10291.5(b) which provided then (and provides now) that
This reliance is misplaced.
As we explained above, the Commissioner's notice that he would withdraw approval from policies containing discretionary clauses, the administrative hearing officer's proposed decision approving such notice, and the Commissioner's order adopting that decision (together, "the Commissioner's decision" or "the decision") held that discretionary clauses create "uncertainty" about how a policy will be enforced and therefore what entitlements it ultimately guarantees. For that reason, the Commissioner decided such clauses render insurance policies "misleading and ambiguous" in violation of Cal. Ins.Code § 10291.5(b)(1).
This decision did not, as Stephan contends, render void all discretionary provisions contained in policies issued or renewed after it was made. Section 10291.5(b) does not directly void any policy or policy provision, even those that fail to conform with its strictures. Rather, § 10291.5(b) provides the Commissioner grounds for refusing to approve or withdrawing approval from any non-conforming policy. See id. § 10291.5(b); id. § 10291.5(f). Specifically, the statute provides that any policies that are approved by the Commissioner and are "in accordance with the conditions, if any, contained in the approval ... shall ... be conclusively presumed to comply with, and conform to" § 10291.5. Id. § 10291.5(k) (emphasis added). Thus, "[r]egardless of whether the Insurance Commissioner should have approved the policy, an otherwise valid policy is a binding contract and governs the obligations of the parties until the Commissioner revokes his approval." Peterson v. Am. Life & Health Ins. Co., 48 F.3d 404, 410 (9th Cir.1995).
The policy form upon which the Plan was written was approved by the Department of Insurance in 1991.
In sum, the Plan's discretionary authority provision did not violate the terms of the CSA, nor is the provision void under California law. We therefore review Unum's decision for abuse of discretion. See Glenn, 554 U.S. at 111, 128 S.Ct. 2343.
As we have explained, because the Plan grants discretionary authority to
This abuse of discretion standard, however, is not the end of the story. Instead, the degree of skepticism with which we regard a plan administrator's decision when determining whether the administrator abused its discretion varies based upon the extent to which the decision appears to have been affected by a conflict of interest. Id.
Under ERISA, Unum has a duty to process claims "solely in the interests of the [plan's] participants and beneficiaries." Glenn, 554 U.S. at 106, 128 S.Ct. 2343 (alteration in original) (internal quotation marks omitted). But because Unum "both decides who gets benefits and pays for them, ... it [also] has a direct financial incentive to deny claims." Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 868 (9th Cir.2008); see also Glenn, 554 U.S. at 105, 114-15, 128 S.Ct. 2343; Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 966 (9th Cir.2006) (en banc). Unum's dual role as plan administrator, authorized to determine the amount of benefits owed, and insurer, responsible for paying such benefits, creates a structural conflict of interest. See Glenn, 554 U.S. at 105, 114-15, 128 S.Ct. 2343.
While not altering the standard of review itself, the existence of a conflict of interest is a factor to be considered in determining whether a plan administrator has abused its discretion. Id. at 108, 128 S.Ct. 2343. The weight of this factor depends upon the likelihood that the conflict impacted the administrator's decisionmaking. Where, for example, an insurer has "taken active steps to reduce potential bias and to promote accuracy," the conflict may be given minimal weight in reviewing the insurer's benefits decisions. Id. at 117, 128 S.Ct. 2343. In contrast, where "circumstances suggest a higher likelihood that [the conflict] affected the benefits decision," the conflict "should prove more important (perhaps of great importance)." Id.
The district court held that "Unum's conflict of interest did not weigh heavily upon its decision-making process in this case and therefore does not tip the scale towards a finding of an abuse of discretion." In reaching this conclusion, the district court erred by failing to apply traditional principles of summary judgment; denying Stephan's motion to compel discovery of certain internal memoranda between Unum's claim analyst and its in-house counsel; and ignoring evidence that Unum has a history of biased decisionmaking that indicates that its conflict of interest in this case ought to be given more weight.
Traditional summary judgment principles have limited application in ERISA cases governed by the abuse of discretion standard. Nolan v. Heald College,
Consideration of a conflict of interest is, however, an exception to this feature of ERISA cases as "the traditional rules of summary judgment" do apply. Id. As to issues regarding the nature and impact of a conflict of interest, summary judgment may only be granted if after "viewing the evidence in the light most favorable to the non-moving party, there are [no] genuine issues of material fact." Id. (internal quotation marks omitted).
Here, there is no indication that the district court viewed the evidence of bias in the light most favorable to Stephan. Rather, as in Nolan, "without evidentiary hearing or bench trial, the district court considered and rejected [Stephan's] bias argument by weighing the documentary evidence of bias, and ignoring the protections that summary judgment usually affords the non-moving party." Id. This was error.
On remand, the district court may, but need not, hold a bench trial to determine the impact of Unum's conflict of interest. See id. Such a trial would ensure the "full bias inquiry" necessary to determine what weight to give a conflict of interest. Id. The district court may, however, rule once again on summary judgment if a renewed motion is made. But it must do so in accordance with the traditional summary judgment principles.
In particular, it should, where relevant, permit the admission of evidence outside the administrative record. Although, for the most part, judicial review of benefits determinations is "limited to the administrative record" — that is, the record upon which the plan administrator relied in making its benefits decision — the evaluation of a conflict of interest is not so limited. Id. Evidence outside the administrative record is "properly considered" in determining the extent to which a conflict of interest affected an administrator's decision. Id.
Here, as explained further below, the district court should consider any relevant evidence about Unum's history of biased decisionmaking; any evidence that its decisionmaking was biased in this case, including the internal memoranda between Stephan's claim analyst and its in-house counsel; as well as any evidence that Unum took steps to reduce the potential impact of a conflict of interest, either in general or in this case. And, if considered on summary judgment, the district court should view the evidence in the light most favorable to the non-moving party. Id.
In an effort to demonstrate to the district court that Unum operated under a conflict of interest, Stephan sought to discover a series of internal memoranda created between December 2007 and February 2008 by Unum's in-house counsel, at the request of Unum's claims analyst. Stephan argues that although ordinarily such memoranda would fall under the attorney-client privilege, Unum is a fiduciary of TWP's ERISA plan, and therefore the fiduciary exception to the privilege permits his discovery of the memoranda.
The district court assumed without deciding that the fiduciary exception applied to wholly-insured ERISA plans like TWP's. But it held that the exception did
"As applied in the ERISA context, the fiduciary exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration." United States v. Mett, 178 F.3d 1058, 1063 (9th Cir.1999) (internal quotation marks omitted). Although the Ninth Circuit has held that the fiduciary exception applies generally in the ERISA context, see id. at 1062-63, whether it applies to insurance companies in particular is a question of first impression in this Circuit.
The justifications for excepting ERISA fiduciaries from attorney-client privilege apply equally to insurance companies. In particular, courts have cited two rationales for applying an exception to the attorney-client privilege to ERISA fiduciaries: "[S]ome courts have held that the exception derives from an ERISA trustee's duty to disclose to plan beneficiaries all information regarding plan administration." Mett, 178 F.3d at 1063. On this view, the attorney-client privilege is subordinated to the fiduciary's disclosure obligation. See id. (citing In re Long Island Lighting Co., 129 F.3d 268, 271-72 (2d Cir.1997)).
"Other courts have" reasoned that because the ERISA fiduciary is "a representative for the beneficiaries of the trust which he is administering," it is not the fiduciary, but rather the plan beneficiary that is the "real client." Mett, 178 F.3d at 1063 (internal quotation marks omitted). On this view, the fiduciary exception is not really an exception at all. Attorney-client privilege is maintained; there is only a different understanding of the identity of the client. Id.
Neither of these theories provides any basis for distinguishing ERISA trustees, to whom the Ninth Circuit has already extended the fiduciary exception, from insurance companies also serving in the role of ERISA fiduciary. The duty of an ERISA fiduciary to disclose all information regarding plan administration applies equally to insurance companies as to trustees.
ERISA has broad disclosure requirements: It requires that "every employee benefit plan ... afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim." 29 U.S.C. § 1133. Because "[t]he opportunity to review ... pertinent documents is critical to a full and fair review," Ellis v. Metropolitan Life Insurance Co., 126 F.3d 228, 237 (4th Cir.1997), the regulations implementing this provision require that
Similarly, the obligation that an ERISA fiduciary act in the interest of the plan beneficiary does not differ depending on whether that fiduciary is a trustee or an insurer. There is therefore no principled basis for excluding insurers from the fiduciary exception.
The district court held that even if the fiduciary exception applies to wholly-insured ERISA plans, the particular documents requested by Stephan do not fall within this exception because they "were created after [Stephan's] counsel contacted Unum and an adversarial relationship had begun." After reviewing these documents in camera, we disagree.
"The fiduciary exception has its limits — by agreeing to serve as a fiduciary, an ERISA trustee is not completely debilitated from enjoying a confidential attorney-client relationship." Mett, 178 F.3d at 1063. Mett addressed these limits, considering whether the fiduciary exception applied to two memoranda written by a law firm that "wore many hats, serving at various times as counsel to [two ERISA trustees] personally and in their capacities as ERISA plan trustees, to [a corporation] as a corporation and in its role as plan administrator, and to the ERISA plans themselves." Id. at 1062. The memoranda were written to the trustees and "relate[d] to the potential civil and criminal consequences" the trustees might face due to illegal actions they had taken in administering an ERISA plan. Id.
In analyzing whether the documents fell within the fiduciary exception, Mett explained:
Id. at 1064. The memoranda at issue in Mett, we held, fell within the latter category. They were not rendering advice "on a matter of plan administration," but "were plainly defensive on the trustees' part and aimed at advising the trustees how far they were in peril." Id. (internal citations and quotation marks omitted).
Here, the documents sought fall on the other end of the Mett spectrum. The documents at issue are notes of conversations between Unum claims analysts and Unum's in-house counsel about how the insurance policy under which Stephan was covered ought to be interpreted and whether Stephan's bonus ought to be considered monthly earnings within the meaning of the Plan. Unlike the memoranda in Mett, the disputed documents offer advice solely on how the Plan ought to be interpreted. They do not address any potential civil or criminal liability Unum might face, nor is there any indication that they were prepared with such liability in mind.
Unum argues that, nevertheless, the fiduciary exception ought not apply to the documents because of the context in which
The content of the documents confirms this conclusion. Whereas the Mett memoranda were prepared to advise ERISA trustees "regarding their own personal civil and criminal exposure in light of undocumented withdrawals that had already occurred," Mett, 178 F.3d at 1064, the documents here were prepared to advise Unum claims analysts about how best to interpret the Plan, and were communicated to the analysts before any final determination on Stephan's claim had been made. The content of the documents was thus about plan administration, a topic to which, under Mett, the fiduciary exception applies.
In sum, advice on the amount of benefits Stephan was owed under the Plan, given before Unum had made any final determination on his claim, constitutes advice on plan administration. Such advice was given before the interests of Stephan and Unum became adverse. The fiduciary exception to the attorney-client privilege therefore applies to the documents at issue here. Absent some other basis for withholding them, the district court, on remand, should permit discovery of the documents.
The Supreme Court instructed in Glenn that a "conflict of interest ... should prove more important (perhaps of great importance)... where an insurance company administrator has a history of biased claims administration." Glenn, 554 U.S. at 117, 128 S.Ct. 2343. In so stating, Glenn cited a law review article "detailing such a history for one large insurer." Id. (citing John H. Langbein, Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials Under ERISA, 101 Nw. U.L.Rev. 1315, 1317-21 (2007)). That insurer was Unum. Id.
Numerous courts, including ours, have commented on Unum's history "`of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics,'" McCauley v. First Unum Life Ins. Co., 551 F.3d 126, 137 (2d Cir.2008) (quoting Radford Trust v. First Unum Life Ins. Co., 321 F.Supp.2d 226, 247 (D.Mass.2004), rev'd on other grounds, 491 F.3d 21, 25 (1st Cir.
The district court held that Stephan had not "demonstrated `a history of biased claims administration.'" Given the public record and the record in this case, that conclusion is incorrect.
Furthermore, Unum did not present any evidence indicating that it made any effort to mitigate its conflict of interest. Unum "was not required to present evidence demonstrating its efforts to achieve claims administration neutrality." Montour, 588 F.3d at 634. But "the Supreme Court's decision in [Glenn] placed it on notice as to the potential significance of such evidence in defense of a suit by a claimant challenging an adverse benefits determination." Id. Glenn explained that a conflict of interest would
554 U.S. at 117, 128 S.Ct. 2343. So far, Unum has presented no such evidence.
In reconsidering the weight to accord to Unum's conflict of interest, the district court should take into account the public record of Unum's history of biased decisionmaking as well as any evidence of such history Stephan produces. In addition, it should allow Unum the opportunity to demonstrate that, before making the decision on Stephan's claim, it implemented procedures to mitigate possible bias.
As we have explained, on remand, the district court should reconsider what weight to give Unum's conflict of interest in its analysis of whether Unum abused its discretion. In particular, the court must determine whether the "conflict may have tainted the entire administrative decisionmaking process" and therefore the "stated bases for [Unum's] decision" ought to be reviewed "with enhanced skepticism." Montour, 588 F.3d at 631. Although we express no opinion on the ultimate outcome of this inquiry, we note that there are several aspects of Unum's decision that might well indicate that "bias infiltrated the entire decisionmaking process." Id. at 634.
First, Unum's interpretation of the language of the Plan rests on terms that do not appear in the relevant text. The Plan entitled Stephan to sixty percent of his monthly earnings up to a maximum of $20,000. It specified that
As Stephan worked for less than a year before becoming disabled, his Plan benefit was to be calculated based on his "average gross monthly income ... for the period of [his] employment" at TWP.
As noted above, in the letter offering Stephan employment, TWP provided:
The Plan is silent as to whether and how such a bonus ought to be included in Stephan's gross monthly earnings if he is disabled before the bonus is received.
Unum insists that the "monthly earnings" upon which disability benefits are based must be limited to "earnings received up to the date of disability." But the language limiting earnings to income already "received" appears in section (a) of the definition, applicable after two years of employment, not in section (b), which applies to employees disabled after fewer than two years of work. As Stephan had worked for less than a year before becoming disabled, it is section (b) that applies to him. Section (b) contains no reference to when income is received. Unum's reliance on the term "received" to interpret section (b) is therefore misplaced.
Furthermore, Unum's interpretation would make arbitrary distinctions based on an insured's length of employment, distinctions not supported by the text of the Plan. For example, if Stephan had become disabled the day he received his bonus, it would be included in the earnings upon which Unum's disability payments were based. But if he had become disabled one day before his first bonus was received, it would not be so included, even if he had worked for twelve months at an adequate level and his bonus was, therefore, guaranteed.
In addition, the Plan's definitions of "monthly earnings" and "gross monthly income" are the same — "total income before
Finally, interpreting "gross monthly income" to include only income actually received would mean that employees who became disabled before receiving their first paycheck would receive no disability payments at all. Similarly, the disability payments for an employee whose paycheck was incorrect — for example someone who had been accidentally underpaid due to a payroll error or intentionally underpaid due to discrimination — would be calculated based on this erroneous figure.
The district court "expresse[d] no opinion on these matters, and limit[ed] its holding to the facts of this action." But the Plan applies to all TWP employees, not merely Stephan, and Unum is required by law to ensure that "the plan provisions" are "applied consistently with respect to similarly situated claimants." 29 C.F.R. § 2560.503-1(b)(5). Unum's interpretation of the Plan as limiting monthly earnings to income actually received either disregards this obligation or reaches an unsupportable result.
Similarly, Unum relies on a questionable interpretation of Stephan's offer letter. As noted above, Stephan's offer letter provided that his compensation included a "guaranteed $300,000 bonus for [his] first twelve months of employment" (emphasis added). Stephan's bonus was thus a nondiscretionary part of his income, so long as he met the conditions of the offer letter. The letter required only that Stephan "perform at the level both [he and TWP] anticipate[d] and that [Stephan] not voluntarily terminate[] [his] employment or be[] terminated for cause prior to the relevant payment dates."
Unum decided that because Stephan "did not work a full 12 months ... it is apparent that TWP went outside their own employment agreement when [Stephan] received a bonus in December 2007." Such a conclusion is far from clear from the language of the offer letter.
Stephan was certainly not "terminated for cause." Nor is it sensible to understand his inability to work due to disability as a voluntary termination of employment. And although the bonus was contingent on Stephan maintaining a particular level of performance in his first twelve months, the letter does not specify that level. Nor is there any indication that Stephan fell below any requisite performance standard. Finally, the letter does not indicate that periods of disability cannot count toward the requisite period of employment.
Moreover, the central question at issue in this case is not whether Stephan was entitled to receive his bonus in its entirety, but whether he earned it on a pro rata basis each month as part of his income. Unum's interpretation of the offer letter does not answer that question. In relying on Stephan's offer letter, Unum thus relied on a contractual interpretation that is, at best, only weakly supported by the contractual language.
In support of its decision, Unum repeatedly cited a telephone call during
Unum took this quotation out of context and then proceeded to give it undue weight in its determination of Stephan's pre-disability earnings. The text of the notes from which the quotation was drawn states more completely:
(emphasis added). In contrast to Unum's implication, this conversation demonstrates that TWP understood Stephan's bonus not as a discretionary addition to his income, but rather as an integral — in fact, the "main" — part of his payment for each month's work, despite the fact that it was not to be received until later. TWP's counsel therefore most probably meant not that it was giving Stephan his bonus to be charitable, but rather that it considered the bonus an essential part of Stephan's salary.
Other evidence in the record confirms that TWP understood Stephan's bonus as part of his monthly earnings, and therefore as earnings upon which disability payments ought to be calculated. For example, the claim form TWP submitted for Stephan listed as his "Salary/Wage prior to date last worked," a semi-monthly salary of $8,333.33 as well as a bonus of "$300,000 (for 2007)." And in the same conversation upon which Unum relies to support its earnings determination, TWP "also stated that they have an issue with the monthly earnings and the amount of ben[efit]s [Unum] will be paying."
Given the strong support in the record for the conclusion that TWP believed Unum's bonus to be part of his monthly earnings, Unum's reliance on TWP's statement that it would "morally honor" Stephan's contract as implying that TWP did not understand the bonus as part of Stephan's monthly income is "without support in inferences that may be drawn from the facts in the record," Salomaa, 642 F.3d at 676, and may indicate bias.
In addition to mischaracterizing TWP's understanding of Stephan's bonus, Unum ultimately disregarded TWP's conclusion that the bonus ought to be included in the calculation of Stephan's pre-disability earnings. Unum also rejected the views of Carol Poulin, a Certified Public Accountant, who in his former positions as Manager and then Director of Financial Assessment at Unum,
Relying on several documents related to Stephan's claim,
Unum rejected Poulin's conclusion because it did "not take into account the fact that the bonus is contingent on a level of performance over the first 12 months of employment, which [Stephan] did not complete." However, Poulin's report states that he reviewed Stephan's offer letter. Furthermore, as we have explained, Unum misreads the offer letter as specifying that the bonus was not part of Stephan's earnings.
Unum's failure to give any weight to Poulin's analysis and its distortion of TWP's views indicate that it failed to take into account relevant evidence, supporting the conclusion that its decisionmaking was affected by a conflict of interest.
Unum repeatedly cited the premiums paid for Stephan as evidence that Stephan's bonus ought not be included as gross monthly earnings. The record makes clear, however, that Unum either did not in fact rely on the premiums or did so in a way that was illogical. In either case, Unum's citation of premium payments supports an inference of bias.
Because of what seems to have been a recordkeeping error, Unum believed for most of the benefits determination process that TWP had paid premiums for Stephan corresponding to an annual income of only $100,000. While still under the impression that TWP paid premiums based on a salary of $100,000, Unum found that Stephan was owed disability payments based on an annual salary of $200,000. Thus, Unum could not have initially relied on the premiums paid by TWP to determine Stephan's pre-disability earnings.
Nevertheless, once Unum confirmed that TWP paid premiums for Stephan based on a salary of $200,000, it began to justify its decision with reference to these premiums. This "shifting and inconsistent" reliance on premiums raises the possibility that Unum's decision was affected by its conflict of interest. See Salomaa, 642 F.3d at 678.
Furthermore, there is conflicting evidence in the record about how TWP paid its premiums and, therefore, to what extent the premiums accurately reflected the earnings of TWP employees. Unum's own review of TWP's premium payments was inconclusive, finding that there was not "sufficient information to be able to clearly determine if the earnings figures [on which premiums were paid] ... are salary only or some combination of salary and bonus." Indeed, with respect to TWP's premiums, the only thing clear from the record is that they were not a reliable source of evidence of employees' actual earnings. The record notes, for example, "a significant adjustment [in premiums] in April of 2006, which does not appear to correspond to a significant increase in policy lives covered but may reflect an attempt to correct a historical underpayment of premiums" — that is, an adjustment of premiums entirely unrelated to the earnings of TWP employees.
Thus, Unum's reliance on TWP's premium payments was both inconsistent and illogical. That reliance therefore could be
Attached to the letter Stephan sent to Unum appealing its decision, Stephan provided a letter from TWP stating that each month, the company recorded a compensation expense equal to 1/12th of the cash amount of Stephan's annual bonus. In its letter rejecting Stephan's appeal, Unum stated that if Stephan's bonus payment truly accrued monthly, it would have been paid monthly. This assertion is incorrect. Companies that use an accrual method of accounting record expenses when they are incurred, rather than when they are paid. See, e.g., Carl S. Warren, James M. Reeve & Jonathan Duchac, Accounting 104 (24th ed.2011). Thus, a compensation expense can be accrued without it having actually been paid.
That Unum relied on an unsupported assertion contrary to basic accounting principles is yet another factor relevant to assessing the degree to which Unum's structural conflict of interest may have affected its benefits decision.
We affirm the district court's ruling that the proper standard of review is abuse of discretion. We reverse, however, the district court's grant of summary judgment to Unum. We remand the case to the district court for reconsideration of the weight Unum's conflict of interest ought to be accorded in determining whether Unum abused its discretion. On remand, the district court may, but need not, determine that additional discovery; an evidentiary hearing; and/or a bench trial is required. We leave it to the district court in the first instance to determine the procedures best suited to evaluating fully Unum's conflict of interest. Having reconsidered the nature and impact of Unum's conflict of interest — including any evidence that the conflict led Unum to render an interpretation of the policy that is unsupported by the record — the district court should re-weigh the relevant evidence and determine whether Unum abused its discretion in failing to include Stephan's bonus in its pre-disability earnings calculation.
O'SCANNLAIN, Circuit Judge, dissenting:
I agree with the majority that we evaluate Unum Life Insurance Company's interpretation of plan terms under an abuse of discretion standard. I cannot agree, however, that remand is appropriate. The district court did not, as the majority contends, improperly weigh evidence at the summary judgment stage. And Unum's interpretation of the plan — which is silent on whether a bonus should be counted as monthly income — is reasonable and supported by the record. I would therefore affirm the grant of summary judgment in favor of Unum.
The majority holds that the district court "failed to apply the traditional rules of summary judgment to its analysis of whether and to what extent a conflict of interest impacted Unum's benefits determination." Op. at 921. I disagree. The district court properly considered the evidence before it. Stephan presented no specific evidence of bias; the exhibits he filed included correspondence with Unum, an expert report, and Unum's notes from Stephan's claim folder, all of which showed consistent handling of Stephan's claim.
Lacking support for its assertion that the district court improperly weighed the evidence before it, the majority directs the district court on remand to "permit the admission of evidence outside the administrative record" to evaluate bias. Op. at 930. This is not our law. A district court is not required to consider evidence outside the record. Rather, when evaluating the "nature, extent, and effect on the decision-making process of any conflict of interest," the district court "may, in its discretion, consider evidence outside the administrative record." Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 970 (9th Cir.2006) (en banc) (emphasis added); Nolan v. Heald College, 551 F.3d 1148, 1150 (9th Cir.2009) (explaining that Abatie "permit[s]" plaintiffs to submit evidence outside the administrative record). We therefore cannot, as the majority suggests, require the district court to conduct an independent assessment of bias beyond the evidence presented by the parties. See op. at 929-31.
Remand thus serves only to provide Stephan a second opportunity to litigate his case. That is not appropriate here.
Nevertheless, the majority decides to remand. Having so decided, the majority's opinion should be at an end. But it is not. While purporting to "express no opinion" on whether Unum's interpretation of the plan should be found unreasonable, Op. at 934, the majority expansively opines on the correct outcome of the district court's inquiry, see op. at 934-39. In doing so, the majority mischaracterizes the record and traverses well outside the bounds of our deferential review. What is more, the majority's extensive dicta, see op. at 934-39 — which, in any event, does not bind the district court — relies on inconclusive evidence and concludes that, because it would have interpreted that evidence differently, Unum's interpretation is unreasonable. See op. at 936-39. This is not abuse of discretion review.
To take one example: the majority unfairly criticizes Unum's reliance on TWP's statement that it would "morally honor" its employment contract and posits that TWP "most probably meant" that TWP viewed the bonus as a necessary component of Stephan's salary. Op. at 937. Based on the record, which consists only of Unum's
The evidence demonstrates that Unum's conclusion that Stephan's bonus was not included in the calculation of monthly benefits under the plan is a reasonable one. Unum consistently explained that it was not including the annual bonus because that bonus was contingent on Stephan completing a year of satisfactory performance, which he did not do; because the bonus was not paid on a monthly basis; because TWP had not paid premiums on the higher amount; and because it did not find TWP's expert persuasive. Its interpretation of the plan should not be disturbed. See Conkright v. Frommert, ___ U.S. ___, 130 S.Ct. 1640, 1647, 1651, 176 L.Ed.2d 469 (2010); Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 676 (9th Cir.2011).
We may not substitute our views on how the plan should be interpreted for those of the plan administrator. The district court, after considering the evidence Stephan presented, correctly concluded that Unum's conflict of interest carried little weight in light of other considerations and that Unum had reasonably interpreted the plan. It should not have to revisit that determination.
It is admittedly difficult to weigh the extent to which a conflict influenced a benefits determination. See Salomaa, 642 F.3d at 675. But "district courts are well equipped to consider the particulars of a conflict of interest." Abatie, 458 F.3d at 969. The district court did so correctly in this case, and I would affirm its grant of summary judgment in favor of Unum.
I respectfully dissent.
(emphasis added). In addition, the certificate of coverage states "[w]hen making a benefit determination under the policy, Unum has discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy."
