Yesterday we took a look at some of the factors which help keep trustees, with all their discretionary powers, in line. First, a classic trustee has no personal interest in his decisions. Second, he is held to the “highest duty known to law” – a fiduciary duty. Third, he cannot unilaterally assume his discretionary powers; they must be conferred on him by the trustor.
Now, under ERISA we very often pretend insurance companies are trustees, and we give their decisions to approve or deny claims the same sort of deference we give to decisions by trustees. Does that make any sense?
Well, no. There are very material differences between trustees and insurance companies.
First, insurance companies have an obvious and profound conflict of interest when they decide whether to approve an insurance claim. The money involved is not in some trust, but in the insurance company’s own bank account. That’s a big conflict of interest, and I’ll do a post soon about how that is handled.
Second, insurers are supposedly subject to fiduciary duties under the ERISA statute. But, remember they get to be Goofus while we all have to be Gallant. And indeed, although the label “fiduciary” is applied to ERISA insurers, the conduct ERISA allows is way, way short of anything a real fiduciary would even think about trying to do.
Finally, insurance companies routinely confer discretion on themselves by just putting a couple of lines of boilerplate into the insurance policies they peddle. The employer who buys the policy for its employees is supposed to be the trustor here, and yet the insurance company, the supposed “trustee,” is the source of the language giving it all that power to ruin lives.
As we continue we’ll have more occasion to explore the manners in which these supposed “fiduciaries,” these supposed “trustees,” act for their own benefit above all else, which is the antithesis of a fiduciary’s job. As the Eleventh Circuit Court of Appeals has observed, “it is difficult to understand why any plan would give discretionary authority to an insurance company from whom had been purchased a fixed-premium policy. … The basis for the deferential standard of review in the first place was the trust nature of most ERISA plans. … The insurance company here could hardly be regarded as a trustee for the insured.” The case is Moon v. American Home Assur. Co., and the citation is 888 F.2d 86 (11th Cir. 1989). You can look it up.