For nearly 17 years, plan fiduciaries have known that their decisions on benefit claims will be treated with deference by courts that review those decisions – so long as the governing plan documents clearly grant the fiduciaries the discretionary authority to interpret the plan. This rule of judicial deference, under which a court will overturn a fiduciary’s interpretation only if it was “arbitrary and capricious,” has its roots in the U.S. Supreme Court’s ruling in Firestone v. Bruch. If a plan does not clearly grant this discretion to its fiduciaries, a court is free to take a “fresh look” at a benefit decision, without giving any deference to the fiduciary’s interpretation of the plan (a “de novo” review).
To obtain the more deferential standard of judicial review, it is not only necessary that a plan contain this “Firestone language”; it is also critical that this language be placed in the right document. Two recent decisions by the Seventh U.S. Court of Appeals (Schwartz v. Prudential Insurance Co. and Sperandeo v. Lorillard Tobacco Co.) conclude that this interpretive authority must be set forth in the actual plan document, and not merely the summary plan description.
The benefits at issue in these two cases were fully insured – that is, funded through insurance policies. The insurers relied on language in the certificates of coverage and SPDs to contend that their benefit decisions were entitled to deference by the court. The court held, however, that the insurance policies – and not the certificates of coverage or SPDs – were the ERISA plan documents at issue. Those policies did not contain the discretion-granting Firestone language, even though the certificates and SPDs did. As a result, the court reviewed the insurers’ decisions using a de novo standard, and on that basis overturned some of those decisions.
The lesson for plan sponsors and other fiduciaries is clear: ensure not only that plans contain appropriate Firestone language, but also that the language appears in the right documents. For an insured welfare plan, this is the insurance policy, and not the certificate of coverage or SPD.