ERISA Sliding Scale Standard of Review When Insurer Also Is Plan Administrator

When an ERISA defendant is both the insurer and plan administrator, the court will apply a less deferential standard of review to a plan administrators’ decision.  Due to the conflict of interest, courts apply a sliding scale decreased level of deference to the arbitrary and capricious standard. In Loughray v. Hartford Group Life Ins., No. 05-CV-01450-CBS-BNB (D. Colo. Apr. 2, 2007), Magistrate Judge Shaffer carefully and thoroughly analyzed the standard of review to be applied to an administrator’s denial of benefits and provides a detailed review of how to apply the standard. The court held that the standard of review to be applied to the conflicted defendant insurance company’s denial of benefits would be the “sliding scale” approach employing the arbitrary and capricious standard of review with a decreased level of deference given to the administrator’s decision in proportion to the seriousness of the conflict. The court found that the insurance company, Hartford, was conflicted because it served as both an insurer and plan administrator. Under the sliding scale approach, the court shifted the burden to Hartford “to establish that its interpretation of the terms of the plan is reasonable and its application of the terms of the plan is supported by substantial evidence.” The court defined substantial evidence as “such evidence that a reasonable mind might accept as adequate to support the” conclusion reached by the decision maker. The court noted that a lack of substantial evidence often indicates that the decision was arbitrary and capricious. After carefully reviewing the record, the court found that Hartford’s denial of benefits was not arbitrary and capricious. This decision provides an excellent analysis of how to apply the standard of review.