Note on Reading the Tea leaves: Sifting Through Jicarilla and Garner to Construct a Workable Fiduciary Exception Framework for ERISA Insurers
Mark secures a new manager-level job with a $200,000 base salary and a guaranteed bonus of $300,000 for his first full year of employment. His employer also offers a competitive benefits package, which includes a long-term disability plan. Unfortunately, after only three months on the job, Mark gets into a terrible bicycling crash, rendering him permanently disabled.
Mark informs human resources that he will be applying for disability benefits under the disability plan, but he is told that the administration of the plan has been outsourced to an insurance company. He applies for disability benefits with the insurer responsible for evaluating his eligibility for benefits under the plan and paying them if appropriate. The insurer approves Mark’s claim, but deems him eligible for a monthly benefit payment based on only his $ 200,000 base salary. Feeling cheated, Mark files an appeal arguing that his benefits should be based on his total compensation of $ 500,000. The insurer denies his appeal, stating that he did not work a full year prior to the accident and any bonus paid to him would be mere goodwill by his employer.
Mark decides to sue the insurance company. During discovery, he requests to see a memo written by the insurance company’s lawyer for the claims analyst that oversaw Mark’s claim. The insurer, however, contends that this memo is protected by the attorney-client privilege.
What happens next, strangely enough, depends on where the suit takes place. If Mark’s claim is litigated in a federal court in Pennsylvania, New Jersey, or Delaware, then Mark is out of luck. His request to compel production of the memo will be automatically rejected. But, if he happens to be on the West Coast, he will automatically prevail through a common law fiduciary exception to the attorney-client privilege. If he is somewhere in between, the result is uncertain.
This inconsistency and uncertainty in the law denotes a current circuit split in the federal courts of appeal. The Third and Ninth Circuits disagree as to whether a beneficiary of an employee benefit plan can defeat an insurer’s assertion of the attorney-client privilege, where the insurer is tasked with evaluating and paying benefit claims as a third-party claims administrator. In the Ninth Circuit, beneficiaries automatically defeat the privilege pursuant to Ninth Circuit caselaw on the fiduciary exception to the attorney-client privilege, and in the Third Circuit, just the opposite. Where the fiduciary exception applies, it precludes fiduciaries who obtain legal advice in the execution of their fiduciary obligations from asserting the attorney-client privilege against their beneficiaries. No circuit beyond the Third and Ninth has yet examined this issue, leaving much uncertainty for benefit plan participants and insurer-fiduciaries across the country.
Many perspectives have been written on whether the Ninth or Third Circuit “got it right,” in holding the fiduciary exception per se applicable to insurers and per se not, respectively. This Note, however, focuses not on which court came to the right result, but rather, it scrutinizes the underlying legal framework that allowed the courts to divide. After reviewing the basic doctrinal test–a two-rationale framework which determines the fiduciary exception’s applicability–and how it has been applied both historically and in the circuit split, this Note “reads the tea leaves” that is an uncertain fiduciary exception jurisprudence in an effort to establish uniformity. This is accomplished by a two-part solution. First, this Note extracts the key principles from the Supreme Court’s only fiduciary exception case to define the proper doctrinal elements for each part of the two-rationale framework. But even if the courts are in accord as to the exact legal test by which the fiduciary exception should be applied, uncertainty still remains given the pliability of that framework. To resolve this shortcoming, a new prong to the fiduciary exception test for ERISA insurers is proposed: a good cause prong, borrowed from the shareholder derivative suit context, but modified so that the insurer bears the burden of showing cause for nondisclosure.
Part I of this Note provides background on the fiduciary exception. Part I-A traces the doctrine’s trust law origins, whereby the two-rationale framework was established as the legal test for the exception. Part I-B discusses how that test has been extended, focusing on its use in shareholder derivative suits through the Garner doctrine. Part II explores the fiduciary exception in ERISA cases, with Part II-A covering trustee-like ERISA cases. Part II-B dives into an ERISA context where the doctrine has not been so easily applied: the insurer-fiduciary context of the circuit split. Part II-C discusses the uncertainty surrounding the split and its causes. Finally, Part III offers a two-part solution to rework the doctrine. In Part III-A, the Supreme Court’s Jicarilla decision is probed to establish the proper elemental tests for the two-rationale framework. Part III-B then proposes a new doctrinal prong for the fiduciary exception framework in the ERISA insurer context: a good cause prong deriving from Garner, but with a modified burden standard.