On May 17, 2012, in a 2-1 decision, the Third Circuit upheld a district court’s decision that Standard Insurance Co. did not abuse its discretion when it determined that an offset clause in its long-term disability policy allowed it to reduce its payments to a plan participant by the amount he was receiving from another policy.
In Fleisher v. Standard Insurance Co., No. 11-2490, Standard offset plaintiff’s long term disability benefits by the amount he was receiving under a second policy pursuant to an offset clause in its policy that allowed for offsetting against other “group insurance” policies. The plaintiff claimed he should have received the full monthly benefit under his Standard policy, in addition to the monthly benefit under the second policy, because the second policy was an “individual policy” to which the offset clause did not apply and that the administrator’s decision that the policy was a group policy was arbitrary and capricious.
The Court recognized that the plan administrator’s decision to offset the policies involved an interpretation of “group insurance,” which it determined to be an ambiguous term, and a factual determination about whether the second policy was indeed a group insurance policy. It explained that the fact that the plan administrator interpreted an ambiguous term does not change the deferential standard of review and it still must defer to the administrator’s interpretation unless that interpretation is arbitrary and capricious. It further recognized that a conflict of interest existed because Standard benefitted from its decision to offset the policies, but ultimately concluded the administrator’s interpretation was not so close as to make the conflict a tiebreaking factor.
In a strongly-worded dissent, Judge Garth argued that the principle of contra proferentem — that ambiguous contract terms in an insurance policy must be construed against the insurance company that drafted it — should apply to avoid the inequitable outcome in the case. According to the dissent, the Standard policy to which the plaintiff subscribed did not alert him to its offset provision, nor did Standard offer an interpretation of those provisions so that a layperson could assess the protection that he was seeking. Here, the dissent argued that court should consider the equitable realities of the circumstances.
This decision demonstrates the high hurdle that plaintiffs must overcome when dealing with plan interpretation issues under the arbitrary and capricious standard of review. The Third Circuit now joins the majority of the appellate courts that hold the doctrine of contra proferentem does not apply when administrators are granted the authority to interpret the plan.