By: Ron Kramer and Michelle Scannell,

On September 12, 2012, the Ninth Circuit held that the fiduciary exception to the attorney-client privilege applies to insurance companies that serve as ERISA fiduciaries and plan sponsors.  It also ruled that a district court failed to properly apply the abuse of discretion review by not correctly weighing evidence of the plan administrator’s structural conflict of interest.  Stephan v. UNUM Life Ins. Co. of America, No. 10-16840

In Stephan, plaintiff was insured under his employer’s UNUM-sponsored and administered long-term disability plan.  Three months after plaintiff began working for his employer, he sustained serious injuries in a cycling accident that rendered him a quadriplegic.  After UNUM calculated his monthly benefit solely upon his $200,000 annual salary, plaintiff appealed the calculation on the basis that it should also include a $300,000 annual bonus that was guaranteed in his offer of employment. 

The district court weighed UNUM’s conflict of interest as a factor in its application of the  abuse of discretion standard of review.  See Met. Life Ins. Co. v. Glenn, 544 U.S. 104, 113.  The court ignored evidence of UNUM’s “history of biased decision-making,” holding that the conflict of interest did not weigh heavily upon its decision and therefore did not tip the scale toward a finding of an abuse of discretion.  The court also denied plaintiff’s motion to compel production of internal memoranda between UNUM’s in-house counsel and a claims analyst regarding plan interpretation on the basis that the interests of plaintiff and defendant had “sufficiently diverged at the time the memoranda were created,” and therefore not subject to the fiduciary exception to the attorney-client privilege.

In considering the denial of plaintiff’s motion to compel UNUM’s internal memoranda, the Ninth Circuit held for the first time that the fiduciary exception to the attorney-client privilege applies to insurance companies.  The Ninth Circuit rejected the Third Circuit approach that the fiduciary exception was inapplicable to insurance companies (see Watchel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007)), and sided with numerous district courts that have found the fiduciary exception to apply to insurers.  The Ninth Circuit reasoned that the rationale for excepting ERISA fiduciaries from the attorney-client privilege applied equally to insurance companies, because “the obligation of an ERISA fiduciary does not differ depending on whether that fiduciary is a trustee or an insurer.”

The Ninth Circuit also rejected arguments that the fiduciary exception was inapplicable on the grounds that at the time of the communications the interests between the plaintiff and defendant had sufficiently diverged given UNUM already had received letters from plaintiff’s counsel indicating the parties may become adverse.  In this case, the communications at issue were prior to the plan’s final determination of plaintiff’s claim, and constituted legal advice on what plaintiff was owed under the plan.  The Ninth Circuit held that, where plan administration legal advice is given before the final determination of a claim, the interests of the plan and participant are not adverse and the fiduciary exception applies.

The Ninth Circuit also noted that while the traditional standards of summary judgment have limited application in ERISA cases governed by the abuse of discretion standard,  consideration of a conflict of interest is an exception where the traditional rule of viewing the evidence in the light most favorable to the non-moving party does apply.  The court held that the district court erred by failing to view the evidence of UNUM’s bias in the light most favorable to the non-moving party—plaintiff, and also by failing to consider evidence outside of the administrative record as to the alleged conflict of interest. 

On a related note, in an amicus brief released three days prior to the Stephan opinion, the DOL urged the Ninth Circuit to clarify the appropriate standard of review throughout the circuit.  See Pacific Shores Hospital v. United Behavioral Health, No. 12-55210 (brief filed August 12, 2012).  The DOL has urged the court to expressly rule that the abuse of discretion standard requires consideration of “all relevant factors” relevant to the reasonableness of the administrator’s determination.  Stay tuned for updates on the application of the abuse of discretion review within the Ninth Circuit…