                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-31-2000

Pinto v. Reliance Std. Life Ins. Co.
Precedential or Non-Precedential:

Docket 99-5028




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Filed May 31, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

NO. 99-5028

MARIA H. PINTO, Appellant

v.

RELIANCE STANDARD LIFE INSURANCE COMPANY

On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civ. No. 96-cv-03508)
District Judge: Honorable Anne E. Thompson

Argued: September 22, 1999

Before: BECKER, Chief Judge, and GARTH, Circuit Judges
and POLLAK, District Judge.*

(Filed: May 31, 2000)

       SAMUEL J. HALPERN, ESQUIRE
        (ARGUED)
       443 Northfield Avenue
       West Orange, NJ 07052

Counsel for Appellant



_________________________________________________________________
* Honorable Louis H. Pollak, United States District Judge for the Eastern
District of Pennsylvania, sitting by designation.
       STEVEN P. DEL MAURO, ESQUIRE
       ROBERT P. LESKO, ESQUIRE
        (ARGUED)
       Del Mauro, DiGiaimo & Knepper
       8 Headquarters Plaza - North Tower
       Morristown, NJ 07960

       Counsel for Appellee

OPINION OF THE COURT

BECKER, Chief Judge.

This appeal concerns the standard courts should use
when reviewing a denial of a request for benefits under an
ERISA plan by an insurance company which, pursuant to
a contract with an employing company, both determines
eligibility for benefits, and pays those benefits out of its
own funds. This question, and variations thereof, have
bedeviled the federal courts since considered dicta in
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989),
gave opaque direction about how courts should review
discretionary benefits denials by potentially conflicted
ERISA fiduciaries. In Firestone, the Court instructed that
the "arbitrary and capricious" standard was appropriate but
that a conflict of interest should be considered as a "factor"
in applying this standard.

Courts of appeals have taken different approaches to
integrating these seemingly incongruous directions when
reviewing decisions of insurance companies that fund a
plan and are also ERISA plan administrators. Following the
lead of five other such courts, we hold that, when an
insurance company both funds and administers benefits, it
is generally acting under a conflict that warrants a
heightened form of the arbitrary and capricious standard of
review. In reaching this conclusion, we are cognizant of the
previous cases in which we have been highly deferential to
decisions of an employer who funds and administers a
benefit plan, a practice grounded in the belief that the
structural incentives to deny meritorious claims are
generally outweighed by the opposing incentives to grant

                               2
them--such as the "incentives to avoid the loss of morale
and higher wage demands that could result from denials of
benefits." Nazay v. Miller, 949 F.2d 1323, 1335 (3d Cir.
1991). However, we conclude that these incentives
(assuming their existence) do not apply with the same force
to an insurance company that pays benefits out of its own
coffers. The relationship with the welfare of the
beneficiaries is more attenuated, and there are problems of
imperfect information. In the insurance company-as-
funder-and-administrator context, the fund from which
monies are paid is the same fund from which the insurance
company reaps its profits. This is in contrast to the
actuarially determined benefit funds typically maintained
by employers (especially in the pension area) that usually
cannot be recouped by the employer or directly redound to
its benefit. Our rule is also informed by the understanding
that "smoking gun" direct evidence of purposeful bias is
rare in these cases so that, without more searching review,
benefits decisions will be virtually immunized.

The courts of appeals that have forged the trail in this
area have presented different formulations of the
heightened standard. Some courts, led by the Eleventh
Circuit, have established a standard approaching de novo
review, shifting the burden to the defendant company to
explain its decisions. However, we side with the majority of
courts of appeals, which apply a sliding scale method,
intensifying the degree of scrutiny to match the degree of
the conflict.

In this case, applying a heightened degree of scrutiny
because of the financial conflict, we conclude that there is
a genuine issue of material fact as to whether the
defendant, Reliance Standard Life Insurance Company,
acted arbitrarily and capriciously when it concluded that
the plaintiff, Maria Pinto, an employee of Reliance
Standard's client Rhone-Poulenc Corporation, was not
totally disabled by her cardiac condition and therefore did
not deserve long-term disability benefits. Our heightened
review allows us to take notice of discrete factors
suggesting that a conflict may have influenced the
administrator's decision. First, Reliance Standard's reversal
of its initial decision to grant benefits was itself

                               3
questionable. Second, its final report credited the evidence
favorable to denial while inadequately explaining why it
rejected the contrary evidence--the same evidence on the
basis of which it had initially determined to award benefits.
Third, while Reliance Standard relies on the fact that two
physicians found Pinto not to be totally disabled while two
others disagreed, one of the doctors on whom Reliance
Standard relied was not a cardiologist but a pulmonologist,
and he found Pinto's condition satisfactory only from his
(pulmonary) vantage point, whereas the disability dispute is
over a condition that is cardiological in nature.

In light of the evidence in the record, we conclude that a
factfinder could find that Reliance Standard's actions were
arbitrary and capricious. Therefore, we will reverse the
grant of summary judgment and remand to the District
Court for further proceedings consistent with this opinion.

I. Facts and Procedural History

Pinto was an accounting clerk for Rhone-Poulenc from
1986 to 1991. In July 1991, she stopped working because
of a heart condition, which was diagnosed as mitral
stenosis and cardiac asthma. After receiving short-term
benefits from Rhone-Poulenc, she applied, in June 1992,
for long-term disability (LTD) benefits from Reliance
Standard, which had contracted to administer and pay LTD
benefits under Rhone-Poulenc's ERISA plan. The policy
provides benefits for individuals who submit "satisfactory
proof " of "Total Disability" to Reliance Standard. In
pertinent part, an employee is "Totally Disabled" when,
"after a Monthly Benefit has been paid for 24 months, an
Insured cannot perform the material duties of any
occupation." It is undisputed that Reliance Standard had
discretion to interpret the plan.

When Pinto applied for LTD benefits, Dr. Alan Bahler, her
treating physician since 1977, sent Reliance Standard a
diagnosis of her condition, which was confirmed by a
cardiac catheterization. He reported that she had mitral
stenosis secondary to rheumatic heart disease, which
brings on shortness of breath, and orthopnea (the inability
to breathe well without sitting erect) with borderline

                                  4
congestive heart failure. Bahler further attested that Pinto
had developed symptoms of mitral valvular dysfunction,
including symptoms of cardiac asthma and early congestive
heart failure, worsening exercise tolerance, and
palpitations. He concluded that "[h]er present condition
precludes her from actively working even at a clerical level
. . . [h]er only viable option at the present time is continued
medical therapy, sedentary life style, and avoidance of high
stress situations that could precipitate her cardiac asthma."
In December 1992 and April and August 1993, Bahler
recertified Pinto's total disability. In the 1993 certification,
Bahler indicated that Pinto could not stand for long, could
not lift ten pound objects, could not be exposed to stress,
and should remain sedentary.

In October 1992, Reliance Standard sent Pinto a letter
granting her application for long term benefits. It advised
her that periodic medical certification would be required,
and requested that she promptly apply for social security
disability benefits. In December 1992, Pinto certified, in
connection with a disability review by Reliance Standard,
that she had not worked in any capacity, and that she
remained under treatment. She noted that she had been
hospitalized for two days in November of that year, when
she had been treated for bronchial asthma and acute
bronchitis. In April 1993, Pinto recertified that she was
disabled and represented that she had recently been
treated by two physicians.

Pinto also applied for Social Security Disability benefits.
In May 1993, the Social Security Administration (SSA)
denied Pinto's application, finding her not disabled. She
forwarded a copy of the determination letter to Reliance
Standard. Reliance Standard strongly encouraged Pinto to
appeal the adverse decision, which she did. In September
1993, SSA denied Pinto's appeal, concluding that her
asthma attacks could be controlled by medication, that her
rheumatic heart disease was stable, and that her shortness
of breath did not preclude work. One month later, Reliance
Standard requested that Dr. Bahler relay to it the specific
limitations that prevented Pinto from being an accounting
clerk. Dr. Bahler responded by referring to his previous
reports.

                               5
In November 1993, Reliance Standard terminated Pinto's
benefits. Its denial letter cited the SSA denial, and the
language tracked that of the denial.1 It also asserted: "Your
physician has stated that you can perform the duties of a
sedentary occupation within your present physical
limitations and restrictions." Reliance Standard appeared to
read Dr. Bahler's assertion that Pinto needed to maintain a
sedentary lifestyle as a statement that she could perform
sedentary work, and the described limitations to define
absolutely the limits of her potential (i.e., it apparently read
his statement that she could not lift ten pound items to
imply that she could regularly lift less weighty items).

Pinto requested a review of this decision. Dr. Bahler
wrote Reliance Standard in January 1994, explaining
Pinto's medical history and affirming his determination that
Pinto's "only viable option at the present time is continued
medical therapy, sedentary life style, and avoidance of high
stress situations that could precipitate her cardiac asthma.
. . . Pinto is totally and permanently disabled at this time
and therefore is unfit to perform any task or job in the
labor market." Then, in February 1994, the SSA reversed
its earlier denial and awarded her benefits. It determined
that she had a severe cardiac condition and that she was
too disabled to perform any job for which she had the
requisite skills.
_________________________________________________________________

1. The SSA denial stated:

       * You have asthma. However, these attacks can be c ontrolled with
       prescribed medication.

       * You have experienced heart problems. However, fo llowing a
       recovery period, you are able to work.

       * The evidence shows no other condition which sign ificantly limits
       your ability to work.

The Reliance Standard revocation letter stated:

       1) if you have asthma it can be controlled by medi cation,

       2) your heart condition is stable,

       3) your shortness of breath according to the Socia l Security
       Administration Denial, the tests show you are still able to work.

                               6
In the early summer of 1994, Reliance Standard retained
Dr. Martin I. Rosenthal, an internist, who examined Pinto
and reviewed Dr. Bahler's echocardiogram and cardiac
catheterization studies. He recommended pulmonary
testing and, after some initial ambivalence, concluded that
Pinto was not totally disabled. In November (following
Rosenthal's suggestion), Dr. Robert A. Capone, a
pulmonologist, examined Pinto, and initially declined to
decide whether she had a disabling reactive airways disease
because he thought therapeutic intervention might make a
difference. However, when pressed by Reliance Standard in
December (no therapeutic interaction had occurred between
November and December) he indicated that he did not
think that any respiratory condition prohibited her from
working, and, while noting the inadequacy of the available
data, concluded that he did "not believe that there is a
strong likelihood of reactive airways disease."

After Dr. Rosenthal's examination but before Dr.
Capone's, a Reliance Standard staff worker, in an internal
document, recommended reestablishing Pinto's benefits
pending the pulmonary testing. However, Reliance Standard
decided to do the opposite, holding the resumption of
benefits until the pulmonary testing. It is noteworthy that
the same staff worker had similarly recommended a
resumption of benefits in April because she thought
Reliance Standard had misunderstood Dr. Bahler's
assertion that Pinto must be sedentary to mean sedentary
work instead of sedentary lifestyle. In February 1995,
Reliance Standard rejected Pinto's appeal of its earlier
benefits reversal. It wrote her that "Dr. Bahler, Dr.
Rosenthal, and Dr. Capone have all indicated you retain the
physical functional capacity to engage in sedentary work.
The subsequent correlation of this activity level with the
material duties of your occupation substantiated that you
are capable of performing the material duties of your
regular occupation."

In January 1996, Pinto was examined by Dr. Rowland D.
Goodman, II, a heart and chest specialist who shares
offices with Dr. Bahler. Dr. Goodman reviewed her medical
records, examined her, and concluded that she suffered
from rheumatic heart disease with mitral stenosis and that

                                7
she was totally disabled. Goodman's report was unavailable
to Reliance Standard when making the initial decision, but
was used when making the decision in question here (after
the remand discussed infra).

In July 1996, Pinto filed the present ERISA suit in the
District Court under 29 U.S.C. S 1132(a)(1)(b), which allows
for a beneficiary to sue for "benefits due to him under the
terms of the plan." In January 1997, Reliance Standard
moved for summary judgment on the grounds that the
decision was discretionary, and not arbitrary and
capricious. The District Court agreed and granted the
motion. Pinto appealed. In an unpublished opinion (hence
non-precedential under our Internal Operating Procedures
S 5.3), we vacated the judgment and remanded, see Pinto v.
Reliance Std. Life Ins. Co., 156 F.3d 1225 (Table) (3d Cir.
May 28, 1998) (No. 97-5297), concluding that Reliance
Standard had apparently misinterpreted Dr. Bahler's
diagnosis when it stated that "all" of the physicians who
had examined her determined that Pinto had the
"functional capacity to engage in sedentary work." Given
the disconnect between this interpretation of Dr. Bahler's
diagnosis and his own repeated conclusion that Pinto was
unfit for any work, we stated that

       we cannot confidently rule that Reliance's decision was
       not arbitrary and capricious. We are unsure whether
       Reliance properly reviewed Dr. Bahler's reports or
       whether it misinterpreted his conclusions. Moreover,
       we do not know whether it would have made the same
       decision based solely on Dr. Rosenthal and Dr.
       Capone's evaluations. Therefore, these are matters that
       will require reconsideration by Reliance.

We also briefly discussed the problem of the standard of
review for situations where an insurer administers benefits
out of its own funds:

       We are not convinced that such a dual role presents
       the type of conflict of interest that would warrant
       discarding the arbitrary and capricious standard, but
       in any event under Firestone such a conflict would
       merely be a factor in the court's determination whether
       there has been an abuse of discretion. . . . We . . .

                                8
       review Reliance's determination under an arbitrary and
       capricious standard, taking into account the
       circumstances.

Reliance Standard dutifully reconsidered, and affirmed its
earlier denial. In August, an Assistant Manager of Quality
Review, Richard D. Walsh, issued a letter explaining the
rejection. The letter opined that, although Dr. Bahler had
stated that Pinto should not work, the limitations that he
put on her activity would not preclude her from working.
Walsh cited the United States Department of Labor's The
Revised Handbook for Analyzing Jobs as evidence that the
job of accounting clerk is "sedentary." He also cited the
conclusions of Drs. Rosenthal and Capone. As regards Dr.
Goodman's examination, Walsh stated that he had
"provided no new findings, restrictions, or limitations to
substantiate his conclusion," and commented on the fact
that he shares a mailing address with Dr. Bahler, implicitly
suggesting that Goodman's conclusions might be biased by
his association with Dr. Bahler. Walsh did not mention
Pinto's successful appeal of the Social Security denial.
Although there is no record evidence that Reliance
Standard knew of Social Security's reversal, it must have
known of it at least after the case was remanded as it is
mentioned in the previous panel's opinion.

On remand, the District Court again granted summary
judgment for Reliance Standard. Although it purported to
apply the arbitrary and capricious standard "shaped by the
circumstances of the inherent conflict of interest," it
proceeded to explain that "an administrator's decision will
only be overturned if it is without reason, unsupported by
substantial evidence or erroneous as a matter of law." Pinto
v. Reliance Std. Life Ins. Co., No 96-3508 (D.N.J. Dec. 12,
1998). The court concluded that there was not an issue of
material fact as to whether Reliance Standard had acted
arbitrarily and capriciously. Of the rejection of Dr. Bahler's
conclusions in favor of those of its own doctors, the court
stated that "[s]uch a determination based on independent
medical evaluations is not arbitrary and capricious, even
when Reliance Standard's dual role as both insurer and
decisionmaker is taken into account." Id. This appeal
followed. We have jurisdiction pursuant to 28 U.S.C.
S 1291, and our standard of review is plenary.

                               9
II. Reviewing Conflicted Decisions

A. Firestone

Our analysis of the issue in this case must begin with
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).
Prior to Firestone, courts had adopted different approaches
to the conflict of interest problem under ERISA, many
choosing to vary the degree of deference they gave ERISA
benefits administrators operating under a conflict of
interest. See Brown v. Blue Cross & Blue Shield of Ala., 898
F.2d 1556, 1560 (11th Cir. 1990) (collecting cases).
However, as one court of appeals has stated, "the Supreme
Court [in Firestone] . . . swept the standard of review board
clear." De Nobel v. Vitro Corp., 885 F.2d 1180, 1185 (4th
Cir. 1989).

Firestone began when a group of plaintiffs sued their
employer, who was also the ERISA plan administrator, for
wrongfully terminating welfare and pension benefits. A
panel of this court considered the relevant principles of
trust law, with special attention to the rationales for the
general deference given to impartial trustees, concluding
that those reasons carry little or no force when trustees are
in a position to profit from denying trust benefits. See
Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134, 145 (3d
Cir. 1987). We also considered the incentives and actual
relationship of the parties, and the fact that the benefit
plan was contracted for and its terms subject to
negotiation. Id. We concluded that trust and contract
principles both dictated that our review of the conflicted
benefits denial should be de novo, giving no deference to
either the administrator's or participants' interpretations.
We essentially applied "the principles governing
construction of contracts between parties bargaining at
arms length." Id.

The Supreme Court affirmed the specific holding in that
case--that the administrator's decision should be reviewed
de novo, giving no deference to either party--but used a
significantly different rationale. The Court began by stating
that interpretation of ERISA should be governed by the
common law of trusts, and then grounded the de novo

                               10
review on the fact that the plan gave the administrator no
discretion to interpret the plan. See Firestone , 489 U.S. at
111. The Court observed that trust principles dictated that
fiduciaries should be given no deference when making non-
discretionary decisions, see 489 U.S. at 111; see also supra
note 2. It then turned to a brief discussion pertinent to this
case, noting that "a deferential standard of review [is]
appropriate when a trustee exercises discretionary powers,"2
but that "if a benefit plan gives discretion to an
administrator or fiduciary who is operating under a conflict
of interest, that conflict must be weighed as a "factor in
determining whether there is an abuse of discretion." Id. at
115 (quoting Restatement (Second) of TrustsS 187, cmt. d
(1959)) (emphasis added). Since Firestone, courts have
struggled to give effect to this delphic statement, and to
determine both what constitutes a conflict of interest and
how a conflict should affect the scrutiny of an
administrator's decision to deny benefits. The next two
Sections discuss these problems as applied to an
independent insurer who is empowered with discretion to
determine who deserves benefits under a plan which it
funds.

B. What Constitutes A Conflict?

Employers typically structure the relationship of ERISA
plan administration, interpretation, and funding in one of
three ways. First, the employer may fund a plan and pay an
independent third party to interpret the plan and make
plan benefits determinations. Second, the employer may
_________________________________________________________________

2. In an article entitled The Supreme Court Flunks Trusts, 1990 S. Ct.
Rev. 207, Professor John H. Langbein argues that the Supreme Court's
correlation of arbitrary and capricious review with discretionary
decisions and de novo review with nondiscretionary decisions has no
foundation in the common law of trusts. See id. at 219. He submits that
in our opinion in Bruch we were "following trust-law tradition in
scrutinizing fiduciary conduct more closely when conflict of interest is
suspected." Id. at 217. Langbein correctly predicted that companies
would quickly redraft their plans to confer unambiguous grants of
discretion so as to garner deferential review, see id. at 221, and also
predicted that the problems of how courts should deal with conflicted
fiduciaries would resurface, see id. at 222.

                                  11
establish a plan, ensure its liquidity, and create an internal
benefits committee vested with the discretion to interpret
the plan's terms and administer benefits. Third, the
employer may pay an independent insurance company to
fund, interpret, and administer a plan. While we have
previously held that the first two arrangements do not, in
themselves, typically constitute the kind of conflict of
interest mentioned in Firestone, see infra Section E, today
we address the third arrangement for the first time,
concluding that it generally presents a conflict and thus
invites a heightened standard of review.3 Our sister circuits
that have examined this issue have fallen into two basic
camps. Most hold that the nature of the relationship
between the funds, the decision, and the beneficiary invites
self-dealing and therefore requires closer scrutiny, but
others allow heightened review only if there is independent
evidence that the conflict infected a particular benefits
denial.

C. Courts of Appeals Holding that the Independent
       Insurance Company Administrator is Operating
       under an Inherent Conflict

The Eleventh Circuit was the first to conclude that an
insurance company acts under a "strong conflict of
interest" when both administering and paying out benefits
under an ERISA plan. Brown v. Blue Cross & Blue Shield of
Ala., 898 F.2d 1556, 1561 (11th Cir. 1990). It held that
there is

       an inherent conflict between the roles assumed by an
       insurance company that administers claims under a
       policy it issued. . . . Because an insurance company
_________________________________________________________________

3. There may be, of course, variations on each of these arrangements.
For example, an employer may pay out of a fund fixed by actuarial
tables, which the employer only pays into, but cannot withdraw from, or
one from which the employer may withdraw unused assets. An
insurance company that administers funds might charge the employing
company a fixed fee, or the fee could be closely dependent on the
benefits payouts. Any such difference might affect a district court's
assessment of the incentives of an administrator/insurer and therefore
affect the nature of its review.

                               12
       pays out to beneficiaries from its own assets rather
       than the assets of a trust, its fiduciary role lies in
       perpetual conflict with its profit-making role as a
       business. Id. at 1561 (internal quotations omitted). The
       Brown court noted that a structural conflict of interest
       may unconsciously encourage even a principled
       fiduciary to make decisions that are not solely in the
       interest of the beneficiary. See id. at 1565. Under this
       view, although the arrangement is not illegal or
       inappropriate under ERISA, it warrants heightened
       scrutiny. "[J]udicial hesitation to inquire into the
       fiduciary's motives will leave the beneficiaries
       unprotected unless the existence of a substantial
       conflicting interest shifts the burden to thefiduciary to
       demonstrate that its decision is not infected with self-
       interest." Id.

In Doe v. Group Hospitalization & Med. Servs. , 3 F.3d 80
(4th Cir. 1993), the Fourth Circuit, like the Eleventh,
concluded that a "conflict flows inherently from the nature
of the relationship" when an employer contracts with an
insurance company to provide and determine ERISA
benefits. Id. at 86.

       Undoubtedly, [Blue Cross's] profit from the insurance
       contract depends on whether the claims allowed exceed
       the assumed risks. To the extent that Blue Cross has
       discretion to avoid paying claims, it thereby promotes
       the potential for its own profit. . . . Even the most
       careful and sensitive fiduciary in those circumstances
       may unconsciously favor its profit interest over the
       interests of the plan, leaving beneficiaries less
       protected than when the trustee acts without self-
       interest and solely for the benefit of the plan.

Id. at 86-87. See also Bedrick v. Travelers Ins. Co., 93 F.3d
149, 154 (4th Cir. 1996) (citing Doe). The Fifth Circuit, in
a recent en banc discussion, also affirmed a commitment to
heightened scrutiny of decisions by an insurer who
administers benefits from its own funds. In Vega v. Nat'l
Life Ins. Serv., Inc., 188 F.3d 287 (5th Cir. 1999), the plan
administrator insurance company was a subsidiary of the
plan insurer (the court treated the interests as aligned), and
while the court recognized that if the company denied

                               13
meritorious claims, its "reputation may suffer as a result
and others may be less willing to enter into contracts where
the company has discretion to decide claims," id. at 295
n.8, it concluded that these incentives did not outweigh the
strong incentive to self-deal, see id. at 295-98. The Tenth
Circuit and Eighth Circuits have also concluded that when
an insurance company acts as the administrator for
benefits coming from its own funds, the conflict warrants a
more searching review. See Armstrong v. Aetna Life Ins. Co.,
128 F.3d 1263 (8th Cir. 1997); Pitman v. Blue Cross & Blue
Shield of Okla., 24 F.3d 118, 120-22 (10th Cir. 1994) (citing
Doe).

D. Courts of Appeals Holding that the Independent
       Insurance Company Structural Relationship Does
       not Give Rise to a Conflict That Should Affect
       Standard of Review

The Seventh Circuit requires a specific demonstration
that bias affected a decision before modifying the arbitrary
and capricious standard when reviewing the decisions of an
insurance company in this posture. See Mers v. Marriott
Internat'l Group Accidental Death and Dismemberment Plan,
144 F.3d 1014 (7th Cir. 1998). In Mers, the benefit plan
was insured by the American International Group (AIG), an
independent insurer, that also was charged with
interpreting the plan. The Mers court considered, and
rejected, Mers's argument that less deference should be
given to AIG's decision because it was operating under a
conflict of interest. "We presume," it held,"that a fiduciary
is acting neutrally unless a claimant shows by providing
specific evidence of actual bias that there is a significant
conflict." Id. at 1020. Relying on what it styled as law and
economics principles, the court concluded that the
requested payout in that case was slight compared to the
company's bottom line, and that it is in a company's best
long-term interest to award meritorious claims so that
employees and employers will think and speak well of it,
and seek business with it. Id. at 1021. Neutrality, opined
the panel, begets business success, while self-dealing hurts
it. Id. Therefore, a claimant bears the burden of providing
specific evidence of a "significant conflict" (without

                               14
suggesting what that would entail), or specific evidence of
bias. Id. at 1020.

The Second Circuit, like the Seventh, requires evidence
that a conflict actually infected the decision before it uses
anything but the most deferential review of a fiduciary's
determination. See Whitney v. Empire Blue Cross & Blue
Shield, 106 F.3d 475 (2d Cir. 1997); Sullivan v. LTV
Aerospace & Defense Co., 82 F.3d 1251, 1255-56 (2d Cir.
1996); Pagan v. NYNEX Pension Plan, 52 F.3d 438, 440-44
(2d Cir. 1995). It reasons not from effect but language,
concluding that Firestone simply does not require anything
but arbitrary and capricious review unless the plaintiff
demonstrates how a conflict biased a fiduciary's decision.
See Pagan, 52 F.3d at 440-44. However, it is noteworthy
that a recent panel of the Second Circuit, in an opinion by
Judge Oakes joined by Judges Newman and Winter, has
expressed dissatisfaction with Pagan and Whitney. While
recognizing that it was bound by precedent, it stated that
"[w]e have numerous concerns regarding Pagan, which we
believe reduces Firestone's ruling as to the impact of a
conflict of interest." DeFelice v. American Int'l Life Assur. Co.
of New York, 112 F.3d 61, 66 n. 3 (2d Cir. 1997).

E. Courts of Appeals in Which the Law is Unclear

The Ninth and Sixth Circuits appear to be unsettled on
this issue. The Ninth Circuit sometimes requires something
more than the fact that an insurance company administers
benefits out of its own funds to trigger heightened review.
In Atwood v. Newmont Gold, 45 F.3d 1317, 1322-23 (9th
Cir. 1995), the court explained that the traditional abuse of
discretion standard applies even in conflicted situations
unless there is specific evidence that the conflict infected
the process. In Snow v. Standard Ins. Co., 87 F.3d 327, 331
(9th Cir. 1996), the court followed Atwood when an
insurance company both funded and administered an
ERISA plan, declining to apply heightened review because
there was no evidence that the "formal conflict led to a true
conflict." 87 F.3d at 331. See also Lang v. Long-term
Disability Plan of Sponsor Applied Remote Tech., 125 F.3d
794 (9th Cir. 1997) (only applying heightened review
because there were independent indications that the

                               15
conflict biased the decisionmaking). On the other hand, in
Tremain v. Bell Indus., Inc., 196 F.3d 970, 976 (9th Cir.
1999), the court stated that "less deferential" arbitrary and
capricious review was in order when the plan administrator
was also the insurer. Cf. Kearney v. Standard Ins. Co., 175
F.3d 1084, 1090 n.2 (9th Cir. 1999) (Because we conclude
that Kearney is entitled to de novo review, which gives no
deference at all to Standard's decision, we do not reach the
question whether he would be entitled to less deferential
review were he entitled only to review for abuse of
discretion.").

The Sixth Circuit's precedent is also unclear. In Miller v.
Metropolitan Life Ins., 925 F.2d 979, 984-85 (6th Cir. 1991),
the court took the insurance company's conflict of interest
into account in the court's review of the insurance
company's decision as an administrator, therefore applying
a heightened arbitrary and capricious standard. On the
other hand, in Yeager v. Reliance Standard, 88 F.3d 376,
381-82 (6th Cir. 1996), the court did not consider the
conflicted role of the insurance company when applying the
arbitrary and capricious standard.

F. The Law of this Circuit

We have not previously addressed the precise issue
involved in this case. There is, however, some cognate
discussion of the standard of review in cases where an
employer both funded and administered a plan. In thefirst
such case, Nazay v. Miller, 949 F.2d 1323 (3d Cir. 1991),
we applied the unmodified arbitrary and capricious
standard in reviewing a denial of benefits. While implicitly
recognizing that there might be a risk of opportunism, we
concluded that this alone did not constitute evidence of a
conflict of interest, in part because the employer"had
incentives to avoid the loss of morale and higher wage
demands that could result from denials of benefits." Id. at
1335. We also commented on the fact that the denial was
individual, instead of class-based, implying that when more
money was at stake--i.e., when a large class of beneficiaries
requested and was denied benefits--the potential conflict
might invite closer scrutiny. See id.

                               16
In the same year, we decided Kotrosits v. GATX Corp.
Non-contributory Pension Plan for Salaried Employees , 970
F.2d 1165, 1173 (3d Cir. 1992), in which a benefits
committee within a company administered the company's
funded plan. We concluded that the unmodified arbitrary
and capricious review was appropriate in the absence of
specific, tangible evidence that the structural relationship
had tainted the review process. Though we held that a
plaintiff urging that we disregard the grant of discretion in
a plan "has the burden of showing some reason to believe
the exercise of discretion has been tainted," we stated that
this burden could be met "where such a party shows the
kind of conflict of interest that could realistically be
expected to bias the decision makers." Id. at 1173. If such
a conflict were present, we suggested, "[Firestone] counsels
in favor of withholding deference." Id. 4 By way of explaining
why we presumed that the fiduciary was not influenced by
self-interest in Kotrosits, we compared the assets of the
plan (which were substantial) to the potential costs of
paying out to the beneficiaries (which were also substantial,
but less so), and concluded that it was unlikely that the
company would have to replenish the plan. See id. "[T]he
record shows no direct impact on the Plan sponsor and
only a possibility of future indirect consequences to it." Id.

In Abnathya v. Hoffman-LaRoche, Inc., 2 F.3d 40 (3d Cir.
1993), we recognized that "some degree of conflict inevitably
exists where an employer acts as the administrator of its
own employee benefits plan," but held that the conflict in
that case was insufficiently compelling to "require special
attention or a more stringent standard of review under
[Firestone]." Id. at 45 n.5. We noted that the company's
contributions to the fund were fixed such that it"incurs no
direct expense as a result of the allowance of benefits, nor
does it benefit directly from the denial or discontinuation of
benefits." Id. See also Mitchell v. Eastman Kodak, 113 F.3d
433, 437 n.4 (3d Cir. 1997) (following the reasoning and
language of Abnathya).

While Heasley v. Belden & Blake Corp., 2 F.3d 1249 (3d
_________________________________________________________________

4. The Fifth Circuit has taken this as evidence that we follow the
Eleventh Circuit. See Vega, 188 F.3d at 297

                               17
Cir. 1993) is not directly on point, it demonstrates an
openness to using heightened scrutiny when a party
administers benefits out of its own funds. In Heasley, we
reviewed de novo whether an ERISA plan term
"experimental procedure" applied to a liver transplant. We
recognized that the apparent ambiguity of this term might
be cured if the plan provided for a party to interpret it, but
noted that under such a scheme, the interpretation should
be allocated to an independent party, given the threat of
self-dealing. See id. at 1260-61 n.12. This, we said, followed
the "general and sensible rule that courts scrutinize more
closely decisions by plan administrators acting under a
conflict of interest." Id.

The final opinion that bears mention is our earlier
unpublished (and therefore non-precedential) opinion in
this very case, Pinto v. Reliance Std. Life Ins. Co., 156 F.3d
1225 (Table) (3d Cir. May 28, 1998) (No. 97-5297). In that
opinion we stated as follows:

        We are not convinced that such a dual role presents
       the type of conflict of interest that would warrant
       discarding the arbitrary and capricious standard, but
       in any event under Firestone such a conflict would
       merely be a factor in the court's determination whether
       there has been an abuse of discretion.

        An issue similar to that before us here was
       considered by our sister circuits in Brown v. Blue Cross
       and Blue Shield of Alabama, Inc., 898 F.2d 1556 (11th
       Cir. 1990), and Miller v. Metropolitan Life Insurance
       Corp., 925 F.2d 979 (6th Cir. 1991). The Miller court,
       following Brown, held that in such a circumstance
       although the insurance company's "fiduciary role lies
       in perpetual conflict with its profit making role as a
       business, and the conflict of interest is substantial . . .
       the abuse of discretion or arbitrary and capricious
       standard still applies, but application of the standard
       should be shaped by the circumstances of the inherent
       conflict of interest." Miller, 925 F.2d at 984. We too will
       apply this standard and review Reliance's
       determination under an arbitrary and capricious
       standard, taking into account the circumstances.

                               18
        Under the arbitrary and capricious standard, an
       administrator's decision will only be overturned if it is
       "without reason, unsupported by substantial evidence
       or erroneous as a matter of law. . . . the court is not
       free to substitute its own judgment for that of the
       defendants in determining eligibility for plan benefits."
       It is important to recognize that ERISA does not make
       the judges the decisionmakers. It merely assures that
       the appropriate procedure is followed.

The opinion is somewhat delphic. But the citations to
Miller, see supra Section II.E, infra Section IV, (and also to
Brown, see supra Section II.C, infra Section IV), both of
which consider an insurer making decisions out of its own
funds to be operating under an inherent conflict (in
contrast to citations of cases of a contrary stripe), suggest
that a heightened degree of scrutiny is required in this
situation, an approach essentially the same as that we
adopt in this opinion, but which we refine and clarify. See
Part IV, adopting the "sliding scale" approach endorsed by
a majority of our sister circuits.5

III. Is Heightened Review Required When an
       Insurance Company Both Funds and Administers
       Benefits?

Informed by our canvass of the jurisprudence, we are
persuaded that heightened scrutiny is required when an
insurance company is both plan administrator and funder.
We find especially persuasive the analysis of the Fourth,
Fifth, Eighth, Tenth and Eleventh Circuits, and their
conclusion that potential self-dealing warrants that
fiduciary insurer's decisions be closely inspected. We do not
denigrate the Seventh Circuit's suggestion that if a carrier
denied clearly meritorious claims on a regular basis and
_________________________________________________________________

5. The purpose of the remand was to permit Reliance Standard to revisit
its denial of benefits, because the panel thought that Reliance Standard
had misunderstood Dr. Bahler's assessment of Pinto's capabilities.
Therefore, the prior panel did not need to precisely assess the structural
relationship, nor determine a method for shaping our arbitrary and
capricious review when there is a conflict. Both issues are now squarely
before us.

                               19
became notoriously unfriendly to claimants, unions and
employees might protest and demand that their employer
switch to a different insurance plan. Nor do we think that
most insurance companies are unmoved by the importance
of building a strong reputation and competing successfully
for the business of administering plans. An insurance
company "can hardly sell policies if it is too severe in
administering them." Doe v. Travelers Ins. Co., 167 F.3d 53,
57 (1st Cir. 1999). However, ERISA litigation generally
arises only in close cases, and there would seem to be
insufficient incentive for the carrier to treat borderline
cases (unlikely to become causes celebres) with the level of
attentiveness and solicitude that Congress imagined when
it created ERISA "fiduciaries." Rather, insurance carriers
have an active incentive to deny close claims in order to
keep costs down and keep themselves competitive so that
companies will choose to use them as their insurers, an
economic consideration overlooked by the Seventh Circuit.

To amplify, while in a perfect world, employees might
pressure their companies to switch from self-dealing
insurers, there are likely to be problems of imperfect
information and information flow. Employees typically do
not have access to information about claim-denying by
insurance companies, and the relationship between
employees and insurance companies is quite attenuated; so
long as obviously meritorious claims are well-handled, it is
unlikely that an insurance company's business will suffer
because of its client's employees' dissatisfaction.
Additionally, many claims for benefits are made after
individuals have left active employment and are seeking
pension or disability benefits. Details about the handling of
those claims, whether responsible or irresponsible, are
unlikely to seep into the collective knowledge of the still-
active employees. If Pinto's claim is denied, few at Rhone-
Poulenc will learn of it, and Reliance Standard will have
little motive to heed the economic advice of the Seventh
Circuit that "it is a poor business decision to resist paying
meritorious claims for benefits." Mers, 144 F.3d at 1020.

We also observe that the typical employer-funded pension
plan is set up to be actuarially grounded, with the company
making fixed contributions to the pension fund, and a

                               20
provision requiring that the money paid into the fund may
be used only for maintaining the fund and paying out
pensions. As we explained in Abnathya and Mitchell, the
employer in such a circumstance "incurs no direct expense
as a result of the allowance of benefits, nor does it benefit
directly from the denial or discontinuation of benefits."
Abnathya, 2 F.3d at 45 n.5; Mitchell, 113. F.3d at 437 n.4.
In contrast, although there is nothing in the record
indicating the precise nature of Reliance Standard's
internal structure, the typical insurance company is
structured such that its profits are directly affected by the
claims it pays out and those it denies.6

We recognize that the preceding section involves implicit
assumptions about economic behavior, but such
assumptions have become necessary in the post-Firestone
era as we, and other courts, must somehow determine
when a conflict warrants close scrutiny. Inasmuch as we
are making such assumptions, however, they seem less
exceptional than those of the Seventh Circuit, which, we
believe, has an overly optimistic view of the flow of
information and the sophistication of employees.
Furthermore, while all circuits that have considered these
questions appear to agree that some level of conflict may be
unavoidable and not every conflict will heighten the level of
scrutiny, the Seventh and Second Circuits alone require
evidence of actual self dealing, and hold that the nature of
the relationship itself can never, or almost never, affect the
standard of review. Needless to say, Firestone contains no
such requirement, and its use of the word "conflict" instead
of "direct evidence of bias" counsels against the most stern
reading. As we opined in Kotrosits, the Firestone court
appears, by recognizing the import of a conflict, to have
"implicitly adopted the position . . . that, where the
_________________________________________________________________

6. We do not, of course, pretend to establish an absolute, per se rule,
recognizing that different relationships between the parties could effect
a
different result. Cf. Metropolitan Life Ins. Co. v. Potter, 992 F. Supp.
717
(D.N.J. 1998) ("[A] conflict may arguably be ameliorated where, as here,
the plan is experience-rated because the premiums charged to the
employer are adjusted annually based on claims paid the previous year
and thus the fiduciary's incentive to deny claims to increase profits is
lessened, if not eliminated.").

                               21
claimant demonstrates that it would be inequitable to defer
to the plan administrator, stricter scrutiny of his decision is
in order." 970 F.2d at 1172. Finally, this is not a scenario
where a "smoking gun" is likely to surface, and direct
evidence of a conflict is rarely likely to appear in any plan
administrator's decision. Our reading, we believe, infuses at
least some meaning into the Firestone regime.

Finally, the unique role of insurance companies within
ERISA supports our position. ERISA generally requires that
assets of a benefits plan be "held in trust by one or more
trustees." 29 U.S.C. S 1103(a). However, this requirement is
excepted for insurance companies; the requirements that
the assets be held in a trust does not apply "to assets of a
plan which consist of insurance contracts or policies issued
by an insurance company qualified to do business in a
State." 29 U.S.C. S 1103(b)(1). Therefore,"[i]nasmuch as
`the basis for the deferential standard for review in the first
place was the trust nature of most ERISA plans,' the most
important reason for deferential review is lacking." Brown v.
Blue Cross and Blue Shield of Ala., 898 F.2d 1556, 1561
(11th Cir. 1990) (quoting Moon v. American Home
Assurance Co., 888 F.2d 86, 89 (11th Cir. 1989)).

Our own case law in the general area, set forth in Section
II.E, supports our conclusion. These opinions are self-
consciously laden with negative pregnants, suggesting that
structural bias could heighten the review. For example, we
noted that the defendants in those cases did not "incur" a
"direct expense as a result of the allowance of benefits," or
"benefit directly from the denial or discontinuation of
benefits," Abnathya, 2 F.3d at 45 n.5; Mitchell, 113 F.3d at
437 n.4, implying that a company that did profit directly
would be subject to a more stringent standard. Likewise,
the most deferential review was appropriate when the
employer had "incentives to avoid the loss of morale and
higher wage demands that could result from denials of
benefits," Nazay, 949 F.2d at 1335, and there was only a
"possibility of future indirect consequences to it," Kotrostis,
970 F.2d at 1173. By negative implication, a heightened
standard of review would appear to be appropriate when a
plan funder like an insurance company "incurs a direct
expense," the consequences to it are direct and

                               22
contemporary, and, while it has incentives to maintain good
business relationships, it lacks the incentive to"avoid the
loss of morale and higher wage demands that result from a
denial of benefits." We are also supported by the fact that
the great bulk of district courts in this Circuit have
interpreted this precedent as mandating heightened
scrutiny when the insurance company is the insurer and
makes determinations.7

For all the foregoing reasons, we believe that a higher
standard of review is required when reviewing benefits
denials of insurance companies paying ERISA benefits out
of their own funds.

IV. What Standard of Review?

The question remains, then, what should be the higher
standard of review? This secondary question is distinct
from the first: even those courts that find that there is no
conflict in the insurance company context have struggled
with how to incorporate a conflict--when theyfind one--
_________________________________________________________________

7. See Nolen v. Paul Revere Life Ins. Co., 32 F. Supp. 2d 211, 216 (E.D.
Pa. 1998) (the dual role requires a heightened standard); Morris v. Paul
Revere Ins. Group, 986 F. Supp. 872, 881-82 (D.N.J. 1997) (same); Rizzo
v. Paul Revere Ins. Group, 925 F. Supp. 302, 309 (D.N.J. 1996) (same),
aff 'd, 111 F.3d 127 (3d Cir. 1997); Nave v. Fortis Bens. Ins. Co., No.
98-
3960, 1999 U.S. Dist. LEXIS 13382 (E.D.Pa. Aug. 25, 1999) ("Fortis's
dual role as the Plan's claims administrator and as the insurance
company which insures the benefits provided under the Plan certainly
creates a genuine or substantial conflict of interest."); Landau v.
Reliance
Std. Life Ins. Co., No. 98-903, 1999 U.S. Dist. LEXIS 3673 (E.D. Pa. Jan.
13, 1999) (following Brown); Sciarra v. Reliance Standard Life Ins. Co.,
No. 97-1363, 1998 U.S. Dist. LEXIS 13786 (E.D. Pa. Aug. 26, 1998)
("[Defendant's] dual role as administrator and insurer of its own plan
creates a conflict between its providing benefits to claimants and its own
financial status"); Perri v. Reliance Standard Life Ins. Co., No. 97-1369,
1997 U.S. Dist. LEXIS 12741 (E.D. Pa. Aug. 19, 1997) ("Reliance
Standard's dual role as administrator and insurer of its own plan creates
a conflict between its providing benefits to claimants and its own
financial status."); cf. Marques v. Reliance Std. Life Ins. Co., 1999 U.S.
Dist. LEXIS 17406 (E.D. Pa. Nov. 1, 1999) ("[T]his Court finds it hard to
believe that there is not a conflict of interest when the defendant makes
benefit decisions and pays for benefits out of its own assets.").

                               23
into the framework of arbitrary and capricious review
mandated by Firestone. In Kotrosits v. GATX Corp. Non-
contributory Pension Plan for Salaried Employees, 970 F.2d
1165, 1173 (3d Cir. 1992) we stated that had a conflict
existed, Firestone "counsels in favor of withholding
deference." This suggests de novo review. On the other
hand, in Abnathya v. Hoffman-LaRoche, Inc., 2 F.3d 40, 45
n.5 (3d Cir. 1993) we suggested that the circumstances
might require "special attention or a more stringent
standard of review under Firestone." Again, we turn to the
other circuits, where we find three methods of dealing with
a conflict: burden shifting, de novo review, and the sliding
scale.

We begin with Brown v. Blue Cross & Blue Shield of Ala.,
898 F.2d 1556 (11th Cir. 1990), in which the Eleventh
Circuit turned to the common law of trusts to determine
the appropriate method for reviewing the conflicted
discretionary decisions of an insurance company. See 898
F.2d at 1564. It concluded that while an uninterested
fiduciary should receive a great deal of deference, common
law trust cases dictated that the highly conflicted one
should not; even potentially conflicted decisions were
closely scrutinized, in part to protect the particular
beneficiaries in a given case, and in part "to discourage
arrangements where a conflict arises." Id. at 1565. The
court determined that a beneficiary need only show a
substantial structural conflict of interest in order to shift
the burden to the fiduciary to demonstrate that the conflict
did not infect a benefits denial. See id. at 1566. It
announced the following rule:

       [W]hen a plan beneficiary demonstrates a substantial
       conflict of interest on the part of the fiduciary
       responsible for benefits determinations, the burden
       shifts to the fiduciary to prove that its interpretation of
       plan provision committed to its discretion was not
       tainted by self-interest. That is, a wrong but apparently
       reasonable interpretation is arbitrary and capricious if
       it advances the conflicting interest of the fiduciary at
       the expense of the affected beneficiary or beneficiaries
       unless the fiduciary justifies the interpretation on the
       ground of its benefit to the class of all participants and
       beneficiaries.

                               24
Id. at 1566-67.

To be sure, as a preliminary matter, the court mustfirst
determine that the fiduciary's decision was " `wrong' from
the perspective of de novo review." Id. at 1567 n.12. But
once shifted, the task of justifying the interpretation is by
no means insurmountable. If the fiduciary can demonstrate
a routine practice or give other plausible justifications--
such as the interests of other beneficiaries--deference may
be granted. "Even a conflicted fiduciary should receive
deference when it demonstrates that it is exercising
discretion among choices which reasonably may be
considered to be in the interests of the participants and
beneficiaries." Brown, 898 F.2d at 1568. The kind of
justification that is given as an example is an assertion,
supported by evidence, that an insurance company's
"interpretation of its policy is calculated to maximize the
benefits available to plan participants and beneficiaries at
a cost that the plan sponsor can afford (or will pay)." Id.
The legitimacy of such an assertion should be ascertained
by looking to, among other things, the consistency of the
practice, the reasonableness of the "reading" (in that case,
interpreting a term), and the internal consistency of the
plan with the proferred reading. See id.

The essence of the Eleventh Circuit's approach is that the
fiduciary should be accorded deference, but only when
deciding between options which are all in the best interest
of the beneficiary or beneficiaries. Insurance companies,
unlike the typical trustees, may be viewed with some
skepticism because of the primacy of their profit-making
function. Therefore, given the structural conflict, the
administrator of an insurance company funding an ERISA
plan has the burden of proving that beneficiary interests
motivated a decision which would be "wrong" under de
novo review. See id. A version of the Brown approach has
been followed by several panels of the Ninth Circuit. See,
e.g., Atwood v. Newmont Gold Co., Inc., 45 F.3d 1317, 1322
(9th Cir. 1995) (given material probative evidence of a
conflict, the burden is shifted to the denying company to
give a legitimate justification for a denial).

The Second Circuit, while stringent in requiring
particular evidence that a conflict infected the

                               25
decisionmaking process, uses de novo review once it credits
such evidence. See Sullivan v. LTV Aerospace & Defense
Co., 82 F.3d 1251, 1255-56 (2d Cir. 1996). Unlike the
Eleventh Circuit, the test outlined in Sullivan does not
include burden shifting. "If the court finds that the
administrator was in fact influenced by the conflict of
interest, the deference otherwise accorded the
administrator's decision drops away and the court
interprets the plan de novo." Id.

Other courts have rejected the shifting burden and
either/or models, and instead use a sliding scale approach,
according different degrees of deference depending on the
apparent seriousness of the conflict. According to the
Fourth Circuit, "the fiduciary decision will be entitled to
some deference, but this deference will be lessened to the
degree necessary to neutralize any untoward influence
resulting from the conflict." Doe v. Group Hospitalization &
Medical Services, 3 F.3d 80, 87 (4th Cir. 1993). Despite this
divergence from the Eleventh Circuit's burden shifting, we
read the Doe court as engaging in a highly demanding
exercise when it applies this sliding scale, "review[ing] the
merits of the interpretation to determine whether it is
consistent with an exercise of discretion by a fiduciary
acting free of the interests that conflict with those of the
beneficiaries." Id.

The Fourth Circuit's sliding scale approach has been
adopted by several other courts. See Vega v. National Life
Ins. Service, Inc., 188 F.3d 287, 296 (5th Cir. 1999) (en
banc) (using the sliding scale approach); Chambers v.
Family Health Plan Corp., 100 F.3d 818 (10th Cir. 1996)
("[T]he arbitrary and capricious standard is sufficiently
flexible to allow a reviewing court to adjust for the
circumstances alleged, such as trustee bias in favor of a
third-party or self-dealing by the trustee."); Miller v.
Metropolitan Life Ins. Co., 925 F.2d 979, 984 (6th Cir. 1991)
(the arbitrary and capricious standard is "shaped" by the
circumstances when there is a conflict of interest). Despite
a feint in the direction of adopting the Brown approach, see
Armstrong v. Aetna Life Ins. Co., 128 F.3d 1263, 1265 (8th
Cir. 1997) (holding that the "perpetual conflict" which exists
when an insurer administers benefits from its own plan

                               26
warrants a de novo standard of review), the Eighth Circuit
has settled on the sliding scale. See Woo v. Deluxe Corp.,
144 F. 3d 1157, 1165 (8th Cir. 1998) (explicitly adopting
sliding scale). The First Circuit uses something like the
sliding scale, testing a decision by measuring its
"reasonableness" in the context it was made, which
necessarily includes an awareness of the effects of the
decision on the parties. Doe v. Travelers Ins. Co., 167 F.3d
53, 57 (1st Cir. 1999). Reasonableness, notes that court,
"has substantial bite itself." Id.

We adopt the approach of the sliding scale cases. That
approach allows each case to be examined on its facts. The
court may take into account the sophistication of the
parties, the information accessible to the parties, and the
exact financial arrangement between the insurer and the
company. For example, a court can consider whether the
insurance contract is fixed for a term of years or changes
annually, and whether the fee paid by the company is
modified if there are especially large outlays of capital by
the insurer.

Another factor to be considered is the current status of
the fiduciary. Our previous cases, discussed supra Section
II.F, which hold that an employer fiduciary is not conflicted
generally assume that the company is stable and will act as
a repeat player: The presumed desire to maintain employee
satisfaction is based on this premise. When companies are
breaking up, or laying off a significant percentage of their
employees, or moving all their operations, these incentives
diminish significantly. See Langbein, supra note 2, at 216
("The employer's reputational interest is not likely to be
effective when the long term relationship between the firm
and the workers is dissolving, as in a plant closing or in a
corporate restructuring.").

Furthermore, the sliding scale approach better adheres to
Firestone's dictate that a conflict should be considered as a
"factor" in applying the arbitrary and capricious standard.
489 U.S. at 115. Following Firestone to the Restatement of
Trusts would counsel that a conflict of interest requires
tighter review, but not necessarily a shifted burden, when
the fiduciary is conflicted. "In the determination of the
question whether the trustee in the exercise of a power is

                               27
acting from an improper motive the fact that the trustee
has an interest conflicting with that of the beneficiary is to
be considered." Restatement (Second) of Trusts S 187, cmt.
g (emphasis added). Comment (d) lists several factors,
including conflict of financial interest, to examine whether
there is an abuse of discretion, stating that the factors
"may be relevant" and including "the existence or
nonexistence of an interest in the trustee conflicting with
that of the beneficiaries." We think the best way to
"consider" these potentially relevant factors (in this case,
the structural conflict of interest) is to use them to heighten
our degree of scrutiny, without actually shifting the burden
away from the plaintiff.

We acknowledge that there is something intellectually
unsatisfying, or at least discomfiting, in describing our
review as a "heightened arbitrary and capricious" standard.
The locution is somewhat awkward. The routine legal
meaning of an "arbitrary and capricious" decision is that
used, quite understandably, by the district court: a decision
"without reason, unsupported by substantial evidence or
erroneous as a matter of law." Once the conflict becomes a
"factor" however, it is not clear how the process required by
the typical arbitrary and capricious review changes. Does
there simply need to be more evidence supporting a
decision, regardless of whether that evidence was relied
upon?

This is unsatisfying. Rather, once "factors" are
introduced, arbitrary and capricious stops sounding like
arbitrary and capricious and more like some form of
intermediate scrutiny, which has no analogue in thisfield.
As we have seen, other courts have reconciled the sliding
scale and the "arbitrary and capricious" language from
Firestone by essentially reformulating the arbitrary and
capricious standard for ERISA law, concluding that"the
arbitrary and capricious standard may be a range, not a
point. . . [it is] more penetrating the greater is the suspicion
of partiality, less penetrating the smaller that suspicion is."
Wildbur v. ARCO Chem. Co., 974 F.2d 631, 638 (5th Cir.
1992) (quoting Van Boxel v. Journal Co. Employees' Pension
Trust, 836 F.2d 1048, 1052-53 (7th Cir. 1987)); Lowry v.
Bankers Life & Casualty Retirement Plan, 871 F.2d 522,
525 n. 6 (5th Cir. 1989) (same).

                               28
While we also find this explanation wanting, we can find
no better method to reconcile Firestone's dual commands
than to apply the arbitrary and capricious standard, and
integrate conflicts as factors in applying that standard,
approximately calibrating the intensity of our review to the
intensity of the conflict. While the approach of Professor
Langbein, see supra note 2, and of the Eleventh Circuit
would seem more compatible with the basic principles of
trust law, and hence a better "fit", only the Supreme Court
can undo the legacy of Firestone. In sum, we adopt the
sliding scale approach, and, accordingly, will expect district
courts to consider the nature and degree of apparent
conflicts with a view to shaping their arbitrary and
capricious review of the benefits determinations of
discretionary decisionmakers.

V. Application

Were we to apply extremely deferential arbitrary and
capricious review, we would likely affirm the judgment of
the district court, because there is some credible evidence
which an administrator could have relied upon to conclude
that Maria Pinto was not totally disabled. Two doctors, one
of whom is a specialist in cardiology, stated that they did
not believe that she was totally disabled. Therefore,
Reliance Standard's decision was not "without reason,
unsupported by substantial evidence or erroneous as a
matter of law." Abnathya, 2 F.3d at 45 (quoting Adamo v.
Anchor Hocking Corp., 720 F.Supp. 491, 500 (W.D.Pa.
1989)). On the other hand, were we to apply de novo
review, we would probably conclude that Reliance Standard
made the incorrect determination, because Pinto presented
credible evidence from her long-time treating cardiologist
that she was totally disabled for cardiological reasons,
evidence which was affirmed by another cardiologist, and
only one other cardiologist, who had much less opportunity
to perform tests and examine her than her own doctor,
concluded that she was not. According deference to neither
side, Pinto's case seems stronger.

However, applying a heightened arbitrary and capricious
review, we are deferential, but not absolutely deferential.
Like the Fifth Circuit, "[t]he greater the evidence of conflict

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on the part of the administrator, the less deferential our
abuse of discretion standard." Vega, 188 F.3d at 297.
Therefore, we look not only at the result--whether it is
supported by reason--but at the process by which the
result was achieved. In so doing, we note several problems.
First, Reliance Standard reversed its own initial
determination that Pinto was totally disabled without
receiving any additional medical information. The only thing
that changed between Reliance Standard's initial
acceptance and its subsequent denial was that Pinto
notified Reliance Standard that her SSA application had
been rejected (a determination that SSA subsequently
abandoned). The SSA's rejection of Pinto appears to have
triggered Reliance Standard's investigation into Pinto's
disability, suggesting that Reliance Standard places
significant trust in the SSA process, yet the SSA's
subsequent reversal had no such effect. Inconsistent
treatment of the same facts was viewed with suspicion by
the Brown court. See 898 F.2d at 1569 ("That [the
insurance company] would reach opposing conclusions on
the basis of the same evidence seriously challenges the
assumptions upon which deference is accorded to[its]
interpretation of the plan.").

Second, looking at the final decision, we see a selectivity
that appears self-serving in the administrator's use of Dr.
Bahler's expertise. Reliance Standard used some of Dr.
Bahler's specific limitations to explain its rejection, but it
did not accept (or satisfactorily explain its rejection of) his
conclusion that she was totally disabled. The Fifth Circuit
addressed a similar circumstance, where the administrator
credited one part of the advice of a treating doctor, but not
his other advice. That court held that this was
unacceptable in the context. See Salley v. E.I. DuPont de
Nemours & Co., 966 F.2d 1011, 1015 (5th Cir. 1992). This
inconsistent treatment of the same authority in two
separate instances (the SSA, Dr. Bahler) raises the
likelihood of self-dealing. Applying the sliding scale to this
case, our review is ratcheted upward by these suspicious
events.

Finally, when a staff worker reviewing the files
recommended that Pinto be reestablished pending further

                               30
testing, her suggestion was rejected, and Reliance Standard
decided to do the opposite: suspend the resumption of
benefits. Although this in itself does not prove bias, it lends
further support to the view that whenever it was at a
crossroads, Reliance Standard chose the decision
disfavorable to Pinto. The default position was that benefits
were not granted.

Taking all of these procedural anomalies into account, we
find ourselves on the far end of the arbitrary and capricious
"range," and we examine the facts before the administrator
with a high degree of skepticism.8

Reliance Standard relies heavily on the "two-to-two"
argument, arguing that because there are two doctors on
either side of the Pinto disability debate, a decision to credit
either side cannot be arbitrary and capricious. However,
neither of the doctors retained by Reliance Standard had
the same contact with Pinto that Dr. Bahler did. Dr.
Rosenthal read Dr. Bahler's reports, examined Pinto, and
talked with her, but this examination, however professional,
does not compare with the eighteen years of interaction
between Dr. Bahler and Pinto. The essence of Dr. Bahler's
conclusion was that Pinto's condition was "labile"; that is,
her condition could severely worsen under stress or activity
("high stress situations . . . could precipitate her cardiac
asthma."). Although she might be able to persist in an
occupation for some time, and she had basic motor skills,
the risk of work was too great. Reliance Standard gave no
explanation for its rejection of this aspect of Dr. Bahler's
assessment.

Moreover, while Reliance Standard relies on Dr. Capone,
Dr. Capone is a pulmonologist; he could only, and did only,
assess whether she had pulmonary problems. The
pulmonary examination was at Dr. Rosenthal's suggestion,
_________________________________________________________________

8. Our focus on process should not be read to require an additional duty
to conduct a good faith, reasonable investigation. That is, we are not
holding that Reliance Standard had a duty to gather more information,
merely that the decision might have been arbitrary and capricious given
the information available. Compare Vega, 188 F.3d at 188 (rejecting
claim that administrator had an affirmative duty to conduct good faith
and reasonable investigation).

                               31
but neither Pinto nor Dr. Bahler have suggested that the
source of her disability was pulmonary. That Dr. Capone
concluded that she was not disabled by respiratory disease
should not discredit Dr. Bahler. Moreover, Dr. Capone
originally suggested that in order to decide whether Pinto
was disabled, she would first need to undergo therapy to
see if it made a difference. She never underwent therapy,
but despite his initial reluctance--and after being pressed--
he concluded that she was not totally disabled. If Reliance
Standard was as accommodating with Dr. Bahler's
conclusions as it was with Dr. Capone's, it would likely
have granted Pinto benefits.

For these reasons, a factfinder could conclude that
Reliance Standard's decision to credit its doctors over Drs.
Bahler and Goodman was the result of self-dealing instead
of the result of a trustee carefully exercising itsfiduciary
duties to grant Pinto the benefits due her under the
insurance plan. Summary judgment was therefore
inappropriate, for there is a genuine issue of material fact
as to whether Reliance Standard acted arbitrarily and
capriciously. The judgment of the District Court will be
reversed, and the case remanded for further proceedings
consistent with this opinion. There is sufficient evidence at
this stage to merit a penetrating review of the decision
under the heightened standard. The decision was close
enough that such a review may result in a determination
that it was arbitrary and capricious. On remand, the
District Court may take evidence regarding the conflict of
interest, and ways in which the conflict may have
influenced the decision, and then determine whether,
considering the conflict, the decision was "arbitrary and
capricious" in the sense described in Section IV.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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