Carolina Care Plan Incorporated v.  Carolyn L. McKenzie

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 CAROLINA CARE PLAN INCORPORATED,
Defendant-Appellant,
v. No. 05-2060 
CAROLYN L. MCKENZIE,
Plaintiff-Appellee. 
Appeal from the United States District Court
for the District of South Carolina, at Charleston.
C. Weston Houck, Senior District Judge.
(CA-03-2908-2)
Argued: September 20, 2006
Decided: October 23, 2006
Before MOTZ and GREGORY, Circuit Judges, and
Richard L. VOORHEES, United States District Judge
for the Western District of North Carolina,
sitting by designation.
Affirmed in part and reversed in part by published opinion. Judge
Motz wrote the opinion, in which Judge Gregory and Judge Voorhees
joined.
COUNSEL
Jeffrey Stuart Patterson, NELSON, MULLINS, RILEY & SCAR-
BOROUGH, L.L.P., Columbia, South Carolina, for Appellant.
Charles M. Gibson, Jr., Charleston, South Carolina, for Appellee.
Certiorari dismissed, July 30, 2007

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OPINION
DIANA GRIBBON MOTZ, Circuit Judge:
In this ERISA case the district court concluded that the plan admin-
istrator abused its discretion by denying coverage for a cochlear
implant. The court then awarded attorneys’ fees to the claimant. For
the reasons that follow, we affirm the order directing the administra-
tor to provide coverage for the cochlear implant, but reverse the
award of attorneys’ fees.
I.
Carolyn L. McKenzie suffers from "a profound sensorineural hear-
ing loss in both ears" that "[h]earing aids do not address." Accord-
ingly, McKenzie sought authorization for a cochlear implant under
her employer’s ERISA plan, which is contained in a Carolina Care
Plan, Inc. ("CCP") insurance policy that CCP drafted and administers.
McKenzie’s physician, Dr. Paul Lambert, III, the Chair of the
Department of Otolaryngology at the Medical University of South
Carolina, wrote to CCP on several occasions in support of McKen-
zie’s application for authorization for the implant. Dr. Lambert
explained that "[t]he only medical treatment for [McKenzie’s] condi-
tion is implantation with a cochlear prosthesis." Id.
A cochlear implant is a pair of components that "replace[ ] the
function of a permanently inoperative [cochlea]." An outer compo-
nent, placed behind the ear, receives sound and converts it into elec-
tric signals. It wirelessly transmits the signals to a surgically
implanted inner component, which in turn stimulates the nerve end-
ings of the cochlea. The nervous system transmits the impulses to the
brain, which interprets them as sound.
CCP originally denied McKenzie’s request because it considered a
cochlear implant specifically excluded from coverage by two exclu-
sions in the CCP policy. The relevant exclusions provide:
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Section 2:
What’s Not Covered —
Exclusions
. . . .
B. Comfort or Convenience
1. Television.
2. Telephone.
3. Beauty/Barber service.
4. Guest service.
5. Supplies, equipment, and similar incidental
services and supplies for personal comfort.
Examples include:
— Air conditioners.
— Air purifiers and filters.
— Batteries and battery charges.
— Dehumidifiers.
— Humidifiers.
6. Devices and computers to assist in communi-
cation and speech.
. . . .
Q. Vision and Hearing
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1. Purchase cost of eye glasses, contact lenses, or
hearing aids.
2. Fitting charge for hearing aids, eye glasses or
contact lenses.
3. Eye exercise therapy.
4. Radial keratotomy.
5. Laser and other refractive eye surgery.
CCP notified McKenzie that it regarded a cochlear implant as both "a
form of hearing aid" and a "[d]evice . . . assist[ing] in communication
and speech."
Dr. Lambert then wrote CCP, explaining that cochlear implants are
not hearing aids, which "merely amplify sound," but "implantible
prosthetic device[s]" that are "implant[ed]" in the body by an opera-
tion to "code sounds and then replicate it electronically." CCP eventu-
ally dropped the "hearing aid" rationale for denying the claim.
With respect to CCP’s other ground for denying coverage — the
exclusion for "[d]evices and computers to assist in communication
and speech" — Dr. Lambert wrote that "[a] cochlear implant is not
recommended based on comfort or convenience." Moreover, the doc-
tor explained, unlike "non-electric augmentative or alternative . . .
communication boards," cochlear implants are not "device[s] . . . used
to assist in communication and speech." Id.
Unpersuaded, CCP continued to deny coverage on this ground.*
McKenzie then brought this suit in state court, and CCP removed it
to federal court. The district court found that CCP abused its discre-
tion in refusing to authorize McKenzie’s cochlear implant and
*This exclusion provided CCP’s sole ground for denial of McKenzie’s
claim. As CCP’s counsel conceded at oral argument, the company does
not argue that, without the exclusion, cochlear implants would not be
covered by the plan.
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ordered CCP to provide coverage. The district court also awarded
attorneys’ fees to McKenzie. CCP appeals both orders.
II.
A.
CCP initially contends that, in holding CCP abused its discretion
in denying McKenzie benefits, the district court did not sufficiently
defer to CCP as an ERISA plan administrator with discretion to inter-
pret the plan.
When an ERISA plan grants its administrator discretion, a court
reviews the administrator’s decision for abuse of discretion, rather
than de novo. Smith v. Cont’l Cas. Co., 369 F.3d 412, 417 (4th Cir.
2004) (citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101,
111 (1989)). McKenzie concedes that the plan granted CCP "discre-
tion to interpret the benefits and other terms and exclusions." Brief of
Appellee at 10. Consequently, we must review CCP’s decision for
abuse of discretion.
However, when a plan administrator with discretion faces a conflict
of interest "such that its decision to award or deny benefits impacts
its own financial interests," we modify the abuse of discretion stan-
dard. Smith, 369 F.3d at 417. We decrease the deference accorded to
the ERISA administrator "to the degree necessary to neutralize any
untoward influence resulting from the conflict." Id. at 418 (quoting
Doe v. Group Hospitalization and Med. Servs., 3 F.3d 80, 87 (4th Cir.
1993)) (internal quotation marks omitted). Under this "sliding scale[,]
[t]he more incentive for the administrator . . . to benefit itself," the
less a court defers. Id. (quoting Ellis v. Metro. Life Ins. Co., 126 F.3d
228, 233 (4th Cir. 1997)) (internal quotation marks omitted). CCP
admits "that it is both the plan administrator and insurer" and thus
faces "a conflict of interest under Fourth Circuit law." Brief of Appel-
lant at 11. Nevertheless, CCP argues that it should receive substantial
deference because the financial impact of McKenzie’s claim is
assertedly minimal and "the mere fact that a defendant is acting as
administrator and insurer should not, without more, have a significant
impact on the deference granted to its decision." Id. at 14.
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Precedent offers CCP little support for this view. We have consis-
tently reduced the deference afforded to administrators based on the
"mere" fact that they also insure the plan and thus profit by denying
claims. See, e.g., Stup v. Unum Life Ins. Co., 390 F.3d 301, 307 (4th
Cir. 2004); Evans v. Metro. Life Ins. Co., 358 F.3d 307, 311 (4th Cir.
2004); Doe, 3 F.3d at 85-87. In so holding, we have recognized that
the Supreme Court has directed 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." Firestone, 489 U.S. at 115
(internal quotation marks omitted) (emphasis added). Moreover,
recently the Court has questioned "the degree to which a plan provi-
sion for unfettered discretion in benefit determinations guarantees
truly deferential review . . . when the judicial eye is peeled for conflict
of interest." Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 384
n.15 (2002).
This is not to say that evidence of cost is irrelevant — a frequent
and expensive claim might well demand comparatively more scrutiny
on the "sliding scale" than an inexpensive and infrequent claim.
But the fact is, when an entity both administers and insures a plan,
its profits (or losses) depend in part on how the actual cost of provid-
ing coverage diverges from the projections on which it based premi-
ums. Over time, a predilection to deny coverage pays well, even for
inexpensive and infrequent treatments. Of course, in a chalkboard-
perfect market, consumers might punish a particularly biased insurer;
but in reality, health insurance companies benefit financially when
they deny claims. This conflict demands diminished deference to the
administrator’s decisions, whatever the amount at issue. Conse-
quently, the district court did not err in its application of a modified
abuse of discretion standard. We apply the same standard in our
review of the administrator’s decision.
Under a modified abuse of discretion standard, an administrator’s
decision will be upheld if it is reasonable. Stup, 390 F.3d at 307.
Courts consider the following nonexclusive factors in assessing the
reasonableness of an administrator’s decision:
(1) the language of the plan; (2) the purposes and goals of
the plan; (3) the adequacy of the materials considered to
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make the decision and the degree to which they support it;
(4) whether the fiduciary’s interpretation was consistent
with other provisions in the plan and with earlier interpreta-
tions of the plan; (5) whether the decision making process
was reasoned and principled; (6) whether the decision was
consistent with the procedural and substantive requirements
of ERISA; (7) any external standard relevant to the exercise
of discretion; and (8) the fiduciary’s motives and any con-
flict of interest it may have.
Booth v. Wal-Mart Stores, Inc. Assocs. Health and Welfare Plan, 201
F.3d 335, 342-43 (4th Cir. 2000). With these principles in mind, we
turn to CCP’s denial of McKenzie’s claim.
B.
CCP denied McKenzie’s claim on the ground that cochlear
implants fell within its exclusion for "[d]evices and computers to
assist in communication and speech." The district court held that CCP
abused its discretion by denying McKenzie coverage on this ground.
The court reasoned that the language in the exclusion on which CCP
relied was ambiguous, that other provisions in the ERISA plan were
inconsistent with CCP’s interpretation, and that the ambiguity in the
plan should have been, but was not, construed against CCP, which
drafted the plan.
CCP maintains that the first Booth factor — the plan’s language —
supports its decision to deny coverage. It argues that cochlear
implants are "devices" designed to help individuals hear, which in
turn assist with "communication" — triggering the exclusion for "de-
vices and computers to assist in communication and speech." How-
ever, the policy language could just as easily be read to exclude only
devices that "assist communication and speech." (Emphasis added).
This would suggest the exclusion applies to augmentative communi-
cation items that assist in both communication and speech, not to
cochlear implants, which do not directly aid a recipient’s speech.
Accordingly, the plan language offers no more than ambiguous sup-
port for CCP’s decision.
Other Booth reasonableness factors weigh decidedly against CCP’s
interpretation of the ERISA plan. For example, CCP’s decision is
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inconsistent with several other provisions in the plan. When a contract
groups clauses under a common heading, like the exclusions listed
under "Comfort or Convenience," interpretation of one provision is
informed by the company it keeps. See, e.g., Md. Cas. Co. v. City of
S. Norfolk, 54 F.2d 1032, 1037 (4th Cir. 1932). Indeed, the policy
itself notes that, although its headings do not "define" an exclusion,
they "group . . . items . . . that fall into a similar category." The items
listed under the heading "Comfort or Convenience" — television,
telephone, beauty/barber service, guest service, air conditioners, air
purifiers and filters, batteries and battery charges, dehumidifiers, and
humidifiers — do not "fall into a similar category" as cochlear
implants. They differ in kind. The listed items "comfort" and remedy
the "[in]convenience[s]" facing an ill person; a cochlear implant rem-
edies a disability and enables the recipient to function more fully in
the world.
When the exclusion for "[d]evices and computers to assist in com-
munication and speech" is read along with the exclusions under the
heading "Vision and Hearing," CCP’s interpretation seems even more
strained. The policy specifically excludes, under the "Vision and
Hearing" heading, "eyeglasses, contact lenses, [and] hearing aids" —
but not cochlear implants. It is reasonable to infer from this omission
that the parties did not intend to exclude coverage of cochlear
implants. See R.L. Coolsaet Constr. Co. v. Local 150, Int’l Union of
Operating Eng’rs, 177 F.3d 648, 658-59 (7th Cir. 1999). Further, an
exclusion for "vision and hearing" is far more specific than an exclu-
sion for "[d]evices and computers to assist in communication and
speech," which could, at least arguably, govern a wide range of treat-
ments and services. Since the exclusion that specifically addresses
hearing fails to exclude cochlear implants, we hesitate to read a more
general exclusion to do so. See Baton Rouge Oil & Chem. Workers
Union v. Exxonmobil Corp., 289 F.3d 373, 377 (5th Cir. 2002).
CCP’s reading of the "devices and computers" provision also runs
afoul of the well-established doctrine that a contract should be read
to give effect to all its language. See, e.g., Bank v. IBM Corp., 145
F.3d 420, 428-29 (1st Cir. 1998). Under CCP’s interpretation, the
plan would exclude hearing aids from coverage as "devices . . . to
assist in communication and speech." But if the plan excluded them
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under this provision, there would be no reason for it to exclude hear-
ing aids expressly, as it does, in the "Vision and Hearing" exclusion.
Faced with such ambiguity, a reasonable administrator-insurer
would look to an important external standard for interpreting an
ambiguous contractual provision — that it be construed against the
drafting party. See Doe, 3 F.3d at 89. CCP acknowledges the exis-
tence of this rule, often called contra proferentem, but argues that it
should not apply here. According to CCP, when an administrator’s
only conflict is that it also insures the plan, it should be free to con-
strue plan ambiguities against the insured. Brief of Appellant at 17.
Although other circuits have taken this approach, see, e.g., Morton v.
Smith, 91 F.3d 867, 871 n.1 (7th Cir. 1996), we have not.
We directly addressed this question in Doe, 3 F.3d at 85-87. There,
as here, the ERISA plan gave the administrator the discretion to inter-
pret the terms of a plan that it also insured; we reviewed the denial
of benefits under a modified abuse of discretion standard. Id. at 85-87.
In the course of our review, we held that "we may take account of the
principle that in making a reasonable decision, ambiguity which
remains in the [ERISA plan language] must be construed against the
drafting party, particularly when, as here, the contract is a form pro-
vided by the insurer rather than one negotiated between the parties."
Id. at 89. We agreed with the Ninth Circuit that "using a presumption
such as construction against the drafter in evaluating the reasonable-
ness of an interpretation is not inconsistent with review for abuse of
discretion." Id. (citing Kunin v. Benefit Trust Life Ins. Co., 910 F.2d
534, 539 (9th Cir. 1990)). We have since frequently followed this
rule, see, e.g., Bynum v. CIGNA Healthcare of N.C., Inc., 287 F.3d
305, 313-14 (4th Cir. 2002); Bailey v. Blue Cross & Blue Shield of
Va., 67 F.3d 53, 57-58 (4th Cir. 1995), and even if we could do so,
we see no reason to abandon it now. When an ERISA plan vests dis-
cretion in an administrator who also insures the plan, reasonable exer-
cise of that discretion requires that the administrator construe plan
ambiguities against the party who drafted the plan.
We note that applying this principle does not deprive an
administrator-insurer of its discretion under an ERISA plan. When an
administrator applies unambiguous plan terms to the facts of a partic-
ular claim, courts will defer to every judgment the administrator
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makes that is supported by substantial evidence and a reasoned deci-
sionmaking process.
But when plan language is ambiguous, this well-established doc-
trine of contra proferentem does apply, and for good reason. Ambigu-
ity imposes costs on the parties to a contract: one party may rely on
an errant interpretation, or find its original intent flouted if a dispute
arises. Contra proferentem shifts the cost of ambiguity to the party
best positioned to avoid and bear it — the administrator-insurer who
drafts the plan and who can spread the costs of ambiguity across all
policy-holders. Encouraging clarity in ERISA plans also contributes
to a more efficient market for health insurance, promoting healthy and
open competition. Consumers, whether individuals or organizations,
can more easily compare lists of covered and excluded treatments
than they can compare guesses of how different insurers will interpret
ambiguous plan language. Further, as we discussed above,
administrator-insurers face a conflict of interest. Construing ambigu-
ity against the drafter encourages administrator-insurers to write clear
plans that can be predictably applied to individual claims, countering
the temptation to boost profits by drafting ambiguous policies and
construing them against claimants.
We do recognize the legitimacy of the concern, raised by CCP’s
counsel during argument, that drafting and updating a clear insurance
policy can be costly — especially in the changing and heavily regu-
lated healthcare field. Surely, at some point, the costs of producing
greater clarity outweigh its benefits. But this only supports the appli-
cation of contra proferentem. When one party — who controls the
contract language — bears both the costs and benefits of clarity, it
will rationally choose the most efficient balance between clarity and
ambiguity.
Given the ambiguity of the exclusion language relied on by CCP,
the inconsistency between CCP’s interpretation and several other pro-
visions in the ERISA plan, and CCP’s failure to construe the ambigu-
ous language against the drafting party, we agree with the district
court that CCP abused its discretion in denying McKenzie’s claim for
a cochlear implant.
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III.
Finally, we turn to the district court’s award of attorneys’ fees.
"ERISA places the determination of whether attorneys’ fees should
be awarded in an ERISA action completely within the discretion of
the district court." Quesinberry v. Life Ins. Co. of N. Am., 987 F.2d
1017, 1028 (4th Cir. 1993) (en banc). Unlike some federal statutes,
ERISA establishes no presumption for the award of fees to a "prevail-
ing insured or beneficiary." Id. at 1029.
Moreover, in awarding fees a district court must justify the exercise
of its discretion by considering the following, non-exclusive general
guidelines:
(1) degree of opposing parties’ culpability or bad faith;
(2) ability of opposing parties to satisfy an award of attor-
neys’ fees;
(3) whether an award of attorneys’ fees against the oppos-
ing parties would deter other persons acting under sim-
ilar circumstances;
(4) whether the parties requesting attorneys’ fees sought to
benefit all participants and beneficiaries of an ERISA
plan or to resolve a significant legal question regarding
ERISA itself; and
(5) the relative merits of the parties’ positions.
Id. at 1029. We review an award or denial of attorneys’ fees for abuse
of discretion, id. at 1028-29, and the findings of fact underpinning
such an award for clear error, Johannssen v. Dist. No. 1 - Pac. Coast
Dist., MEBA Pension Plan, 292 F.3d 159, 178 (4th Cir. 2002).
The district court found that only one factor (the fourth) weighed
against an award of fees. We agree that McKenzie sought primarily
to benefit herself and thus the fourth factor weighs against the award
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of fees. The court found every other factor to weigh in favor of an
award of fees. We agree that CCP, as a large corporation, could easily
pay the fees, and thus the second factor weighs in favor of an award
of fees. However, the district court incorrectly assessed the remaining
three Quesinberry factors.
The court found the first factor, "culpability and bad faith,"
weighed in favor of an award of fees simply because the court con-
cluded that CCP’s denial of coverage was "unreasonable and . . . an
abuse of discretion." In so finding, the court clearly erred. "Culpabil-
ity" and "bad faith" require more than "mere negligence or error."
Wheeler v. Dynamic Eng’g, Inc., 62 F.3d 634, 641 (4th Cir. 1995).
Although denying McKenzie’s claim furthered CCP’s financial inter-
ests, the record contains no evidence of bad faith or culpability here.
The district court also suggested that its conclusion that CCP had
abused its discretion and unreasonably denied coverage for the coch-
lear implant justified awarding fees against CCP on the basis of the
third and fifth factors. If this were so then virtually every time a
claimant prevailed in overturning an administrator’s decision denying
ERISA benefits, the claimant would be entitled to attorneys’ fees.
But, in fact, as noted above, unlike some other statutory attorneys’
fees statutes, ERISA does not provide for a virtually automatic fee
award to a substantially prevailing plaintiff. Therefore, a court cannot
rely solely on an administrator’s improper denial of coverage on a
single claim to support an award of fees to a claimant. Cf. Denzler v.
Questech, Inc., 80 F.3d 97, 104-105 (4th Cir. 1996) (examining the
merits of parties’ positions on appeal when determining whether to
award fees under Quesinberry five-factor test).
Thus, the only factor supporting the award of fees is that CCP, as
a large corporation, can easily pay the fees. This factor, by itself, does
not suffice to support an award of fees. See Quesinberry, 987 F.2d at
1028-30.
Accordingly, the district court abused its discretion in awarding
attorneys’ fees.
IV.
For the foregoing reasons, we affirm the judgment of the district
court holding that the administrator abused its discretion in denying
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coverage, but reverse the award of attorneys’ fees against the admin-
istrator.
AFFIRMED IN PART AND
REVERSED IN PART
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