Allan E. Rud v. Liberty Life Assurance Company of Boston

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-3655
A LLAN E. R UD ,
Plaintiff-Appellant,
v.
L IBERTY L IFE A SSURANCE C OMPANY OF B OSTON ,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 04-C-330-S—John C. Shabaz, Judge.
____________
A RGUED N OVEMBER 9, 2005—D ECIDED F EBRUARY 22, 2006
____________
Before POSNER , R OVNER , and W OOD , Circuit Judges.
P OSNER , Circuit Judge. Allan Rud, a factory worker
employed by Andersen Windows, Inc., fell and seriously
injured his back. Andersen, which sponsors and administers
a welfare benefits plan for its employees, had bought an
insurance policy from Liberty Life, whereby the latter
would process and pay disability claims under the plan.
Rud submitted to Liberty Life a claim for permanent
disability benefits. The insurance policy provided that an
employee would be deemed permanently disabled for the
24 months following the onset of the disability if he couldn’t

-- 1 of 11 --

2 No. 04-3655
do his former work, but that to obtain permanent-disability
benefits beyond that period he had to be unable to perform
the duties of any job. Rud received benefits for the full 24
months and indeed for five more months as the insurance
company considered his entitlement to additional benefits.
But eventually the company concluded that although Rud
couldn’t return to his former, strenuous work (which is why
he had received permanent disability benefits for the first 24
months after his fall), he could perform the duties of a
variety of other jobs, of a light or sedentary character.
Rud disagreed, and filed suit against Liberty Life in a state
court, charging breach of contract under state law but also
violation of ERISA. He did not sue Andersen Windows.
Liberty Life removed the suit to federal district court. The
judge gave summary judgment for Liberty Life, and Rud
appeals.
There is no doubt that Liberty Life’s determination that
Rud was capable of performing light or sedentary work
despite his back problem was reasonable; that is, the
determination was not so off the wall that it could be
adjudged “arbitrary and capricious.” And that is the correct
standard when an ERISA plan provides that the benefits
determination is within the discretion of the ERISA plan’s
administrator or some other ERISA fiduciary, Firestone Tire
& Rubber Co. v. Bruch, 489 U.S. 101, 111-14 (1989), unless the
administrator or other fiduciary has a conflict of interest. Id.
at 115; Ladd v. ITT Corp., 148 F.3d 753, 753-54 (7th Cir. 1998).
(These cases say not that the conflict alters the standard of
review, but that it affects how the standard is applied; but
that comes to the same thing.) Rud argues that Liberty Life,
as an insurance company, is not the plan’s administrator or
any other species of ERISA fiduciary, and that in any event
it had a profound conflict of interest. On either ground, he

-- 2 of 11 --

No. 04-3655 3
concludes, the district court should have given plenary
rather than deferential review to the company’s denial of his
application for benefits.
The plan’s administrator was Andersen Windows, not
Liberty Life. But if Liberty Life was not an ERISA fiduciary
too, there is no basis for Rud’s ERISA claim, Reich v. Conti-
nental Cas. Co., 33 F.3d 754, 756-57 (7th Cir. 1994), and then
all he would have would be a simple state-law breach of
contract suit, though one removable to federal court because
the requirements of diversity jurisdiction (including, in the
case of removal, that the defendant be a citizen of a state
other than the one in which the federal district court to
which he is removing it is located) are satisfied. One cannot
bring an ERISA claim against someone who is not a fidu-
ciary just because he happens to have a contract with an
ERISA plan. Rud could not sue FedEx under ERISA for
failing to deliver a benefits check fedexed to him by an
ERISA fiduciary. See Smith v. Provident Bank, 170 F.3d 609,
617 (6th Cir. 1999); Arizona State Carpenters Pension Trust
Fund v. Citibank (Arizona), 125 F.3d 715, 724 (9th Cir. 1997).
But Liberty Life is an ERISA fiduciary, defined as an entity
that has discretionary authority over assets of an ERISA
plan. 29 U.S.C. § 1002(21)(A); Farm King Supply, Inc. Inte-
grated Profit Sharing Plan & Trust v. Edward D. Jones & Co.,
884 F.2d 288, 292 (7th Cir. 1989). The policy that it issued to
Andersen states that the insurance company “shall possess
the authority to construe the terms of this policy and to
determine benefit eligibility hereunder. Liberty’s decisions
regarding construction of the terms of this policy and
benefit eligibility shall be conclusive and binding.” Plan
assets were used to buy the policy. The administration of
the policy, and thus the disbursement or refusal to disburse
plan assets, was confided to the discretion of the insurance
company. This combination makes Liberty Life an ERISA

-- 3 of 11 --

4 No. 04-3655
fiduciary. Mers v. Marriott International Group Accidental
Death & Dismemberment Plan, 144 F.3d 1014, 1019-20 (7th Cir.
1998); Cozzie v. Metropolitan Life Ins. Co., 140 F.3d 1104, 1107
(7th Cir. 1998).
It may seem odd that Liberty Life should be administering
the plan, when Andersen is the plan administrator. The
oddness is dissipated by recognizing that administration is
divided. Andersen decides who is eligible to participate in
the plan and explains the plan to its employees, but the
determination of eligibility to receive benefits under the
plan is confided to Liberty Life. This division gives the
insurance company discretionary authority over claim
applications, making it an ERISA fiduciary.
We are mindful of the circuit split over the question
whether there can be, alongside the official plan administra-
tor, a “de facto” administrator. Hall v. Lhaco, Inc., 140 F.3d
1190, 1195 (8th Cir. 1998). The courts that say “no” are
worried about the confusion that can result if decisions are
being made by someone (usually the employer) who is not
designated as the plan administrator. Our court, while
aware of the potential for confusion, see Riordan v. Common-
wealth Edison Co., 128 F.3d 549, 551 (7th Cir. 1997), has
suggested that equitable estoppel might sometimes justify
treating someone else as the plan administrator. “We can
imagine a case in which the plan sponsor would be
estopped to deny that it was the administrator; the district
judge may have thought this such a case. If UOP’s legal
department had told Jones’s lawyer to forget about the
Committee and direct all his document requests to the legal
department, and if in reliance on this advice the lawyer had
forgone an opportunity to obtain the documents from the
plan administrator and Jones had suffered a harm as a
result, the elements of equitable estoppel would be present.”
Jones v. UOP, 16 F.3d 141, 144 (7th Cir. 1994). But maybe it’s

-- 4 of 11 --

No. 04-3655 5
wrong to get hung up on who is (are) the plan administra-
tor(s). Maybe the right question to ask is whether the
particular defendant made a discretionary determination
concerning the plaintiff’s entitlement to plan benefits.
A genuine oddity is that the plan is not in the record—
only irrelevant fragments of the plan summary, plus the
insurance policy. The proximate cause of the omission is
that Rud did not sue Andersen. But of course he has or can
obtain a copy of the plan; and Liberty Life must have a
copy. The plan’s absence, however, is of no consequence to
the appeal. No one is questioning that there is a plan and
that the plan confides the making of benefits determinations
to Liberty Life. The policy is the plan, Bidlack v. Wheelabrator
Corp., 993 F.2d 603, 615 (7th Cir. 1993), so far as disability
benefits are concerned, and the recital in the policy that we
quoted thus determines the scope of judicial review—unless
Rud is correct that the insurance company has a conflict of
interest sufficient to defeat the recital.
He argues that a conflict of interest exists because any
money Liberty Life pays to a claimant reduces its profits.
The ubiquity of such a situation makes us hesitate to
describe it as a conflict of interest. There is no contract the
parties to which do not have a conflict of interest in the
same severely attenuated sense, because each party wants
to get as much out of the contract as possible. How serious
the conflict is depends on circumstances. See, e.g., Leahy v.
Raytheon Co., 315 F.3d 11, 15-16 (1st Cir. 2002). If Liberty Life
refuses to honor meritorious claims, it will obtain windfall
profits in the short run, assuming that the premium that
Andersen paid it was calculated on the expectation of a
normal claims experience. But Andersen will be dis-
mayed—it has no interest in conferring such profits on
Liberty Life, thereby incurring its employees’ ill will with no
offsetting financial benefit to itself—and so may refuse to

-- 5 of 11 --

6 No. 04-3655
renew the policy when it expires, or demand a much lower
premium. The latter option suggests a theoretical basis for
suspecting a long-run conflict of interest: the chintzier the
insurance company is in responding to benefits claims, the
lower (given a competitive insurance market) the premium
that Andersen will have to pay, whether to Liberty Life or
to a competitor of Liberty Life, to obtain insurance.
This kind of thinking has persuaded several circuits that
there is a conflict of interest, requiring more searching
judicial review of a denial of benefits than the “arbitrary
and capricious” standard implies, whenever an insurer is
being asked to dip into its own pocket to pay a claim for
benefits. Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377,
387-89 (3d Cir. 2000); Armstrong v. Aetna Life Ins. Co., 128
F.3d 1263, 1265 (8th Cir. 1997); Brown v. Blue Cross & Blue
Shield of Alabama, Inc., 898 F.2d 1556, 1561-62 (11th Cir.
1990). Our court has rejected that position. Shyman v. Unum
Life Ins. Co., 427 F.3d 452, 455 (7th Cir. 2005); Leipzig v. AIG
Life Ins. Co., 362 F.3d 406, 408-09 (7th Cir. 2004); Perlman v.
Swiss Bank Corp. Comprehensive Disability Protection Plan, 195
F.3d 975, 980-81 (7th Cir. 1999); Mers v. Marriott International
Group Accidental Death & Dismemberment Plan, supra, 144
F.3d at 1020-21; Chalmers v. Quaker Oats Co., 61 F.3d 1340,
1344 (7th Cir. 1995). We have pointed out that given reason-
ably well-informed employees, an employer cannot reap a
long-run benefit from reducing welfare benefits, whether
directly or by delegating administration to a hard-nosed
insurance company. The employee’s total compensation
package includes benefits as well as wages; reducing any
component reduces the total. If the employer could have
met its labor needs with a cheaper compensation package,
it would have paid lower wages or promised lower benefits
from the start. There would have been no need to incur the

-- 6 of 11 --

No. 04-3655 7
bother and uncertainty of trying to “steal” contracted-for
benefits through the back door.
This analysis can be criticized as reflecting too sunny a
view of the operation of labor markets, assuming as it does
that employees have such good information that they
cannot be fooled in the fashion suggested and that employ-
ers are always in for the long haul and therefore always
cultivate a reputation for fair dealing with employees. E.g.,
Pierre Cahuc & André Zylberberg, Labor Economics, ch. 4
(2004). Employees, the argument continues, might be less
quick to blame their employer for an adverse benefits
decision by an insurance company, albeit a company that
had been retained by the employer, than they would the
employer itself, if the employer were the plan administrator.
“[W]hile 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 informa-
tion 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 merito-
rious claims are well-handled, it is unlikely that an insur-
ance company’s business will suffer because of its client’s
employees’ dissatisfaction.” Pinto v. Reliance Standard Life
Ins. Co., supra, 214 F.3d at 388.
There is doubtless some truth in these critiques, but their
acceptance would destabilize large reaches of contract law,
of which ERISA is, after all, a part, since it neither requires
employers to establish welfare and pension plans nor
prescribes the terms of such plans.
When the Supreme Court in Carnival Cruise Lines, Inc. v.
Shute, 499 U.S. 585 (1991), held enforceable a forum-selec-
tion clause printed on the back of a cruise ticket, it brushed
aside the arguments that many consumers don’t read the

-- 7 of 11 --

8 No. 04-3655
fine print in their contracts and do not appreciate the
significance, or perhaps even the meaning, of a forum-
selection clause. See also IFC Credit Corp. v. Aliano Bros.
General Contractors, Inc., No. 05-1720, 2006 WL 230179, at *3-
4 (7th Cir. Feb. 1, 2006). Of course ERISA is a paternalistic
statute in a number of respects, notably in its vesting rules.
But it is hard to see why, if the plan unequivocally autho-
rizes the insurance company to make the conclusive deter-
mination of eligibility, the courts should rewrite the provi-
sion. Firestone, it is true, did so, to a degree, by allowing
“arbitrary and capricious” review. This was an implicit
rejection of the model of a perfectly competitive labor
market, for in such a market there would be no reason to
look behind plan language that granted unreviewable
discretion to the administrator. The assumption would be
that the employee had been compensated for surrendering
his right to judicial review. But whether or not Firestone goes
too far, courts that go further by enlarging the scope of
judicial review whenever the plan administrator has a
financial interest in the eligibility determination make even
deeper inroads into freedom of contract, since, as we said,
so attenuated a “conflict of interest” is found in every
contract.
As noted in Pinto v. Reliance Standard Life Ins. Co., supra,
214 F.3d at 379, a number of cases adopt a “sliding scale”
approach that permits the intensity of judicial review of
benefits determinations to vary with circumstances. They
include two of our cases. Manny v. Central States, Southeast
& Southwest Areas Pension & Health & Welfare Funds, 388 F.3d
241, 242-43 (7th Cir. 2004), and Van Boxel v. Journal Co.
Employees’ Pension Trust, 836 F.2d 1048, 1052-53 (7th Cir.
1987); see also Vega v. National Life Ins. Services, 188 F.3d 287,
296-97 (5th Cir. 1999); Chambers v. Family Health Plan Corp.,
100 F.3d 818, 825-27 (10th Cir. 1996). This approach enables

-- 8 of 11 --

No. 04-3655 9
the court to distinguish between two classes of case. The
first is where (1) benefits are paid from a trust fund that has
ample assets that cannot be transferred back to the em-
ployer, so that the employer’s stake in a particular benefits
determination, especially if the amount of the benefits is
small, is negligible, or (2), as in Leahy v. Raytheon Co., supra,
the plan is voluntary and employees can withdraw without
penalty, or (3) the plan uses an insurance policy that is
retrospectively rated, meaning that the insurer charges a
premium equal to its disbursements plus an administrative
fee, so that the less it pays out on claims the less it takes in
in premiums. The second type of case is where the trust
fund is underfunded, the benefits claim is large, the em-
ployer will have to transfer assets to the plan if the claim is
honored, and the employer is planning to leave the indus-
try, a decision that eliminates concern with reputation as a
constraint against sharp dealing with employees.
Rud has presented no evidence to show where between
these end points in the spectrum of potential conflicts of
interest his case lies. The absence of evidence is fatal. The
critical question in the application of the sliding-scale
approach is whether evidence shall be required or conflicts
of interest presumed. If no evidence is required, the sliding-
scale approach can allow a conflict of interest to be attrib-
uted on the basis of the fundamental tug-of-war character of
every contract. Our cases, such as Shyman and Leipzig, by
rejecting the automatic assumption that an insurer has a
conflict of interest that justifies departing from the “arbi-
trary and capricious” standard, implicitly reject a sliding-
scale approach conceived in such abstract terms. But our
cases permit the plaintiff to show that the particular circum-
stances of his case demonstrate the existence of a real and
not merely notional conflict of interest, the sort of thing the
parties would not have foreseen when they agreed that the

-- 9 of 11 --

10 No. 04-3655
plan administrator’s determinations would be conclusive.
Mers v. Marriott International Group Accidental Death &
Dismemberment Plan, supra, 144 F.3d at 1020-21. We find this
approach in cases from other circuits as well. See Atwood v.
Newmont Gold Co., 45 F.3d 1317, 1322-23 (9th Cir. 1995), and
cases cited in Pinto v. Reliance Standard Life Ins. Co., supra,
214 F.3d at 385. It strikes the right balance, consistent with
Firestone, between freedom of contract and a realistic sense
of its limits.
Rud’s claim against Liberty Life cannot survive as a state
law claim for breach of contract, he being a third-party
beneficiary of the insurance policy, a contract between
Andersen and the insurance company. A suit to enforce a
claim for benefits under an ERISA plan can be brought only
under ERISA; parallel state law remedies are preempted. 29
U.S.C. § 1144 (a); Rush Prudential HMO, Inc. v. Moran, 536
U.S. 355, 392 (2002). It is not as if, to return to an earlier
example, Liberty Life were merely a contractor with an
ERISA administrator or fiduciary. It is an ERISA fiduciary,
and Rud’s complaint is that it has failed to comply with the
duties that the plan imposed on it.
A FFIRMED .

-- 10 of 11 --

No. 04-3655 11
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-22-06

-- 11 of 11 --