Court Explores When the “Fiduciary Exception” Evaporates

August 31, 2011

Under what is called the “fiduciary exception,” ERISA benefits plan beneficiaries normally will be given access to otherwise privileged communications between the ERISA administrator and his or her lawyer because they involve plan administration. The exception rests on the theory that the beneficiaries are the real “clients” in that context. The exception no longer applies if the administrator seeks advice about his or her own possible liability, because at that point the administrator is no longer performing a fiduciary function to benefit the beneficiary. Because the same lawyer frequently advises the administrator on both issues, courts must sometimes decide when the fiduciary’s and the beneficiary’s interests sufficiently diverge.

In Klein v. Northwestern Mutual Life Ins. Co., Civ. No. 09cv2843 W (NLS), 2011 U.S. Dist. LEXIS 71586 (S.D. Cal. June 29, 2011), a former Foley & Lardner partner sued the firm and its Long-Term Disability Plan for denying him disability benefits. He relied on the fiduciary exception in seeking communications between the ERISA administrator and the administrator’s lawyer. The defendants argued that the fiduciary exception evaporated when the former Foley partner stated that “he was a litigation partner and he would not want to be in the shoes of the analyst on the witness stand.” Id. at *28. Despite this aggressive statement, the court found that the former partner’s statement did not demonstrate a sufficient divergence of interests – because the administrator had not yet issued a final denial of disability benefits.

Lawyers handling ERISA work should remember that a plan beneficiary may well end up reading the lawyers’ communications with the plan administrator.