The Future of Discretionary Clauses in California Life and Disability Insurance Agreements
On May 11, 2017, the United States Court of Appeals for the Ninth Circuit reversed a district court ruling, and upheld a California law that invalidates a plan provision that assigns the final determination on benefit payout determinations to an insurer. How will this impact the future of discretionary clauses in California life and disability insurance agreements?
On May 11, 2017, the United States Court of Appeals for the Ninth Circuit reversed a district court ruling, and upheld a California law that invalidates a plan provision that assigns the final determination on benefit payout determinations to an insurer. [Talana Orzechowski v. Boeing Co. Non-Union LTD Plan, et al., Case No. 14-55919 (9th Circ. May 11, 2017)]. Thus, the Ninth Circuit remanded the case and required the lower court to review the claim denial based on a de novo standard of review.
The Boeing Company (Boeing) sponsors an Employee Retirement Income Security Act (ERISA) covered non-union disability plan for its eligible employees. Boeing had purchased a disability insurance policy from Aetna Life Insurance Company (Aetna) to insure those benefits. The policy provides discretion to Aetna to “determine all questions that may arise including all questions relating to the eligibility of Employees and Dependents to participate in the Plan and amount of benefits to which any Participant or Dependent may become entitled.” Aetna decided to terminate long-term disability payments to a Boeing worker who suffers from chronic pain and fatigue disorders.
The district court reviewed the benefits decision using an abuse of discretion standard of review because Boeing’s ERISA plan gave Aetna discretionary authority. The Ninth Circuit disagreed and held that the de novo standard of review was required under the California Insurance Code §10110.6, which voided the discretionary clause contained in the plan. The Ninth Circuit concluded that the California Insurance Code §10110.6 is not preempted by ERISA because it falls within the savings clause set forth in 29 U.S.C. § 1144(b)(2)(A), is directed toward entities engaged in insurance and it substantially affects the risk-pooling arrangement between the insurer and the insured.
Preemption and the Savings Clause
ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. §1144(a). However, ERISA’s saving clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” Id. §1144(b)(2)(A). Although ERISA has broad preemptive powers, its “saving clause then reclaims a substantial amount of ground.” Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 364 (2002).
In order for the saving clause in §1144(b)(2)(A) to apply, a statute must satisfy the two-part test set forth in Kentucky Association of Health Plans v. Miller, 538 U.S. 329, 342 (2003). First, the law must be “specifically directed toward entities engaged in insurance,” and second, it “must substantially affect the risk pooling arrangement between the insurer and the insured.” Id. at 342. California Insurance Code §10110.6 meets both prongs of the Miller test.
The California Insurance Code §10110.6, which became effective on January 1, 2012, provides in relevant part:
(a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.
(b) For purposes of this section, “renewed” means continued in force on or after the policy’s anniversary date.
There was also an issue regarding whether the California Insurance Code §10110.6 applied since it became effective on January 1, 2012, and the master plan (which is where the disability plan was housed) was dated January 1, 2011, while the insurance policy had an anniversary date of January 1, 2012, but renewed accordingly. The court concluded it did in fact apply due to the renewal of the policy.
This holding indicates that if an insurance policy or ERISA covered plan, effective on or after January 1, 2012, delegates discretionary authority to a person or a committee, that delegation is invalid under California Insurance Code §10110.6, as it relates to a California resident. When an insurer or its agent denies a claim in which the California Insurance Code Section 10110.6 or similar state law applies, it should be armed to defend the claim decision under a de novo standard of review, (versus arbitrary and capricious), in light of the court decision described above. There is still an open question as to whether or not this will be extended to self-insured plans.