AND ERISA'S SAVINGS CLAUSE
The Effect upon ERISA-Governed Health
and Long Term Disability Claim Denials
By: Michael A. McKuin
Revised: June 2015
As is fully discussed in the article, The Looking Glass Logic of ERISA - Firestone v. Bruch, if insurance companies and plan administrators take care in terms of plan design, the dreaded "Firestone Exception" to the default de novo rule applies and decisions of ERISA fiduciaries are entitled to deferential review by the federal courts. In order for that exception to apply, any discretion (to decide benefit eligiblity issues or to interpret the plan) must be properly reserved by the plan administrator. Then, if some other entity is going to actually exercise that discretion, (such as an insurance company or claims administrator), there must be specific language in the plan, allowing the plan administrator to delegate that discretion to a third party. In addition, ERISA requires that there be a procedure set forth in the plan for doing this. If there isn't, then there is no valid discretion to "defer" to. See, e.g.: Nelson v. EG & G Energy Measurements Group, Inc. 37 F.3d 1384, 1389 (9th Cir. 1994).
In the early days of ERISA preemption, insurance companies were conscientious in structuring employee benefit plans to make certain that these requirements were met, by separating claims administrative functions from funding and insurance obligations. This was typically accomplished by setting up a separate company that performed claims administrative services. Of course, the claims administrator was a subsidiary of the insurance company and was about as independent as a hand puppet. But on paper it looked good. When a health or disability plan was sold, a "plan document" was executed by the employer, who was also (on paper) the "plan administrator". The plan document would contain a "reservation" of discretion to interpret the plan and to decide benefit eligibility issues. There would be a "procedure" set forth in the plan document for delegating this discretion; and of course that delegation would be made to the claims administrator. Then, the insurance company would issue a separate group insurance policy to the employer. Summary Plan Descriptions (SPDs) were provided to the employer, describing benefits provided under the group policy for distribution to the employees.
However, over the years insurance companies got lazier and even greedier than usual. They brought the claims administration operations back in house, creating an obvious conflict of interest. Then, to top it off, not wishing to bother with all this complicated subterfuge to acquire the requisite "discretion" by virtue of properly constructing the plan documents, insurance companies started throwing language into their insurance policies, granting themselves discretion. despite fact that they would have no authority under trust law to do so. However, courts seemed to turn a blind eye to this practice and they were allowed to get away with it in most instances.
Under ERISA’s preemption clause ERISA "shall supersede any and all State laws ... [that] relate to any employee benefit plan." But ERISA also has what’s known as a "Savings Clause", which provides that it exempts from preemption, any state law "which regulates insurance, banking, or securities." [29 U.S.C. §§ 1144(a) and (b). So conduct by insurance companies can still be regulated by state law. And recently, states, such as California, have enacted statutes, banning clauses in life and disability policies (as well as contracts, certificates, or other agreements), which grant insurance companies discretion to determine eligibility for benefits or to interpret plans. (See: Insurance Code Section 10110.6). In California, this would apply to all such policies issued or renewed on or after January 1, 2012 and it applies to all such policies, which insure California residents, regardless of where the policies were "issued".
The Ninth Circuit has held that state laws regulating discretionary clauses in insurance policies fall under ERISA’s savings clause. Standard Insurance Company v. Morrison, 584 F.3d 837, 842 (2009). This could have a profound impact on the standard of judicial review that will be applied by California courts in the future. See e.g.: Polnicky v. Liberty Life Assurance Co. of Boston, 999 F.Supp.2d 1144, 1148 (N.D. CA, 2013), (applying de novo standard of review to ERISA claim for denial of benefits because "[t]he Policy was continued in force after its January 1, 2012 anniversary date, [so] any provision in the Policy attempting to confer discretionary authority to Liberty Life was rendered void and unenforceable").
But that isn’t necessarily the end of the story. In the case of Talana Orzechowski, Plaintiff, v. The Boeing Company Non-Union Long-Term Disability Plan (Case No. SACV 12-01905-CJC ), the Plaintiff argued that the standard of review was de novo because of the state ban on discretionary clauses. The defense, however, argued that the standard of review was deferential, because of the grant of discretion to Aetna was given "by virtue of The Master Welfare Plan and the SPD, neither of which (were) insurance policies and (were) therefore not regulated by the California Department of Insurance or the California Insurance Code." (Source: Defendant's Responsive Trial Brief).
The Court found in favor of the defense, finding the applicable standard to be deferential because: (a) the grant of discretion was in the "plan document" and not just the policy; and (b) the plan document had not "renewed" after the ban’s effective date of 1/1/12. However, the Court’s recitation of evidence left this writer inclined to believe that it would have upheld Aetna’s decision, regardless of the standard of review. The Court specifically found that Aetna had "conducted a thorough, good-faith review of Ms. Orzechowski's claim".
As to the issue of whether the state ban on discretionary language would apply to plan documents in a different context, the wording of the decision was somewhat equivocal. The court was careful, quoting the language of the Ninth Circuit in Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008), stating, "Assuming that the Commissioner may prohibit insurance companies from using this discretionary clause in future insurance contracts, he cannot rewrite existing contracts so as to change the rights and duties thereunder." However, "assuming" is not "deciding" and it's not the same as saying "the Commissioner can". On the other hand, the Court did not seem to completely accept the defense’s position, (that the Insurance Code "has no relevance or applicability to the SPD or The Master Welfare Plan"), stating that "The Court doubts that this argument is entirely correct." But again, "doubting" is not "deciding".
The Plaintiff filed a motion to alter or amend the judgment, arguing that given a reading of all of the plan documents taken as a whole, the operative language of the agreement between Aetna and Boeing did actually renew after the effective date of the ban. The defense filed an opposition essentially reiterating its argument that the "California Insurance Commissioner cannot deprive the employer of its election to include discretionary language in plan documents." By this analysis, the actual obligation under the plan to fund the benefits is that of the employer alone. And the insurance policy is merely a funding mechanism for the employer to do so. And quoting from the Court’s decision, the defense reiterated, "Ms. Orzechowski is suing under ERISA for denial of benefits under the Plan; she is not suing for breach of the Aetna insurance policy."
Whether I like it or not, given the parameters of trust law, the defense has a compelling argument. The defense cited Cerone v. Reliance Std. Life Ins. Co., 2013 U.S. Dist. LEXIS 175300 (S.D. Cal., Dec. 13, 2013). Cerone did acknowledge that there is a distinction between claims brought under the benefits plan and claims brought under the insurance policy. See: Cerone v. Reliance Std. Life Ins. Co., 9 F.Supp.3d 1145 (S.D. Cal., March 28, 2014).
I believe this problem actually arose out of insurance company laziness over the years to take the time to assist employers in assuring that ERISA plans are "properly constructed", so as to enable them to take advantage of the Firestone exception to the de novo rule. Since Insurance companies have been the primary beneficiaries of that exception, one would think it would have served their interests to be more careful.
As of the date of this article, both the Orzechowski and the Cerone cases are pending before the 9th Circuit. Perhaps the decisions in those cases will shed more light on what we may expect. If the state law bans on all discretionary clauses are upheld by the courts, it will be interesting to see if: (a) insurance companies return to those nostalgic days when they simply created a lot of subterfuge to acquire the discretion they so desperately seek; and (b) if they do whether the courts will allow them to get away with it (i.e. whether the savings clause can actually "deprive the employer of its election to include discretionary language in plan documents").
Postscript: In August 2016 a settlement was reached in the Cerone case and the Ninth Circuit appeal was dismissed. However, in May 2017 the Ninth Circuit issued its decision in Orzechowski, holding that “By its terms, §10110.6 covers not only ‘policies’ that provide or fund disability insurance coverage but also ‘contracts, certificates, or agreements’ that “fund” disability insurance coverage.” Therefore, unless the Supreme Court takes up the issue, it appears that for insured plans discretionary review for ERISA benefit plans is dead in California, as to life insurance and disability policies. By its terms the statute does not apply to health insurance policies.
ERISA Disability Lawyer