By: Joseph P. Yonadi, Jr. and Nancy R. Chawla
Last month, the Ninth Circuit dealt a blow to discretionary clauses contained within ERISA plans when it held that a California statutory provision that banned discretionary clauses was not preempted by ERISA. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan (9th Cir. May 11, 2017).
Almost three decades ago, the U.S. Supreme Court created the rule that a de novo standard of review should apply to a denial of benefits claim unless the ERISA plan provides discretionary authority to the plan administrator. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). If discretionary authority is provided in a plan document, summary plan description, or insurance contract, courts can review the claims denial under an arbitrary and capricious or abuse of discretion standard of review. Both standard of reviews are more favorable than a de novo standard of review.
Boeing’s Plan and Aetna’s Policy
The facts in Orzechowski were that Boeing sponsored a long term disability plan for its employees (the “Plan”). The Aetna long term disability policy granted discretionary authority to Aetna to “review all denied claims, determine whether and to what extent employees and beneficiaries are entitled to benefits, and construe any disputed or doubtful terms of the policy.” The policy further stated that “Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously.”
California Insurance Code §10110.6, which became effective on January 1, 2012, provides:
(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.
ERISA Does Not Preempt the California Statute*
Boeing argued that ERISA preempted California Insurance Code §10110.6. The Ninth Circuit held that the California statute fell under ERISA’s saving clause, thus, was not preempted by ERISA. ERISA saves from preemption “any law of any State which regulates insurance, banking, or securities.” §1144(b)(2)(A). In order for the California statute to be saved by ERISA’s saving clause, it must satisfy a two-part test, i.e., the law must be specifically directed toward entities engaged in insurance,” and it “must substantially affect the risk pooling arrangement between the insurer and the insured.” Kentucky Ass’n of Health Plans v. Miller, 538 U.S. 329, 342 (2003). According to the Ninth Circuit, the statute satisfied the two-part test.
The Ninth Circuit remanded the case to the district court to conduct a de novo review of the administrator’s denial of benefits decision because the California statute voided the discretionary authority provisions of the Plan and the policy.
The Impact of the Ninth Circuit’s Decision in Orzechowski
If the Ninth Circuit’s line of thought gains momentum throughout the country, plan sponsors may be required to review their ERISA claims review process to take into account the more rigid de novo standard of review. If you are a plan sponsor that has a significant employee population throughout in State within the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington), you may want to seek counsel and identify any potential risks in your claims review process. We will continue to monitor for any new developments on this front.
* Boeing also argued that the statute did not apply in this case because its Plan predated the effective date of the statute. The Court concluded that the policy renewal was sufficient to invoke the statute.