Discretion and pre-emption: Unraveling ERISA, state insurance law

This article was initially published in the Chicago Daily Law Bulletin on September 14, 2016.

By Mark D. DeBofsky
Mark D. DeBofsky is a name partner of DeBofsky, Sherman & Casciari, PC. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage, and Social Security law. He can be reached at mdebofsky@debofsky.com.

Regular readers of this column have likely perceived my partisanship in favor of plaintiffs in employee benefit disputes. Today’s column, though, represents a different viewpoint and takes issue with a court ruling in California that favored an argument advanced by a plaintiff in a disability benefit dispute.

The reason for my taking such an unlikely position is that the court disregarded key principles of pre-emption under the Employee Retirement Income Security Act.

The case at issue is Thomas v. Aetna Life Insurance Co., 2016 WL 4368110 (E.D. Calif., Aug. 15, 2016), which repeated a mistake made in a prior ruling, Williby v. Aetna Life Insurance Co., 2015 WL 5145499 (C.D. Calif., Aug. 31, 2015). Both cases involved self-funded disability benefit plans — Thomas involved the disability benefit plan sponsored by Federal Express Corp., while Williby examined Boeing Corp.’s self-funded plan.

The issue where both courts went astray relates to the standard of judicial review applicability to the court’s examination of a disability benefit denial. The standard of review applied in ERISA-based benefit disputes is often outcome-determinative, since plaintiffs face an onerous burden in establishing that a benefit denial was not only erroneous, but also arbitrary and capricious.

The ERISA statute permits courts to apply the arbitrary and capricious standard of review in situations where the governing benefit plan contains language that unmistakably and unambiguously states that the designated claim administration possesses the discretionary authority to construe the terms of the benefit plan and determine a claimant’s eligibility to receive benefits.

The seminal case on this issue is Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), which pronounced that while the default standard of judicial review in ERISA claims is de novo, if the plan contains discretion-granting language, the standard of review becomes deferential.

Recognizing the heavy burden imposed on plaintiffs challenging benefit denials, the National Association of Insurance Commissioners in 2004 promulgated a model law prohibiting the inclusion of discretionary language in health and disability insurance plans.

Versions of that law have since been adopted in approximately 20 states (See debofsky.com/Articles/Bloomberg-Benefits-Practice-Resource-Center-Article-on-Discretionary-Clauses.pdf).

In Illinois, 50 Illinois Administrative Code Section 2001.3, adopted the association rule; and in California, Section 10110.6 of that state’s Insurance Code accomplishes the same purpose. But the question raised in Thomas was whether such laws apply only to insurance companies or would they extend to self-funded benefit plans as well? The answer to that question involves an exercise in mental gymnastics that demonstrates the complexity of ERISA pre-emption. The ERISA law contains an exceptionally broad pre-emption provision that states as follows in relevant part:

"Except as provided in [S]ubsection (b) of this section, the provisions of this subchapter and [S]ubchapter III shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan described in [S]ection 1003(a) of this title and not exempt under [S]ection 1003(b) of this title." 29 U.S.C. Section 1144(a). Hence, the general rule is any state law that relates to any ERISA-governed employee benefit plan is pre-empted by ERISA. But there is an exception, known as the savings clause, that states: "Except as provided in [S]ubparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any state which regulates insurance, banking, or securities." 29 U.S.C. Section 1144(b)(2)(A).

Based on that provision, courts have ruled that state laws (which are defined to include "all laws, decisions, rules, regulations or other state action having the effect of law of any state," including the District of Columbia — 29 U.S.C. Section 1144(c)(1)) such as [S]ection 2001.3 are "saved" from pre-emption. See Fontaine v. Metropolitan Life Insurance Co., 800 F.3d 883 (7th Cir. 2015) (finding that Section 2001.3 is saved from pre-emption).

Nonetheless, there is a significant exception to the savings clause known as the deemer clause, which provides:

"Neither an employee benefit plan described in [S]ection 1003(a) of this title, which is not exempt under [S]ection 1003(b) of this title (other than a plan established primarily for the purpose of providing death benefits), nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company or investment company or to be engaged in the business of insurance or banking for purposes of any law of any state purporting to regulate insurance companies, insurance contracts, banks, trust companies or investment companies." 29 U.S.C. Section 1144(b)(2)(B).

Under the deemer clause, self-funded plans governed by ERISA would not be subjected to state insurance regulation. The 7th U.S. Circuit Court of Appeals explained the issue in Moran v. Rush Prudential HMO Inc., 230 F.3d 959, 970 (7th Cir. 2000), affirmed, 536 U.S. 355, 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002), by observing:

"The ‘deemer clause,’ [S]ection 514(b)(2)(B), is an exception to the saving clause exception. A law saved from pre-emption by the saving clause may still be preempted if it falls within the deemer clause. [Citation omitted.] Under this clause, state laws that purport to regulate insurance by ‘deeming’ a plan to be an insurance company are outside of the saving clause and are subject to pre-emption."

While the California federal court in Thomas v. Aetna acknowledged the existence of the deemer clause, the court still found the California ban on discretionary clauses applicable based on a finding that "[S]ection 10110.6 applies to contracts." But that finding directly conflicts with ERISA’s pre-emption provision, which has federalized garden-variety disputes over health and disability benefits and removed claims relating to such benefits from the ambit of breach-of-contract actions even where such benefits are provided though insurance.

Although both Thomas and Williby will therefore likely be reversed by the appeals court, such cases provide a lesson in the complexity of ERISA pre-emption.

—Note: I represented the plaintiff in the Fontaine v. Metropolitan Life case referenced in this article. In addition the reference to an article posted on our firm’s website is to a publication by Bloomberg/BNA reproduced on our website by permission of the copyright holder.