Discretionary clauses and choice of law in ERISA cases

This article was published in the Chicago Daily Law Bulletin on November 16, 2015.

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 . He can be reached at mdebofsky@debofsky.com.

The standard of judicial review utilized in cases brought under the Employee Retirement Income Security Act (ERISA) is critical and may even be outcome-determinative. The parties often vehemently assert their positions in litigation, with the plaintiffs strenuously claiming the right to a de novo standard of judicial review, while the defendants argue just as forcefully for a deferential standard.

Although the Supreme Court ruled in Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989) that the default judicial review standard in cases challenging benefit denials is de novo, the court went on to rule that a deferential standard of review is triggered when "the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan." Id. at 115.

However, even if such discretion-granting language is present, that does not necessarily end the discussion, as illustrated by a recent ruling from a federal court in California.

In Hirschkron v. Principal Life Insurance Co., 2015 WL 6651146 (N.D. Cal. Oct. 29, 2015), the court was presented with insurance policy documentation that clearly reserved discretionary authority to the insurer, Principal. Yet the court found the grant of discretion was negated and applied the de novo standard of judicial review applied. The court's rationale involved a choice of law determination.

Both the policy and certificate of coverage issued by Principal afforded the insurer "complete discretion to construe or interpret the provisions of this group insurance policy, to determine eligibility for benefits and to determine the type and extent of benefits, if any, to be provided."

Nevertheless, the plaintiff argued that California Insurance Code Section 10110.6(a) rendered the discretionary language unenforceable and invalid. That provision states, "[i]f 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."

The California statute did not fully resolve the issue, however. Although the plaintiff was a resident of California, and the policy was issued after the date Section 10110.6(a) went into effect, Principal asserted that the policy contained an express choice of law provision designating the laws of the state of Maryland as governing the group policy.

Principal thus argued the policy's choice of law provision superseded the California statute. The court disagreed, finding:

"The plain language of the section voids discretionary provisions even if the relevant policy, contract, certificate or agreement contains a choice of law provision that ultimately results in the substantive rights and obligations of the parties being governed by the laws of a state other than California." (It should also be noted that Maryland, like California, bans discretionary clauses; however, the scope of and validity of Maryland Code Ann. Ins. Section 12-211(b) has not been ruled upon by any court, although the court found it unnecessary to even address the issue).

The court followed two prior rulings, Rapolla v. Waste Management Employee Benefits Plan, Case No. 13-cv-02860-JST, 2014 WL 2918863, at *5 (N.D. Cal. June 25, 2014), and Snyder v. Unum Life Insurance Company of America, Case No. CV-13-07522-BRO (RZx), 2014 WL 7734715, at *10-11 (C.D.Cal. Oct. 28, 2014) for the proposition that choice of law provisions in ERISA plans should be followed so long as they are "not unreasonable or fundamentally unfair."

However, Snyder went on to hold that applying the choice of law provision with respect to the standard of review applicable to an ERISA benefit claim "would subvert the right to a 'fair review of claims denials' that was granted by the California legislature to all California residents."

The court agreed with Snyder and determined the provisions of the Principal policy and certificate were "void and unenforceable under California Insurance Code Section 10110.6." Therefore, the de novo standard of review applied.

Courts have recognized that discretionary clauses may be unfair to claimants, but other cases have recognized the utility of such clauses. In Conkright v. Frommert, 559 U.S. 506, 130 S.Ct. 1640, 176 L.Ed.2d 469 (2010), the Supreme Court praised deferential review of benefit determinations for promoting "efficiency, predictability and uniformity" in claim determinations. However, Conkright said nothing about ERISA pre-emption; nor did it overrule Firestone.

Moreover, in Rush Prudential HMO Inc. v. Moran, 536 U.S. 355, 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002), the Supreme Court explicitly held that a state law mandating independent review of health maintenance organization (HMO) denials was saved from ERISA pre-emption and that the outcome of the independent review could supersede the insurer's discretionary claim determination.

Moran was cited as the basis for three appellate rulings that upheld laws banning discretionary clauses similar to the California law at issue in Hirschkron - Standard Insurance Co. v. Morrison, 584 F.3d 837 (9th Cir.2009); American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir.2009) and most recently Fontaine v. Metro. Life Insurance Co., 800 F.3d 883 (7th Cir. 2015). Thus, unless the Supreme Court intervenes, state laws banning discretionary clauses invalidate such provisions in insurance policies issued in the approximately 20 states that have such laws.

Nor will choice of law provisions in policies likely dictate a different outcome since cases such as Hirschkron and the cases it cited utilize choice of law rules to negate the choice of law designations that could potentially remove the protections afforded by laws banning discretionary clauses. More locally, in Curtis v. Hartford Life & Accident Insurance Co., 2012 WL 138608, 2012 U.S.Dist.LEXIS 5423 (N.D.Ill. Jan. 18, 2012), the court applied similar reasoning in refusing to follow the choice of law designation in a disability insurance contract.

The court determined that since the coverage was delivered in Illinois, it was subject to the Illinois regulation banning discretionary clauses, 50 Ill.Admin. Code Section 2001.3.

I represented the plaintiffs in the Fontaine and Curtis cases cited in this article.