Marszalek v. Marszalek & Marszalek Plan

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Marszalek v. Marszalek & Marszalek Plan, 2007 U.S.Dist.LEXIS 31607 (N.D.Ill. 4/30/2007)(Issue: Standard of Review).  In this ruling, the court was called upon to determine the standard of review and foreclose discovery if the standard of review were found to be the “arbitrary and capricious” standard.  The court sided with the defendant after finding that the policy contained adequate language reserving discretion.  The language cited by the court reads:

ALLOCATION OF AUTHORITY

Except for those functions which the Policy and the Summary of Insurance Benefits specifically reserves to the Policyowner or Employer, the Company [Northwestern Mutual] has full and exclusive authority to control and manage the Policy and Summary of Insurance Benefits, to administer claims, and to interpret the Policy and the Summary of Insurance Benefits and resolve all questions arising in the administration, interpretation, and application of the Policy and Summary of Insurance Benefits.

The Company's authority includes, but is not limited to:

* The right to resolve all matters when a review has been requested;

* The right to establish and enforce rules and procedures for the administration of the Policy and the Summary of Insurance Benefits and any claim under them;

* The right to determine:

(1) Eligibility for insurance;

(2) Entitlement to benefits;

(3) Amount of benefits payable;

(4) Sufficiency and the amount of information we may reasonably require to determine 1, 2., or 3, above.

Subject to the review procedures of the Policy and the Summary of Insurance Benefits, any decision the Company makes in the exercise of the Company's authority is conclusive and binding.

The court deemed the language sufficient to establish that “the administrator has discretionary authority to make benefits determinations.” *6.  The court also rejected the plaintiff’s argument that a conflict of interest should diminish the standard of review, since, under Seventh Circuit law, the conflict has never altered the standard.  The court also rejected the plaintiff’s argument that a state insurance regulation prohibiting discretionary clauses was operative.  The court explained:

plaintiff argues that Illinois law prohibits the issuance of insurance policies containing clauses that grant insurance companies discretionary authority. In support of this argument, plaintiff relies on an Illinois Department of Insurance Regulation found in § 2001 of the Illinois Administrative Code. 29 Illinois Register 10172; 50 Ill. Admin. Code § 2001 (July 15, 2005). However, the regulation has an effective date of July 15, 2005.  Id. It is not retroactive and therefore, it fails to invalidate discretionary clauses in insurance policies issued prior to July 15, 2005. See Dreyer v. Metro. Life Ins. Co., 459 F. Supp. 2d 675, 681-82 (N.D. Ill. 2006); Guerrero v. Hartford Fin. Servs. Group, 2006 U.S. Dist. LEXIS 29248, *19 (N.D. Ill. 2006). Because the plan documents in this case were issued on October 1, 1996, with an effective date of June 1, 2000 (as to Marszalek & Marszalek), the regulation is inapplicable here. *8-*9.

After deeming the arbitrary and capricious standard applicable, the court then foreclosed discovery under Seventh Circuit standards that limit the court’s review to the claim record unless the plaintiff can make a showing that discovery would reveal a procedural defect in the claim determination.

Discussion:      The application of a deferential standard of review can be faulted on two grounds.  First, the “allocation of authority” language allocates authority, not discretion.  One of the cases cited by the court as authority for the conclusion that the quoted language sufficiently reserves discretion is on appeal and we have argued in that case:

In both Reilly v. Standard Ins. Co., 2004 U.S.Dist.LEXIS 18313 (N.D. Cal. 2004) and in Bode v. St. Joseph's Health Systems, 298 F. Supp.2d 918, 920 (C.D. Cal. 2003), the exact “allocation of authority” language quoted in Appellee’s policy was found insufficient to justify a departure from the default de novo standard of review in ERISA cases prescribed by Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).  Reilly explains:

In this case, the relevant language in the section of the Policy entitled "Allocation of Authority" does not expressly give Standard discretionary authority in making benefit eligibility determinations -- indeed, the word "discretion" is never even used. Rather, the language only allocates to Standard the full and exclusive authority to administer claims, including the right to determine entitlement to benefits and the amount of information it may reasonably require to determine entitlement to benefits. Exh. A at 00035. As the Ninth Circuit has squarely held, however, "an allocation of decision-making authority . . . is not, without more, a grant of discretionary authority in making those decisions." [Ingram v. Martin Marietta Long Term Disability Income Plan for Salaried Employees of Transferred GE Operations, 244 F.3d 1109, 1112-13 (9th Cir. 2001)] (emphasis added); see also Bode v. St. Joseph's Health Systems, 298 F. Supp.2d 918, 920 (C.D. Cal. 2003). Indeed, in Bode, the Court found that the exact language at issue here did not satisfy the standard in Ingram for expressly conferring discretionary authority upon the Administrator. Id. It further found that Ingram, which post-dates the case relied on by Defendants -- Bendixen v. Standard Ins. Co., 185 F.3d 939 (9th Cir. 1999) -- controls in this case.

2004 U.S.Dist. LEXIS 18313, *4-*5.  While these cases are directly on point, the district court found them “not persuasive” because the Ninth Circuit’s precedent is “diametrically opposed” to the Seventh Circuit cases. R. 120; Slip Op. at 24; Appendix at 24.  On the contrary, this Court’s finding in Diaz that “the delegation of authority must be express and unambiguous” is identical to the Ninth Circuit’s position.  In Ingram, the Ninth Circuit found that “the text of a plan [must] be unambiguous” in order for discretion to be granted.  244 F.3d at 1113.  Contrary to the district court’s finding, the Ninth Circuit does not require the plan document to use the magic word ‘discretion’ to depart from the default de novo standard of review.  Instead much like this Circuit, the Ninth Circuit requires that the plan clearly confer discretion in unambiguous terminology.  See, e.g., Feibusch v. Integrated Device Technology Inc. Employee Benefit Plan, 463 F.3d 880 (9th Cir. 2006)(plan language must unambiguously confer discretion).

Standard has known since 1989, when the Supreme Court issued Firestone, and since 2000, when it was party to the Herzberger case, that if it wished to receive a deferential standard of review, it would need to incorporate in its policies the simple language necessary to achieve a discretionary standard of review.  Its failure to do so should not compel a court to engage in semantic gymnastics to try to parse the wording in Standard’s policy; the review standard should therefore simply default to the plenary standard prescribed in Firestone. Accordingly, if for no other reason, the court should reverse and remand based on the district court’s misapplication of a deferential standard of review.  Gutta v. Standard Select, 06-3708 (7th Cir.)(pending)

Thus, authority and discretion are two separate concepts.

The court’s discussion relating to the Illinois regulation is also misplaced.  The regulation states its applicability as to “all individual and group accident and health policies, disability insurance policies, and group accident and health certificates, regardless of whether they provide disability benefits.”  It applies to all policies filed with the Division of Insurance and does not state it only applies to new policies issued following the effective date of the regulation.  Moreover, the court’s ruling demonstrates a fundamental misunderstanding of the nature of insurance policies.  Even if the judge was correct that the regulation applied only to policies that became effective after the date of the regulation (which is July 1, 2005, not July 15), group insurance such as disability benefits is renewed annually. See, e.g., Attorneys Liab. Protection Soc'y v. Reliance Ins. Co., 117 F. Supp. 2d 1114, 1119-1120 (D. Kan. 2000):

The renewal of an insurance policy for a specified period (here, one year) is a separate and distinct contract. See Kane v. American Ins. Co., 52 Conn. App. 497, 725 A.2d 1000, 1002 (Conn. Ct. App. 1999); Hercules Bumpers, Inc. v. First State Ins. Co., 863 F.2d 839, 842 (11th Cir. 1989) ("It is a basic tenet of insurance law that each time an insurance contract is renewed, a separate and distinct policy comes into existence."); Government Employees Ins. Co. v. United  States, 400 F.2d 172, 174-75 (10th Cir. 1968) (renewal of insurance policy constitutes separate contract); see also 13A John Alan Appleman et al., Insurance Law and Practice § 7648 at 450 (1976) ("A renewal contract has been stated by many jurisdictions to be a new, and a separate and distinct contract, unless the intention of the parties is shown clearly that the original and renewal agreement shall constitute one continuous contract.").

Also see, 2 Russ & Segalla, Couch on Insurance 3d (1997), Section 29.33 (Generally, the renewal of an insurance policy represents a separate and distinct contract). The policy at issue, therefore, had to have been considered a new policy subsequent to the date of the regulation’s promulgation.

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