In Cerone v. Reliance Standard Life Ins.Co., 2014 U.S.Dist.LEXIS 46529 (S.D.Cal. March 28, 2014), after the plaintiff’s accidental death claim based on the death of her husband was denied and her appeal exhausted, Debra Cerone filed suit against Reliance Standard Life Insurance Company. The issue decided in this opinion was whether the de novo or abuse of discretion standard of review applied.
The group policy, which was issued to the plaintiff’s husband’s employer, had an effective date of July 1, 2004 with anniversary date of January 1 of each year thereafter. The plaintiff’s husband, Donald Cerone, died in a car accident on August 8, 2011. However, the claim for accidental death benefits was denied based on policy exclusions relating to alcohol intoxication or voluntary consumption of a controlled substance. The claim appeal was denied on August 20, 2012, and suit was filed on January 23, 2013.
The policy unquestionably contained a discretionary clause. Therefore, the issue was the applicability of California Insurance Code 10110.06, effective January 1, 2012, which provides:
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.
The court interpreted that provision to mean that an insurance policy “‘continued in force on or after the policy’s anniversary date'” is therefore renewed under the terms of the statute. The court added,
A renewal of an insurance policy is significant because “[t]he law in effect at the time of renewal of a policy governs the policy . . .” Stephan v. Unum Life Ins. Co. of Am., 697 F.3d 917, 927 (9th Cir. 2012). “Each renewal incorporates any changes in the law that occurred prior to the renewal.” Id. Thus, any relevant changes in the statutory or decisional law in force at the time the insurance policy is renewed “are read into each policy thereunder, and become a part of the contract with full binding effect upon each party.” Id.
Consequently, after January 1, 2012, the discretionary clause in the policy would be ineffective and the standard of judicial review would be de novo. However, the defendant maintained that since the plaintiff’s husband died in 2011, the policy in effect at that time did lawfully convey discretion and thus trigger a deferential standard of review.
The court disagreed, citing both Ninth and Seventh Circuit case law holding that the claim did not accrue until benefits were denied, citing Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d 1154, 1159-60 (9th Cir. 2001) and Hackett v. Xerox Corp. Long-Term Disability Income Plan, 315 F.3d 771, 774 (7th Cir. 2003). The court explained that welfare benefits do not vest “unless and until the employer says they do.” Grosz-Salomon, 237 F.3d at 1160. Hence, the court looked at the policy in 2012 – the initial claim for benefits was denied on January 10, 2012 and the pre-litigation appeal was denied on August 20, 2012. Accordingly, since the policy was amended by operation of law when Cal.Insur.Code § 10110.6 became effective on January 1, 2012, the discretionary clause was ineffective.
The court easily disposed of the defendant’s remaining arguments regarding preemption.
Discussion: While this ruling is a correct interpretation of the cited cases, there is a certain irrationality to the conclusion. If the policy had provided for $500,000 in benefits on the day the decedent died, but the indemnity had been reduced to $250,000 on the day the benefits were denied, the claim should still be for $500,000. That is precisely what the Seventh Circuit ruled in Filipowicz v. American Stores Benefit Plans Committee, 56 F.3d 807, 814-815 (7th Cir. 1995), where the court ruled a plan amendment could not bar recovery of life insurance benefits for which plaintiff had qualified prior to the amendment.
Likewise, in Gibbs v. CIGNA Corp., 440 F.3d 571, 576 (2d Cir. 2006), the Second Circuit found the application of an amendment restating the amount of earnings on which disability benefits could be based was precluded by language stating, “[a]ny modification or termination will not affect your right to benefits from a covered disability that occurred before the termination or modification[.]” 440 F.3d at 577 (emphasis omitted). Gibbs further ruled that an employer’s “subsequent unilateral adoption of an amendment which is then used to defeat or diminish the (employee’s) fully vested rights [is] ineffective.” Id. (quoting Kemmerer v. ICI Americas, Inc., 70 F.3d 281, 287 (3d 1995)).
The Second Circuit similarly explained in Feifer v. Prudential Ins. Co. of Am., 306 F.3d 1202, 1212 (2d Cir. 2002) that because an employee welfare Plan is a unilateral contract,
If the employee does not like the terms, he or she can decline and seek better terms elsewhere. But this choice is one that an employee, once disabled, cannot make. Nor does a disabled employee generally enjoy the retiree’s advantage of being able to select, or at least predict, his or her date of separation from the company, and plan accordingly… Despite the severe impact any such change [in benefits] would have on employees like the plaintiffs, their very disabilities would likely leave them with no alternative place to seek employment income. The nature of this benefit strongly suggests, then, that the parties did not intend or expect that [Defendant] could unilaterally change the terms of long- or short-term disability benefits after the date of disability absent an explicit provision to that effect.
Barker v. Ceridian Corp., 122 F.3d 628, 630 (8th Cir. 1997) also determined that a plan must unambiguously reserve the right to change the level of future disability benefits, i.e. vested benefits. Barker further noted, “the terms [of a contract] must be construed so as to render none of them nugatory and to avoid illusory promises.” 122 F.3d at 638. And contrary to this ruling, the Ninth Circuit, in Shane v. Albertson’s Inc., 504 F.3d 1166, 1168 (9th Cir. 2007), ruled that an amendment modifying the terms of a disability benefit plan was ineffective because the plan stated:
Any amendment to the Plan shall be effective only with respect to Total Disabilities which commence on and after the effective date of the amendment. Total Disabilities commencing prior to the effective date of a Plan amendment are to be provided for under the terms of the Plan in effect at the time those disabilities commenced.
It therefore seems that the respective rights and obligations of the parties should be fixed as of the date when the occurrence triggering the right to benefits happens. Both Grosz-Salomon and Hackett therefore appear illogical in permitting plan administrators to insert discretionary clauses after the fact, although those cases worked to the plaintiff’s advantage here.