On June 19, 2013, Judge Marvin Aspen from the U.S. District Court for the Northern District of Illinois issued a ruling in a case brought by DeBofsky, Sherman & Casciari. Schlattman v. United of Omaha Life Ins.Co., 2013 U.S.Dist.LEXIS 85906 (N.D.Ill. June 19, 2013) is yet another ruling preserving the uninterrupted streak of court rulings upholding the Illinois ban on the inclusion of discretionary clauses in health and disability insurance policies. The court determined that 50 Ill.Admin.Code § 2001.3 was properly promulgated within the scope of the authority possessed by the Illinois Insurance Director and that the regulation survives an assertion of ERISA preemption. The regulation provides:

No policy, contract, certificate, endorsement, rider application or agreement offered or issued in this State, by a health carrier, to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services or of a disability may contain a provision purporting to reserve discretion to the health carrier to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of this State.

In addressing the Director’s regulatory authority, the court first flatly rejected an argument that while some discretionary clauses are impermissible, others would be appropriate. The court determined:

The language in a given policy either legally suffices to grant the administrator discretion, or it does not. As a result, the language either entitles the administrator’s decisions to deferential review, or it does not. Defendant has not offered any legal authority or practical example describing how one grant of discretion could effectively differ from another. The eventual exercise of that discretion by an administrator in a particular circumstance may be less fair or more fair. But neither the grant of discretion itself, nor the resultant shift in the standard of review, contain shades of gray. Accordingly, if the Director had the authority to void the grant of discretion, that ban logically would apply across the board.

The court further determined that the Director’s authority to issue the regulation was within the Director’s “latitude and discretion to adopt regulations that are reasonably necessary to performs its statutory duties.” (citations omitted). Because the Director explained in the notice of issuance of the regulation that “the grant of sole discretion to interpret policies–due to the resultant shift in the standard of review–was unfair, inequitable, and/or in contravention of the public policy of the State of Illinois, which seeks to protect insurance consumers,” the regulation had an adequate basis. The court also pointed out that “Section 2001.3 effectuates Illinois public policy.” (citing Zaccone v. Standard Life Ins. Co., No. 10 C 33, 2013 U.S. Dist. LEXIS 62062, 2013 WL 1849515, at *2, 12 (N.D. Ill. May 1, 2013) (noting that “Illinois has determined that discretionary clauses are against public policy”); Zuckerman, 2012 U.S. Dist. LEXIS 128204, 2012 WL 3903780, at *5-6; Curtis v. Hartford Life & Accident Ins. Co., No. 11 C 2448, 2012 U.S. Dist. LEXIS 5423, 2012 WL 138608, at *2, 9 (N.D. Ill. Jan. 18, 2012) (concluding that Delaware law, which allowed discretionary clauses, was contrary to Section 2001.3 “and the public policy of Illinois”)). Hence, the court concluded, “Section 2001.3 thus shields the public from several of the harms identified in 215 ILCS 5/143(1) and, moreover, furthers Illinois’ stated public policy of protecting insurance consumers.” The cited statutory provision recites that the Director is required to withhold approval of any insurance policy that “contains provisions which encourage misrepresentation or are unjust, unfair, inequitable, ambiguous, misleading, inconsistent, deceptive, contrary to law or to the public policy of this State, or contains exceptions and conditions that unreasonably or deceptively affect the risk purported to be assumed in the general coverage of the policy.” 215 ILCS 5/143(1).

The ERISA preemption argument was also quickly disposed of based on the court’s comment that the same argument had been “vetted and rejected by two circuit courts of appeal (considering similar regulations) and no less than seven judges within the Northern District of Illinois (considering Section 2001.3 specifically). Morrison, 584 F.3d at 841-45; Am. Council of Life Insurers, 558 F.3d 600, 604-07 (6th Cir. 2009); Zaccone, 2013 U.S. Dist. LEXIS 62062, 2013 WL 1849515, at *3-5 (Cole, Mag. J.); Borich v. Life Ins. Co. of N. Am., No. 12 C 374, 2013 U.S. Dist. LEXIS 59674, 2013 WL 1788478, at *3-4 (N.D. Ill. Apr. 25, 2013) (Tharp, J.); Difatta v. Baxter Int’l, Inc., No. 12 C 5023, 2013 U.S. Dist. LEXIS 6360, 2013 WL 157952, at *3 (N.D. Ill. Jan. 15, 2013) (Feinerman, J.); Ehas v. Life Ins. Co. of N. Am., No. 12 C 3537, 2012 U.S. Dist. LEXIS 169151, 2012 WL 5989215, at *7-10 (N.D. Ill. Nov. 29, 2012) (St. Eve, J.); Zuckerman, 2012 U.S. Dist. LEXIS 128204, 2012 WL 3903780, at *6-10 (Tharp, J.); Barrett v. Life Ins. Co. of N. Am., 868 F. Supp. 2d 779, 781 (N.D. Ill. 2012) (Shadur, J.); Curtis, 2012 U.S. Dist. LEXIS 5423, 2012 WL 138608, at *9-10 (Gilbert, Mag. J.); Ball v. Standard Ins. Co., No. 09 C 3668, 2011 U.S. Dist. LEXIS 19146, 2011 WL 759952, at *2-7 (N.D. Ill. Feb. 23, 2011) (Keys, Mag. J.).

Related Articles