Employees applying for long-term disability insurance benefits under an employer sponsored ERISA disability plan often call an ERISA lawyer explaining they have heard about the arbitrary ways in which insurers view evidence and interpret the policy provisions in order to deny claims. They usually don’t know that the source of this conduct—aside from being an insurance company—is often a clause in the insurance policy that purports to grant the insurer “discretion” to interpret the policy’s terms and determine benefit eligibility, contrary to long-standing insurance law construing ambiguous policy provisions against the insurer. Not surprisingly, many states’ insurance commissioners began outlawing such clauses in insurance policies in order to protect the insureds. The insurers have been fighting back in defending ERISA § 502(a) claims for long-term disability benefits, challenging the applicability so such state insurance law under ERISA preemption principles. First, they argue if the discretionary clause is in a plan document that is not the insurance policy, the ban does not apply. Second, where an employer self-funds the benefits but hires an insurance company to review claims, they argue it does not cover an insurance policy either. But insureds claimed two victories over these arguments recently in California, which has such a ban on discretion.
In Lin v. Metropolitan Life Insurance Co., No. C 15-2126 SBA, 2016 U.S. Dist. LEXIS 109397 (N.D. Cal. Aug. 16, 2016), when Lin sued to recover long-term disability benefits under ERISA, the court held that California’s ban on discretionary clauses, found in California Insurance Code § 10110.6, applies even where the clause appears in a master plan document, outside the insurance policy or certificate of coverage. This is consistent with a long-line of federal cases in Illinois, including our own earlier case, Novak v. Life Insurance Company of North America, 956 F. Supp. 2d 900 (N.D. Ill. 2013).
Next in Thomas v. Aetna Life Insurance Co., No. 215CV01112JAMKJN, 2016 U.S. Dist. LEXIS 107815 (E.D. Cal. Aug. 15, 2016), plaintiff sued to recover short-term disability benefits under a self-funded plan sponsored by FedEx, and administered by Aetna (who likely serves as the long-term disability insurer). Aetna argued the California ban does not apply because the plan is not an insured plan. Applying the Supreme Court’s recent decision in Gobeille v. Liberty Mutual Ins. Co., 136 S. Ct. 936, 943 (2016), the court held the California ban on discretionary clauses was not a state law with an “impermissible connection” with an ERISA plan. The court reasoned a law that does not add a new requirement for administrators, but only alters a standard of review in court, is not an “impermissible connection.” Hopefully, this is the start of a new tide turning to ban discretionary clauses in all disability benefit plans.
If you have a claim for long-term disability, talk to a knowledgeable ERISA long-term disability lawyer.