When an insured obtains his or her disability insurance coverage from an employer, more often than not, that claim is governed by Employee Retirement Income Security Act of 1974, also known as ERISA. Litigation under ERISA is very different from “normal” bad faith insurance litigation where the insured sues the insurer for breach of contract and breach of the implied covenant of good faith and fair dealing. Some of the differences favor the insured, while others favor the insurance company/claims administrator. However, thanks to the California Legislature and recent District Court rulings, one of the insurer’s asserted weapons is longer available.
In an ERISA case, the court reviews the claim decision by applying one of two different standards of review: the abuse of discretion standard of review or de novo review. Under the abuse of discretion standard of review, the Court is required to give some deference to the insurer’s decision. However, under the de novo standard of review, the Court does not give any deference to the insurer’s decision, but rather determines in the first instance if the claimant has adequately established that he or she is disabled under the terms of the Plan. Between these two options, obviously, the abuse of discretion standard of review could be viewed as more favorable to disability insurance companies. (We believe that in practice there is not much difference between them as the abuse of discretion standard of review gives a disability insurance claimant more access to good discovery from the insurer and we believe that if judges are convinced that a claimant is really totally disabled, they will rule in favor of the claimant no matter the standard). However, the abuse of discretion standard is no longer available to insurers in California.
An insurer can only reap the benefits of the abuse of discretion standard of review by pointing to language in the insurance plan/policy in which the insurer is specifically granted the “discretion” to make claim decisions and interpret the plan provisions. Such a provision is referred to the “discretionary clause.” California Insurance Code section 10110.6 has now completely foreclosed the inclusions (and effect) of any discretionary clause contained in an plan/policy with a “renewal date” of 2012 or later.
California Insurance Code section 10110.6 states in the relevant part:
(a) 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.
(b) For purposes of this section, “renewed” means continued in force on or after the policy’s anniversary date.
(c) For purposes of this section, the term “discretionary authority” means a policy provision that has the effect of conferring discretion on an insurer or other claim administrator to determine entitlement to benefits or interpret policy language that, in turn, could lead to a deferential standard of review by any reviewing court.
(g) This section is self-executing. If a life insurance or disability insurance policy, contract, certificate, or agreement contains a provision rendered void and unenforceable by this section, the parties to the policy, contract, certificate, or agreement and the courts shall treat that provision as void and unenforceable.
This section, by its own terms, applies to any policy or agreement that provides “disability insurance coverage” to “any California resident” regardless of where it was offered, issued, delivered, or renewed. Thus, when determining whether a subject policy is governed by this section of the California Insurance Code, the only issue is whether the policy was offered, issued, delivered, or renewed on or after January 1, 2012 and before the claim accrued. However, this is typically a minor hurdle for an insured to clear as, for the purposes of section 10110.6, a policy automatically renews every year on the policy’s anniversary date. See Cal. Ins. Code § 10110.6(b) (providing that “renewed” means “continued in force on or after the policy’s anniversary date”). Most Policies renew every year, which means, that as of now, a vast majority of disability insurance policies’ issuance dates (and renewal dates) fall within the relevant time period.
Indeed, numerous recent Court rulings establish that, even if the Policy contains a discretionary clause, per California Insurance Code section 10110.6, that language is unenforceable, and de novo is the proper standard of review. See Polnicky v. Liberty Life Assur. Co. Of Boston, 999 F. Supp. 2d 1144, 1148 (N.D. Cal. 2013) (applying de novo standard of review to ERISA claim for denial of benefits because “[t]he Policy was continued in force after its January 1, 2012 anniversary date, [so] any provision in the Policy attempting to confer discretionary authority to Liberty Life was rendered void and unenforceable”); see also Gonda v. The Permanente Med. Grp., Inc., 10 F. Supp. 3d 1091, 1093-1094 (N.D. Cal. 2014); Cerone v. Reliance Std. Life Ins. Co., 9 F. Supp. 3d 1145 (S.D. Cal. 2014); Curran v. United of Omaha Life Ins. Co., 38 F. Supp. 3d 1184 (S.D. Cal. 2014); Rapolla v. Waste Mgmt. Employee Benefits Plan, 2014U.S. Dist. LEXIS 87256, 2014 WL 2918863 (N.D. Cal. June 25, 2014); Snyder v. Unum Life Ins. Co. of Amer., 2014 WL 7734715 (C.D. Cal. Oct. 28, 2014); Jahn-Derian v. Metro. Life Ins. Co., 2015 U.S. Dist. LEXIS 28652, 2015 WL 900717 (C.D. Cal. Mar. 3, 2015).
Given these rulings, it appears that the abuse of discretion standard of review is now, more than three years after the effective date of the statute, dead in ERISA cases that are filed in Federal Courts in California.
If your claim for short-term disability insurance or long-term disability insurance has been denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group, several of whom previously represented insurance companies, who are exceptionally experienced in handling ERISA short-term and long-term disability insurance litigation.