Case Updates Archives - Page 6 of 21

Ninth Circuit Expands the Availability of Equitable Remedies in ERISA Cases, Approving Surcharge as a Viable Remedy

Since the Supreme Court’s decision in Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985), the courts have grappled with the issue of the extent to which equitable remedies are available under the Employee Retirement Income Security Act (“ERISA”). One of the most interesting and beneficial for plan participants is the issue of the equitable remedy of surcharge under ERISA. Recently, the Ninth Circuit withdrew an earlier decision regarding the availability of the equitable remedy of surcharge in ERISA, and issued a new ruling consistent with the holdings of other Circuit courts. The new ruling, Gabriel v. Alaska Electrical Pension Fund, 2014 DJDAR 16590 (9th Cir. 2014), is much more favorable to ERISA claimants and makes clear that surcharge, a form of equitable relief, is available to ERISA claimants under 29 U.S.C. section 1132(a)(3). Further, the Court also set forth the requirements that a claimant must meet to qualify for other forms of equitable relief, including equitable estoppel and reformation.

The specific facts of the Gabriel matter are unimportant, and ultimately the Ninth Circuit ruled that the district court was correct in holding that the plaintiff was not entitled to the payment of the pension funds that he sought because his rights to those funds never vested. The Ninth Circuit also remanded one aspect of the case to the District Court, but virtually instructed the lower court to deny that claim as well. However, the ruling is important because, by making the equitable remedy of surcharge available to ERISA claimants, the Ninth Circuit aligned itself with the Fourth, Fifth, Seventh and Eighth Circuits in expanding the rights of ERISA claimants.

In the ruling, the Ninth Circuit explained that in Cigna Corp. v. Amara, 131 S. Ct. 1866 (2011), the United States Supreme Court made it clear that because ERISA section 1132(a)(3) allows a claimant to seek “appropriate equitable relief,” those remedies traditionally viewed as equitable were available.

Thus, for example, a claim of “appropriate equitable relief” may include “the reformation of the terms of the plan, in order to remedy the false or misleading information” provided by a plan fiduciary. The Ninth Circuit then explained:

A plaintiff may obtain reformation based on mistake in two circumstances: “if there is evidence that a mistake of fact or law affected the terms of [a trust] instrument and if there is evidence of the settlor’s true intent”; or (2) “if both parties [to a contract] were mistaken about the content or effect of the contract” and the contract must be reformed “to capture the terms upon which the parties had a meeting of the minds.” Skinner, 673 F.3d at 1166. Under a fraud theory, a plaintiff may obtain reformation when either (1) “[a trust] was procured by wrongful conduct, such as undue influence, duress, or fraud,” or (2) a “party’s assent [to a contract] was induced by the other party’s misrepresentations as to the terms or effect of the contract” and he “was justified in relying on the other party’s misrepresentations.” Id.

Next, the Ninth Circuit explained that equitable estoppel is another form of equitable relief available to ERISA claimants. Under the remedy of equitable estoppel, a fiduciary is held to what it promised and the claimant is entitled to the benefit consistent with that promise. However, in ERISA cases, enforcing equitable estoppel is not as simple as demonstrating that a promise for certain benefits were made; other conditions apply. For example, “a federal equitable estoppel claim in the ERISA context [cannot] contradict written plan provisions.”

Accordingly, a plaintiff may not bring an equitable estoppel claim that “would result in a payment of benefits that would be inconsistent with the written plan,” or would, as a practical matter, result in an amendment or modification of a plan, because such a result “would contradict the writing and amendment requirements of 29 U.S.C. §§ 1102(a)(1) and (b)(3).”

…

For the same reason, “oral agreements or modifications cannot be used to contradict or supersede the written terms of an ERISA plan.” (Citations omitted.)

In addition, the court explained that in order to meet the traditional equitable estoppel requirements, the ERISA claimant must also demonstrate “(1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan.” (Internal quotations and citations omitted.)

Finally, with respect to the equitable remedy of surcharge, an equitable remedy in which the claimant is placed in the position he or she would have been in but for the fiduciary’s breach of duty, the Ninth Court reversed its previous, now-withdrawn, decision and noted that Amara allows a claimant to obtain relief by surcharge. The Ninth Circuit explained that in order to prevail on a claim surcharge remedy, after Amara, the claimant is not required to show detrimental reliance, only that the plan or claim fiduciary breached its fiduciary duty owed to the injured claimant. In other words, all that is needed is harm and causation.

While the plaintiff in Gabriel may not ultimately obtain the benefits he was seeking, this was another plaintiff-friendly ruling from the Ninth Circuit.

What’s a Policyholder to Do? California Court Permits “Conditional Judgment” Awarding Replacement Cost to Policyholders

When a covered property is damaged, the insured may face a quintessential Catch-22—the insured cannot afford to proceed with costly repairs or replacement without insurance money, but until the repairs or replacements are finished, the insured cannot recover under the replacement cost provision of the liability policy. A recent court decision held a policyholder must actually repair or replace the damage in order to claim replacement cost value, but may recover a “conditional judgment” for replacement cost benefits and satisfy the condition after trial. Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., 2014 Cal. App. LEXIS 1073, 2014 WL 6679263 (Cal. App. 1st Dist. Nov. 24, 2014) (“Stephens”). Stephens fashions a pragmatic approach whereby insurers can condition payment on actual replacement, while policyholders preserve their rights to benefits after proving coverage.

The case involved a vacant, industrial warehouse owned by Stephens & Stephens XII, LLC (“Stephens XII”), which was covered under a commercial property insurance policy issued by Fireman’s Fund Insurance Co. (“Fireman’s Fund”). The insurance policy initially covered liability, and subsequently, Stephens XII added property damage coverage. The updated policy covered loss from property damage, including rent, and provided two different measures for reimbursement of covered damages: Stephens XII either could recover the replacement cost, or full cost of repairing the damage, so long as the repairs were actually made promptly or as soon as reasonably possible, or the actual cash value, or depreciated value of the damaged property.

Three days after the property damage coverage became effective, Stephens XII discovered large scale vandalism and theft by burglars who stripped all the electrical and conductive materials on the covered property, causing an estimated $1 million in repairs. Stephens XII filed a claim, but Fireman’s Fund delayed resolution of the claim, asserting that given the extensive scope of the vandalism, the damage must have occurred before the policy effective date. Stephens brought suit against Fireman’s Fund for breach of contract and breach of the implied covenant of good faith and fair dealing. Five years later, and one month before the trial, Fireman’s Fund denied coverage. As of the trial date, Stephens XII had yet to repair the damage. Regardless, in a special verdict, the jury awarded Stephens XII the “Replacement Cost,” plus over $2 million in lost “Business Income” for breach of contract, but denied damages for repair and lost profits and awarded $436,896 in “lost rents” as bad faith damages and awarding no damages for loss of rental value.

The trial court granted a judgment notwithstanding the verdict (“JNOV”), holding the terms of policy did not require Fireman’s Fund to pay replacement cost until the property damage was actually repaired or replaced, and such repairs had not been made. Replacement cost insurance, which typically places the insured in a better position than before the loss, creates a moral hazard that the insured will intentionally destroy property and recover under the policy. Therefore, replacement coverage typically requires as a condition to recovery that the insured actually repair or replace the damaged property before the insurer will pay the replacement cost. Generally, policies provide that the actual repair or replacement must occur as soon as possible.

The court noted that often, a policyholder with replacement cost coverage could claim an immediate payment based on the actual cash value to use as seed money to start the repairs. Here, claims discussions were in vain, with Stephens XII taking no steps to make repairs, and Fireman’s Fund never accepting coverage. Stephens XII did not ever seek the actual cost value to use as “seed money” to begin repairs and instead sought the replacement cost value with making any repairs, and sought its lost income. Because Stephens XII did not seek actual cost value and did not repair the damage, the trial court ruled that neither award was warranted. Next, the court rejected the jury award for lost business income. The policy contained a provision under which Fireman’s Fund agreed to pay for “actual loss of Business Income and Rental Value” sustained “due to the necessary suspension of operations during the period of restoration.” The court explained Stephens XII did not sustain losses because potential income lost from a failed property sale did not constitute “business income,” and Stephens XII did not suffer business losses as it did not conduct business at the property, as required by the policy.

On appeal, the Court of Appeal reversed, holding that Stephens XII was entitled to a conditional judgment awarding the replacement value, so long as the repairs were actually made. The court first confirmed that the trial court properly interpreted the contract as stating Stephens XII could claim either replacement cost, only if it actually repaired the damage, or actual cost value, which it did not claim. Further, there was no dispute that Stephens XII did not actually repair the damage, and therefore it was not entitled to replacement cost under the policy. The only issue to resolve was whether Stephens XII was excused from repairs based on Fireman’s Fund’s actions.

Stephens XII successfully argued its failure to repair was prevented by Fireman’s Fund’s failure to accept coverage. The court upheld the jury finding that there was significant evidence of Fireman’s Fund’s refusal to cover the loss which made it difficult for Stephens XII to repair the property. The court held that an insurer’s failure to pay a claim excused the procedural requirements (i.e., time restrictions), but not the insured’s underlying obligations (to repair the building) under the policy. However, the insured was entitled to a conditional judgment for replacement costs conditioned on the insured’s completion of repairs promptly after judgment. The Court of Appeal explained:

If coverage is ultimately resolved in favor of the insured, the insured should remain eligible to receive replacement cost, but only so long as the insured complies with other applicable policy terms, such as a repair requirement. In other words, a coverage dispute should not give the insured a benefit under the policy it never had in the absence of the dispute—such as the right to receive the replacement cost without actually repairing the damage.

The court rejected Stephens XII’s arguments that Fireman’s Fund waived, and was estopped from asserting, its right to demand compliance with the repair provision because it failed to communicate this demand in its correspondence. The court noted that California courts adhere to the general rule that waiver requires an insurer intentionally relinquish its right to deny coverage, and a failure to raise one basis for a denial in a denial letter may not reflect an intention to waive that reason. Here, Stephens XII did not provide sufficient evidence that Fireman’s Fund intended to waive the repair requirement.

Finally, the court upheld the jury’s verdict of $436,896 in “lost rents.”

Stephens identified a problematic issue in recovering replacement cost under a property damage policy and fashioned a rarely used judicial remedy by permitting a conditional judgment of award of replacement/repair costs. This solution seems appropriate and allows an insured to establish its right to coverage under a policy where the insurer denied coverage by requiring insurers to pay the replacement value once repairs are made.

Recent Federal Cases Applying the State and Federal Mental Health Parity Acts: What Do They All Mean?

The Federal Mental Health Parity and Addiction Equity Act (“MH Parity Act”) requires, at a minimum, that the financial requirements and treatment limitations for mental health benefits set by group health plans and health insurance carriers be no more restrictive than those provided for non-mental health medical benefits. The MH Parity Act was originally signed into law by President Bill Clinton in 1996 and amended the Employee Retirement Income Security Act (ERISA) and Public Health Service Act and Internal Revenue Code in 2008. Now, the MH Parity Act is at issue in an increasing number of cases and has been addressed several times by the federal courts in the Ninth Circuit Court of Appeals.

Daniel F. v. Blue Shield of California, U.S. Dist. LEXIS 111643 (N.D. Cal. Aug. 11, 2014) began with two parents seeking coverage for residential treatment of their minor son’s mental health condition under their Blue Shield health insurance plan, governed by ERISA. Blue Shield denied the claim, stating its policy excluded coverage of residential treatment services for severe mental health conditions. Plaintiffs brought suit alleging violation of the insurance contract and a claim for declaratory and injunctive relief, but the court granted summary judgment for Blue Shield. During the appeal of this case, the Ninth Circuit issued Harlick v. Blue Shield of California, 686 F.3d 699 (9th Cir. 2012) holding the MH Parity Act requires health plans to provide coverage for all medically necessary treatment for severe mental illness, subject to the same financial terms as imposed on coverage for physical illnesses. Plaintiffs sought to maintain a class action against Blue Shield on behalf of participants covered under Blue Shield health insurance plans, governed by ERISA, whose claims for residential treatment of mental health claims were denied. However, the court explained class certification would require individualized discovery and proof, inquiries into medical necessity and whether individual mental health conditions and treatment were covered under the California Parity Act and additional difficulties with determining damages. Ultimately, the court held Plaintiffs failed to articulate a definition of an ascertainable class, and denied the motion for class certification.

Brazil v. OPM, 2014 U.S. Dist. LEXIS 44856 (N.D. Cal. Mar. 28, 2014) involved a plaintiff who received medically necessary mental health treatment at a residential facility, but her federal health insurance plan excluded coverage for residential treatment. The Plaintiff exhausted all administrative remedies and brought suit against the Office of Personnel Management (“OPM”) in federal court. The court held the plaintiff cannot recover under the MH Parity Act because the OPM has sovereign immunity, and Congress did not consent to be sued under the MH Parity Act. Brazil demonstrates the MH Parity Act did not apply to federal insurance plans.

A.F. v. Providence Health Plan, 2014 U.S. Dist. LEXIS 109507 (D. Or. Aug. 8, 2014) involved plaintiffs who sought an order enjoining the insurer, Providence Health Plan, from excluding applied behavior analysis therapy for participants diagnosed with autism spectrum disorders. The court granted the plaintiffs’ partial motion for summary judgment holding Providence’s “Developmental Disability Exclusion,” which excluded coverage for services relating to “developmental disabilities, developmental delays or learning disabilities” but not medical or surgical conditions, constituted a violation of the MH Parity Act and the Oregon Mental Health Parity Act.

R.H. v. Premera Blue Cross, 2014 U.S. Dist. LEXIS 108503 (W.D. Wash. Aug. 6, 2014) involved a class action suit in which plaintiffs alleged Premera Blue Cross, imposed treatment limitations on applied behavior analysis and neurodevelopmental therapy when similar limitations were not applied to medical benefits in violation of Washington’s Mental Health Parity Act. Premera agreed to a settlement in which it would remove the limitations and establish a $3.5 million settlement fund to reimburse plaintiffs who were denied services under the limitation. The court approved the unopposed class settlement as fair, reasonable, and adequate.

The trend of cases reveal practical considerations some insureds may encounter in bringing suit against their health insurance company if benefits are small, and additional difficulties establishing a class action suit. However, these decisions reflect the Ninth Circuit Court’s interpretation of the MH Parity Act, its willingness to hold health insurance carriers responsible for violations and ensure that insureds who have health insurance coverage have a viable claims for violations of the MH Parity Act.

Too Little Time – Court Finds ERISA Plan’s Contractual Limitation Period Unreasonably Short and Unenforceable

One hundred days is not a reasonable amount of time to give a plan participant to file a lawsuit under the Employee Retirement Income Security Act of 1974 (“ERISA”). This was the conclusion reached by the United States District Court Southern District of California in its recent decision in Nelson v. Standard Insurance Company, 2014 U.S. Dist. LEXIS 119179 (S.D. Cal. Aug. 26, 2014), which held that a contractual limitation contained in an ERISA-governed group long-term disability policy’s limitation period is unreasonable and unenforceable because the time period may have ran prior to the end of the administrative review process and because it provided the plan participant only one hundred days to file an action in federal court. The holding in Nelson was one of the first in the Ninth Circuit to determine, in the wake of the Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S. Ct. 604 (2013), that a plan’s contractual limitation on filing a lawsuit is unreasonably short. While numerous questions still remain as to what constitutes an unreasonable plan limitations period, the Nelson decision makes it clear that, at the very least, providing a plan participant only one hundred days within which to file a complaint in federal court is not reasonable.

Last year, in its highly anticipated decision in Heimeshoff, the Supreme Court unanimously held that an ERISA governed plan’s limitation period, requiring a claimant to bring an action within three years of when proof of claim was due, was enforceable. The Court found that this contractual time limitation on filing a claim in federal court was valid despite the fact that it was shorter than the applicable statute of limitations. Although the Court held that a plan’s contractual limitation periods should ordinarily be enforced, it also stated that such provisions may not be enforced where the period provided is “unreasonably short.” The Heimeshoff Court explained that a limitations provision is unreasonably short if it “leav[es] [a] claimant[] with little chance of bringing a claim not barred.” The Heimeshoff decision left open the issue of just how short a plan’s contractual limitation must be in order to be considered unreasonable. The Southern District’s decision in Nelson now provides some guidance on this question.

In Nelson, the Plaintiff, a plan participant, brought an ERISA action against her Group Long-Term Disability Plan (“Defendant”) and the plan administrator, Standard Insurance Company (“Standard”). After initially accepting and paying the Plaintiff’s disability benefits in July 2008, Standard terminated her benefits in January 2010 based on a finding that she was no longer disabled. In June 2010, Plaintiff appealed the decision and a final denial was issued in October 2011. In January 2013, Plaintiff filed her action against Standard and Defendant in the Southern District. The plan contained a provision entitled, “Time Limits on Legal Actions”, which states that a plan participant must bring a legal action within three years after the earlier of either (1) the date the administrator received proof of loss or (2) the time within which Proof of Loss was due to the administrator. On the basis of this contractual limitations provision, Defendant filed a motion for judgment on the pleadings under the Federal Rules of Civil Procedure 12(c), arguing that because the Plaintiff provided her Proof of Loss in May 2008 and the contractual time limit had already expired in May 2011, she was barred from suit.

The court in Nelson first stated that it could not determine the date upon which the contractual limitations period began to run because the term, “proof of loss” was never used in Plaintiff’s first amended complaint and she had submitted documentation supporting her disability status on several different dates. Plaintiff argued that her cause of action did not accrue as of the May 30, 2011 date that Defendant contended the limitation period expired. However, Defendant asserted that Plaintiff’s cause of action accrued on February 16, 2011, one hundred days before the contractual time limit expired. The court held that, even accepting Defendant’s argument that the limitation period concluded on May 30, 2011 and that the Plaintiff’s cause of action accrued one hundred days earlier on February 16, Defendant cited to no legal authority finding that a period of one hundred days is a reasonable period for a Plaintiff to file a lawsuit. The court found that this time limitation was especially unreasonable in the Plaintiff’s situation because a final decision had not even been reached on the claim prior to the expiration of the contractual limitation period. Indeed, the court concluded that a contractual limitation period may be rendered unreasonable as a result of undue delay in reviewing a claim. Based on these findings, the court denied Defendant’s motion for judgment on the pleadings because the contractual limitations period in the plan was unreasonably short.

The decision in Nelson demonstrates that, even after Heimeshoff, a plan’s contractual limitation period that may run prior to the completion of administrative review process is a good candidate to be found to be unreasonable and unenforceable. Moreover, at least in the situation presented in Nelson, providing a plan participant with only one hundred days to file an action is patently unreasonable. It is important to note that the Nelson court also specifically stated that, even where a limitation period is found to be reasonable, the doctrine of equitable estoppel may still prevent enforcement of the contractual limitations provision. The decision in Nelson should remind plan participants to be mindful of both statutory and contractual time limitations on their ability to file a lawsuit to protect their benefits.

Court Allows Mandamus Claim Against the California Department of Insurance Regarding Disability Insurance Dispute

There is a commonly held belief that every disability insurance policy sold to the public has been actually reviewed and approved by the California Department of Insurance. Indeed, California Insurance Code section 10291.5 requires the Insurance Commissioner to reject a proposed new disability insurance policy form if it does not meet certain requirements set forth in the Insurance Code. However, prior to the recent ruling of Ellena v. Department of Insurance, 2014 Cal. App. LEXIS 883 (1st Dist. Oct. 1, 2014), the California Department of Insurance was not following this code provision, and in fact maintained that it did not have a duty to review each new disability insurance policy form. There is now no question that the Department of Insurance has a mandatory duty to review all new disability insurance policy forms that insurers wish to sell in California.

Cassaundra Ellena was an employee of the County of Sonoma who was insured under a group disability insurance policy sold and administered by Standard Insurance Company (“Standard”). Unfortunately, Ellena was diagnosed with lupus and was unable to continue working. Ellena filed a claim for long-term disability benefits with Standard, but Standard denied her claim, forcing Ellena to file a lawsuit to collect her disability benefits. Along with naming Standard as a defendant for various causes of action including breach of contract and bad faith (also known as the breach of the covenant of good faith and fair dealing), Ellena also named the California Department of Insurance as a defendant.

Ellena asserted a cause of action for mandamus against the Department of Insurance, alleging that the Department had a mandatory duty to review the policy to make sure it complied with California law before approving the policy. Ellena alleged that the policy was in violation of California law because it improperly allowed Standard to define “own occupation” as other than the one Ellena performed for the City of Sonoma, and also that the policy’s definitions of “disability” and “any occupation” were also improper.

The trial court granted the Department of Insurance’s demurrer, ruling that “Ellena had not sufficiently alleged a violation of a specific mandatory duty and that a writ of mandate could not be based on general enforcement provisions or statutes involving the DOI’s exercise of discretion.” The Department of Insurance was dismissed from the lawsuit, and Ellena timely appealed.

On appeal, a large focus of the Court of Appeals’ ruling turned on what exactly Ellena was seeking through her lawsuit. The Court of Appeals noted that “[w]hile a party may not invoke mandamus to force a public entity to exercise discretionary powers in any particular manner, if the entity refuses to act, mandate is available to compel the exercise of those discretionary powers in some way.” Ellena acknowledged that the Department of Insurance “has the discretion to decide whether to approve a policy, but maintains that the [Department of Insurance] must exercise that discretion by reviewing the policy to determine whether it does or does not comply with California law.” The Department of Insurance argued that the Insurance Code only requires that an insurance company submit its draft policy for review, but that it had no actual duty to review and approve the policy before it is sold to the public.

After reviewing the Insurance Code and characterizing the oversight function of the Department of Insurance as “a matter of great public interest,” the Court of Appeal ruled:

The clear language of this statute is that “[t]he commissioner shall not approve any disability policy for insurance or delivery …” unless it meets a number of requirements. (§ 10291.5, subd. (b), italics added.) “The commissioner shall require from every insurer a full compliance with all the provisions of this code” (§ 12926, italics added) and the commissioner has an obligation to fulfill the duties imposed by the Insurance Code under section 12921.5.

…

The plain meaning of these provisions is that the commissioner has a mandatory duty to review the policy prior to approving it and the commissioner must review the disability policy to ensure it meets the requirements set forth in section 10291.5, subdivision (b). The Insurance Code imposes on the commissioner the duty to review the policy to ensure it complies with the law.

The Court noted that if the Department of Insurance did not actually review each policy that was submitted for review, “how could the commissioner responsibly disapprove any disability policy containing provisions that are ‘unintelligible, uncertain, ambiguous, or abstruse, or likely to mislead a person to whom the policy is offered, delivered or issued,’ as required by subdivision (b) of [section 10291.5]?” The Court further noted the “legislative history to [the 1949 amendment to section 10291.5] supports the conclusion that the statute requires the commissioner to review the disability policy form prior to approving it.” Accordingly, the Court of Appeal concluded that “the Insurance Code requires that the commissioner review a disability policy form prior to approving the policy.”

This is a victory for consumers and policyholders as the Department of Insurance will now be required to review every potential disability policy before it is sold to the public. The Insurance Commissioner and Department of Insurance should now ensure that policies, such as the one sold to Ellena, are in compliance with California law. This decision is also of practical procedural significance to attorneys who engage in insurance litigation against insurers as naming the Department of Insurance will destroy diversity of citizenship jurisdiction thus precluding insurers from removing such cases to federal court.

Recent Federal Court Decisions Give Teeth to California’s Ban on Discretionary Clauses in ERISA Plans

A virtually insurmountable concrete wall was once an apt analogy for the effect of discretionary clauses in ERISA Plans on claimants attempting to challenge a plan administrator’s unreasonable interpretation of policy terms. A valid discretionary clause gave insurance companies power to construe the terms of ERISA- governed group insurance policies based on their own interpretation, which could only be overturned by courts if it were “illogical, implausible or without support in inferences drawn from the facts in the record.” Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666 (2011). In order to counteract the discretion these clauses provided to plan administrators/insurers, California enacted Insurance Code section 10110.6, which placed a ban on such discretionary clauses. After the enactment of this new statute, questions regarding how courts would interpret and enforce it lingered. However, recent decisions in California strongly suggests that courts will give full force to the California statute and apply de novo review of claim denials rather than the abuse of discretion standard to claims denied on or after January 1, 2012.

California Insurance Code section 10110.6 provides in pertinent 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.

The statute applies to life and disability insurance policies issued, delivered or renewed on or after January 1, 2012 in California. One of the key questions that remained after the enactment of the statute was whether, and under what circumstances, it applies to policies that were in effect prior to the enactment of the statute. This question appears to have been answered in two recent Northern District of California decisions finding that the statute applies even to policies that were issued or had an effective date prior to January 1, 2012 where it is renewed annually and the relevant claim is denied after January 1, 2012.

In Polnicky v. Liberty Life Assurance Company of Boston, 2013 U.S. Dist. LEXIS 163915 (N.D. Cal. Nov. 18, 2013) the court interpreted section 10110.6 and concluded that the policy which controlled in that case was the one in effect at the time the claim was denied, after the enactment of section 10110.6, even though the policy had an effective date of January 1, 2010 (before the statute became effective). In Polnicky, the relevant policy was renewed annually on January 1. In March 2010, the plaintiff submitted a claim for short-term disability benefits under his ERISA-governed disability policy, which was denied in June 1, 2012. The plaintiff’s subsequent appeal was then denied in February 2013. The insurer argued that the abuse of discretion standard should be applied given the express grant of discretion authority in the policy. On the other hand, the plaintiff argued that any grant of discretion was void and unenforceable under section 10110.6. The court ultimately held that, because the policy was renewed and continued after its January 1, 2012 anniversary date, any provision in the policy attempting to confer discretionary authority was rendered void and unenforceable.

Recently, in Gonda v. Permanente Med. Group, Inc., 2014 U.S. Dist. LEXIS 5981, 2014 WL 186354 (N.D. Cal. Jan. 16, 2014), the court reaffirmed its prior holding in Polnicky and held that section 10110.6 made void any grant of discretionary authority in ERISA plans even if the plan was issued prior to when the statute came into effect because the policy in question renewed annually and became effective January 1, 2013, prior the final denial of the plaintiff’s claim in May 2013.

As Polnicky and Gonda demonstrate, courts will likely find discretionary clauses invalid and void where the policy is renewed after January 1, 2010, even if it became effective prior to the enact of section 10110.6.

Get the Answers and Assistance You Need