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On July 20, 2017, the Los Angeles Daily Journal quoted Robert McKennon of McKennon Law Group PC in an article entitled “Insurance Claim Denial Because Airbnb Rental May Have Wider Implications,” by Andy Serbe. The article discusses a recently filed complaint, and its broader applications regarding insurance coverage exclusions involving rentals and the impact on the potential for insureds to lose important coverage rights when they engage in once only or sporadic rentals of all or parts of their home. In the article, Mr. McKennon explains that the insurer failed to define the terms in the exclusion, specifically the phrase “other structures reserved for rental.” Accordingly, those terms were ambiguous as applied to the facts of the case (the complaint alleges that the insurer did not cover a claim for damages because the owner used part of the home for an Airbnb rental, which Travelers denied based on this exclusion). Mr. McKennon further explains that, under California law, such ambiguity in exclusions are narrowly construed in favor of the insured. Additionally, the insurer bears the burden of proof when it comes to proving that such an exclusion applies.
ERISA Preempts State Community Property Laws for Spouse’s Interest
The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles life insurance lawyer at the McKennon Law Group PC, call (714)406-5582 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.
Has your spouse designated you as the beneficiary under his or her life insurance policy? This is critically important, especially if his insurance is through his work. Group policies issued to employers for the benefit of their employees are, with few exceptions, governed by a federal law called the Employee Retirement Income Security Act of 1974 (“ERISA”). Section 514(a) of that law provides that ERISA “supersede[s] any and all State laws insofar as they may … relate to any employee benefit plan.” Thus, your spouse’s life insurance obtained as an employee benefit from his or her work is governed by federal ERISA law, not state law.
Why is this important? Many states, including California, have community property laws that protect a surviving spouse’s interest in the deceased spouse’s life insurance policy. Under California State law, specifically its community property laws, a surviving wife, for example, may give a community property right up to half of his or her spouse’s life insurance proceeds even if the surviving spouse is not designated as the beneficiary. There is no such right, however, if the subject life insurance policy is governed by federal ERISA law. Under ERISA, all of a current or former spouse’s life insurance benefits go to the person who is designated as the beneficiary in accordance with the employer’s plan requirements – which usually means filling out the beneficiary form, signing it and returning it to the employer. So, for example, if your husband forgot to switch the beneficiary from his ex-wife to you, you are out of luck. Or, if your spouse designated his or her children as beneficiaries, the children are likely entitled to all his life insurance benefits. California’s community property laws will not help you. In other words, if you are not the named beneficiary under an employer-sponsored ERISA plan, you have no right to the proceeds (unless perhaps you can show the beneficiary waived his/her rights to the benefits after the designation or if you can show the beneficiary exercised undue influence). While that seems harsh for a spouse that simply forgot to make the switch on the employer’s beneficiary form, community property rights will not supersede the beneficiary designation under ERISA.
This is because ERISA preempts state community property laws, including California’s laws. The Ninth Circuit and its federal district courts agree that when a beneficiary has been identified in an ERISA-regulated life insurance plan, a state does not have the authority to supersede the designated beneficiary of the proceeds through community property laws. Instead, under federal ERISA law, the life insurance proceeds must be paid to the designated beneficiary. See Orr v. Prudential Ins. Co. of America, 2012 WL 2122157 (D. Idaho, June 12, 2012). Relying upon the United States Supreme Court’s decision in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), the Orr court held: “In accordance with Egelhoff, the Court finds that ERISA preempts Idaho community property laws when such laws require an ERISA plan administrator to pay ERISA life insurance proceeds to someone other than the designated beneficiary.” Orr at *2. The Ninth Circuit Court of Appeals agrees. See Carmona v. Carmona, 603 F.3d 1041, 1062 (9th Cir. 2010).
In Orr, the insured decedent/employee named his minor son as the beneficiary of his group life insurance policy provided by his employer. Upon the decedent’s death, his surviving spouse sought the proceeds of the group life insurance policy on the basis that Idaho’s community property laws entitled her to a one-half interest in those life insurance proceeds. The Orr court, however, held that the surviving spouse’s state law arguments were completely preempted by ERISA and, under the provisions of ERISA, the proceeds were to be paid to the named beneficiary (the minor son) and not to the unnamed surviving spouse. Id. at *2.
The lesson learned from Orr is that, if a spouse is enrolled in a group life insurance plan governed by ERISA, that spouse must properly designate you as the beneficiary in accord with the plan’s requirements.
Zubillaga v. Allstate Indemnity Co. California Court Rules in Favor of Insured
Underlying every insurance contract in California is an implied promise of “good faith and fair dealing,” which requires that the insurer act in good faith when handling the insured’s claim. If the insurer has a “genuine dispute” as to coverage, then the insurer will typically be found not to have acted in bad faith. In a recent opinion, the California State Court of Appeal reversed a lower court ruling granting summary judgment in favor of the insurer on the genuine dispute doctrine. Ultimately, the Court found that the insured raised an issue of material fact regarding whether the insurer reasonably relied on an expert opinion to repeatedly undervalue her claim. In this article, we cover some of the basics of insurance bad faith and the “genuine dispute” doctrine as it applies to expert opinions. Next, we cover the Court’s ruling in Zubillaga v. Allstate Indemnity Co., and how that ruling is favorable for insureds when they fight insurance company claim denials.
Bad Faith Basics
The implied covenant of good faith and fair dealing requires, among other things, that an insurer refrain from engaging in conduct that would harm an insured’s rights to receive benefits under that insurance contract. Under California law, when an insurer acts “unreasonably” or “without proper cause,” it will likely have acted in bad faith. When determining reasonableness of an insurer’s conduct, courts typically look to certain well-established standards or duties that are expected of the insurer. For example, the insurer has a duty to conduct a thorough and fair investigation into all potential bases for coverage. If an insurer fails to adhere to these duties, the insurer may be found to have acted in bad faith and consequently, may be liable for substantial additional damages, including emotional distress, consequential and punitive damages.
What is the Genuine Dispute Doctrine?
If an insurer can establish that there is a genuine dispute as to coverage, it typically will not be held liable for insurance bad faith. However, the dispute itself must be a legitimate one. In other words, the insurer cannot create an artificial reason to dispute coverage, the genuine dispute must be reached in a reasonable manner. Often, whether there is a genuine dispute revolves around the insurer’s reliance on an expert opinion. Where an insurer relies on independent experts, then a basis may exist for invoking the genuine dispute doctrine. However, expert testimony alone does not automatically insulate an insurer from a bad faith claim. The expert’s opinion and the insurer’s reliance on that expert’s opinion must also be reasonable.
Zubillaga v. Allstate Indemnity Co.
In Zubillaga v. Allstate Indemnity Co., No. G052603, 2017 WL 2627997 (June 19, 2017), the California Court of Appeal addressed an important issue regarding the genuine dispute doctrine and reasonable reliance on an expert opinion. The facts of the case began when a driver ran a red light and hit plaintiff Carmen Zubillaga’s (“Zubillaga”) car. Following the accident, Zubillaga suffered recurrent back pain and saw several doctors. Based on that lower back pain, and her need for ongoing treatment with expensive epidural injections, Zubillaga submitted a claim for $30,000 to Allstate Indemnity Co. (“Allstate”). Over time, Zubillaga repeatedly offered new evidence in support of her need for the epidural injections and, consequently, the higher settlement demand. Allstate refused to meet Zubillaga’s demand, offering much less than $30,000. In doing so, Allstate relied on the opinion of a medical expert to show that there was a reasonable and good faith dispute (genuine dispute) about the value of Zubillaga’s claim.
The trial court granted a motion for summary judgment in favor of Allstate based on the genuine dispute doctrine concerning Allstate’s reliance on an expert opinion. However, the California Court of Appeal took issue with Allstate’s reliance on an expert opinion without reevaluation of material new information which had been provided to Allstate. Since the initial expert opinion, Zubillaga received several treatments and new recommendations from doctors supporting her need for epidural injections. Instead of addressing this latest information, Allstate continued to rely on an opinion which had considered only stale, non-updated evidence. Ultimately, the Court found that Allstate’s assertion was without merit and inconsistent with Allstate’s duty to conduct an adequate and thorough investigation. Accordingly, the Court found potential for bad faith conduct even though Allstate relied on an expert opinion.
In sum, this ruling is favorable to insureds because it reinforces the principle that having an expert opinion is not enough to shelter an insurer from bad faith. Aside from the fact that the expert’s opinion must, itself, be reasonable, the insurer’s reliance must also be reasonable. That also includes addressing material new evidence supplied by the insured, even if that means the insurer has to hire another expert to review updated information. This case and the principles enunciated in it apply not only to automobile insurance claims but also to other types of insurance claims, such as medical insurance, life insurance, and disability insurance claims where updated medical information is often submitted to an insurer after it has made an initial decision based on stale medical information. If the insurer has not investigated the updated medical or other information, this case may help an insured argue that the insurer acted bad faith by not adequately considering the updated information.
Top 5 Ways Insurers Commit Insurance Bad Faith in Denying Accidental Death or Dismemberment Claims
The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.
If you have an individually purchased insurance policy that provides coverage for accidental death or dismemberment, the Employee Retirement Income Security Act (“ERISA”) does not govern your claim. Instead, state law applies to your dispute, including a body of law known as “insurance bad faith” if you live in a state such as California that recognizes the tort of breach of the implied covenant of good faith and fair dealing. In this article, we discuss insurance bad faith in the specific context of accidental death or dismemberment coverage. First, we provide some brief background on insurance bad faith. Next, we discuss the top five ways insurers commit insurance bad faith in the context of accidental death or dismemberment coverage: improper attempts to attribute the cause of injury to a non-accident, improper attempts to rescind, improper lapse of the policy, improper misrepresentation of the policy provisions and improper reliance on the policy exclusions.
What is Insurance Bad Faith
When an insurer enters an insurance contract with the insured, both parties promise to adhere to the express terms of the contract. However, underlying the express terms of the insurance contract is an implied promise of “good faith and fair dealing.” The implied promise of good faith and fair dealing requires that the insurer refrain from engaging in conduct that would harm the insured’s rights to receive benefits under the insurance contract. If the insurer fails to do so, the insurer is said to have acted in “bad faith.” The courts have read certain duties into that implied promise of good faith and fair dealing, such as the duty to conduct a thorough and fair investigation into all potential bases for coverage. Failure to adhere to these duties may result in a breach of the implied promise to act in good faith. Determining whether the insured has acted in bad faith is important, in part, because it directly affects the insured’s potential recovery. When an insurer acts in bad faith, the insured may have access to a substantial additional recovery, including emotional distress, consequential and punitive damages.
1) Improper Attempts to Attribute the Cause of Injury to a Non-Accident
At the heart of accidental death or dismemberment coverage is the promise that, if the insured is dismembered or dies as a result of an accidental injury, the insured or his beneficiaries may recover accidental death or dismemberment benefits under the terms of such a policy. However, the key provision to keep in mind is that the underlying injury must be the result of an accident. How each individual insurance policy defines an accident varies, but it typically includes some language stating that the death, injury or dismemberment resulted from an “accident,” “accidental means” and/or “unforeseeable event” being the “direct and independent cause.” In these cases, the insurer will often assert that an accident did not cause the death or dismemberment. They may challenge the fact that there was an accident or say that some other sickness or injury caused or contributed to the dismemberment or death. To the extent that the insurer’s assertions are disingenuous, or merely an improper attempt to avoid coverage, the insurer has acted in bad faith. As a recent example, McKennon Law Group PC handled a case for our clients’, the son and daughter of a woman who died when she slipped and fell in the shower onto a handheld sprayer cord. The insurer denied the accidental death claim arguing her death was a suicide, not an accident. We hired an accident reconstruction expert and proved it was an accidental injury. The insurer reversed the decision and paid the claim.
2) Improper Rescission of the Policy
Before a potential insured enters an insurance contract, he or she must apply for insurance coverage with the potential insurer. On this application, the potential insured must answer detailed questions regarding his or her medical history. For example, the application may ask whether the potential insured has been treated for chronic back pain within the last ten years. Most policies also have a two-year incontestability clause meaning that, after two years that the policy is in force, an insurer may rescind a policy based only on material misrepresentations made on an insurance application. Often an insurer will, instead of investigating reasons to approve a valid claim, spend its time investigating ways to cancel or rescind the policy. To the extent that the insurer is only conducting the investigation to avoid paying death benefits or is representing immaterial facts as material, it has likely acted in bad faith. Defending such actions requires an experienced attorney, but if the insurer did not act reasonably or with proper cause in denying the claim, the insurer may be subject to significant bad faith damages.
3) Improper Lapse of the Policy
Most insureds pay regular monthly premiums for years without a problem. Occasionally, after an unfortunate accident the insured may be forcibly hospitalized or in a coma, and thus, may uncharacteristically fail to pay the monthly premium. In this unfortunate situation, it does not matter that the insured has paid premiums faithfully for many years. If the insured misses those last few premium payments, the insurer will lapse the policy. However, California recognized this issue in 2012 and so it enacted a statue to protect the insured from this situation. Accordingly, if your accidental death or dismemberment coverage arises from a rider to your life insurance policy, arguably a lapse due to nonpremium payment falls under this California Law and the insurer is required to adhere to certain notice and grace period requirements before it can lapse the policy. A failure to do so may result in improper lapse and potentially, bad faith.
4) Misrepresentation of the Policy Provisions Regarding Coverage
Occasionally, an insurer may improperly interpret the policy as including terms, provisions or requirements for coverage not clearly outlined in the policy. Misrepresenting coverage provisions may give rise to a claim for insurance bad faith if it is improperly communicated to the insured. Sometimes the agent is the culprit regarding such misrepresentations. We have seen several situations where the agent that sold the insured the policy at issue misrepresented the relevant coverage provisions, likely in an effort to gain commission. In those instances, California law requires that insurers do not deny coverage based on an agent’s negligent misrepresentation of those coverage provisions. When insurers ignore their agent’s statements regarding coverage, they may commit bad faith.
5) Misrepresentation of the Policy Provisions Regarding Exclusion from Coverage
Accidental death or dismemberment coverage always contains exclusions. Exclusions carve out exceptions for certain types of injuries and the language of these exclusions is often ambiguous. Under California law, such ambiguity in exclusions is interpreted narrowly, against the insurer (as the entity that drafted the insurance contract). Contrary to that principle, insurers often broadly construe the exclusion provisions and use them to routinely deny claims. To the extent that such an interpretation of the exclusions was disingenuous or overbroad, the insurer may have committed insurance bad faith and will be subject to further damages.
If your claim is governed by insurance bad faith, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial. Having an experienced disability, life and health insurance bad faith attorney matters to the success of your claim. If your claim for health, life, accidental death or dismemberment, short-term disability or long-term disability insurance has been denied, call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.
Top 5 Ways Insurers Commit Insurance Bad Faith in Denying Life Insurance Claims
The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.
If you purchased an individual life insurance policy, as opposed to an employer-sponsored policy, the Employee Retirement Income Security Act (“ERISA”) will not apply to your claim. Instead, separate principles of contract law govern your claim, including “insurance bad faith.” Insurance bad faith litigation, as opposed to ERISA, allows a life insurance beneficiary’s recovery for damages beyond policy benefits. In this article, we discuss insurance bad faith in the specific context of life insurance policies. First, we briefly explain insurance bad faith and next we discuss the top five ways insurers commit insurance bad faith: improper attempts to rescind the policy, unreasonable delay in paying the claim, improper lapse of the policy, misrepresentation of the policy provisions and improper reliance on the policy exclusions.
What is Insurance Bad Faith?
Implied in every insurance contract is a promise of “good faith and fair dealing,” which means that the insurer must not harm the insured’s rights to receive benefits under the policy. To comply with its promise to act in good faith, the insurer must adhere to certain duties, such as the duty to adequately and accurately communicate with the insured. An insurer acts in bad faith when it fails to meet those duties unreasonably and without proper cause. Determining whether there has been bad faith conduct is important, in part, because it directly affects the insured’s potential recovery. If the insurer is found to have acted in bad faith, the insured may have access to a substantial additional recovery, including emotional distress, consequential and punitive damages.
1) Improper Attempts to Rescind the Policy
Most life insurance policies have a two-year incontestability clause. After two years that the policy is in force, an insurer may only be able to rescind a policy based on material misrepresentations made on insurance application. Often an insurer will, instead of investigating reasons to approve a valid claim, spend its time investigating ways to cancel or rescind the policy. For example, if a life insurance policyholder dies and the beneficiary submits a claim, the insurer may conduct an investigation into the insured’s medical history at and prior to the time of the application. If the insurer finds what it characterizes as material misrepresentations it will often attempt to rescind and cancel the policy so that it will never have to pay a death benefit claim. To the extent that the insurer is only conducting the investigation to avoid paying death benefits or is representing immaterial facts as material, it has likely acted in bad faith. There are many ways that only very experienced life insurance attorneys can defend against such actions. If the insurer did not act reasonably or with proper cause in denying the claim, the insurer may be subject to significant bad faith damages.
2) Unreasonable Delay in Paying the Claim
After a beneficiary makes a claim for life insurance the insurer will begin its own investigation into the claim. At this point, the insurer may request additional records regarding proof of death, payment of policy premiums, the insured’s medical history or other records regarding the application for the policy. The insurer must balance competing objectives: on one hand, its duty to conduct a thorough review and on the other, not to unreasonably delay. The “reasonableness” of an insurer’s delay may revolve around whether a “genuine dispute” as to coverage or the amount of coverage, exists and the evaluation of this will be focused on whether the delay in paying the claim was unreasonable given all of the underlying circumstances giving rise to the delay. However, the insurer must reach this position in good faith and this does not include an improper investigation to retroactively rescind the policy.
3) Improper Lapse of the Policy
Most insureds pay regular monthly premiums for years without a problem. Occasionally, in the last few months of the insured’s life, the insured may be so ill that she uncharacteristically fails to pay the monthly premium. In this unfortunate situation, it does not matter that the insured has paid premiums faithfully for many years. If the insured misses those last few premium payments, the insurer will lapse the policy. However, California recognized this problem back in 2012 and so it enacted a statue that would protect the insured from this situation. Accordingly, under California law, an insurer is required to adhere to certain notice and grace period requirements before it can lapse a life insurance policy for nonpayment of premium. If the insurer fails to adhere to those requirements, then it will not only have to pay the life insurance claim because the policy will not have been properly lapsed, but also the insurer will have likely committed insurance bad faith.
4) Misrepresentation of the Policy Provisions
Occasionally, an insurer may improperly interpret the policy as including terms, provisions or requirements for coverage not clearly outlined in the policy. Misrepresenting relevant coverage provisions to the insured can give rise to a claim for insurance bad faith. Sometimes the agent is the culprit regarding such misrepresentations. We have seen several situations where the agent that sold the insured the policy at issue misrepresented the relevant coverage provisions to the detriment of the insured. In those instances, California law requires that insurers do not deny coverage based on an agent’s negligent misrepresentation of those coverage provisions. When insurers ignore their agent’s statements regarding coverage, they may commit bad faith.
5) Improper Reliance on Policy Exclusions
Life insurance policies always contain exclusions from coverage. They essentially take away coverage from the insuring clause and provide what is not covered. These exclusions are worded so as to encompass many possible scenarios which result in non-coverage of a life insurance claim. Exclusions are often ambiguous and life insurers use them routinely to deny claims. Exclusions may include dangerous activities such as skydiving and mountain climbing. They may also include suicide or death in the commission of a crime. If, for example, an insurer conducted an unreasonable and inadequate investigation of a death claim and concluded that the insured’s death was a suicide when the reasonable evidence suggested the death was not the result of a suicide, a life insurer will likely have engaged in a bad faith life insurance claim denial.
If your claim is governed by insurance bad faith, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial. Having an experienced disability, health and life insurance attorney matters to the success of your insurance matter. If your claim for health, life, short-term disability or long-term disability insurance has been denied, call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.
9th Circuit puts final nail in coffin for discretionary clauses in insurer-funded ERISA plans
Disability and life insurers frequently include clauses in their insurance policies affording them complete discretion to decide whether a claim has merit. The clauses usually state the insurer has total discretion to decide whether the claimant is eligible for the policy’s benefits, to decide the amount, if any, of benefits to which they are entitled, to interpret the policy’s terms how they see fit, or something similar. Employers regularly include these same types of “discretionary clauses” in their employee welfare benefit plan documents, and if a group insurance policy is the funding source of the plan’s benefits, they then delegate that discretion to decide the merits of claims to the insurer.
Employee benefit plans and the corresponding group insurance policies that fund them are governed by a federal law, the Employee Retirement Income Security Act of 1974 (“ERISA”), codified at 29 U.S.C. section 1001, et seq. The result of these discretionary provisions in ERISA cases, until recently, has been that a federal court reviewing the insurance company’s claim decision had to give deference to whatever the insurer decided, even if the court disagreed with the insurer’s decision, unless the insurer abused its discretion by acting arbitrarily and capriciously. The district court was required to apply an “abuse of discretion” or “arbitrary and capricious” standard of review rather than a de novo standard (where no such deference to the insurer’s decision is given). The former standard, obviously, is much more difficult than the latter for an insured to meet. While a district court applying an abuse of discretion standard to the insurer’s claim decision is not required to “rubber stamp” it with no oversight, its ability to overturn the decision is far more limited than when reviewing the insurer’s decision de novo.
In most types of insurance policies, insurers have not been so brazen to include these draconian insurer discretionary provisions. It is astonishing that the California legislature let disability and life insurers get away with this practice for so long. The clauses directly contravene many “black-letter” pro-policyholder California insurance laws (such as the doctrine that ambiguous policy provisions must be strictly construed against the insurer as the drafter). Think about it. Under these provisions, the company legally responsible to pay an employee’s or beneficiary’s benefit claim also has nearly unchecked power to decide whether the claim has merit and to interpret the plan’s provisions. From the standpoint of a California policyholder and their counsel, that is shocking, truly shocking. It demonstrates the power of the insurance company lobby.
Not surprisingly, these discretionary provisions lead to a higher rate of claim denials by disability and life insurers than in other types of policies and, in our opinion, industry wide abuse, particularly for disability insurers. The U.S. Department of Labor estimates that a whopping 75 percent of long-term disability claims are denied. The statistics seems to provide empirical support for Lord Acton’s famous phrase uttered in the 1800’s, “power tends to corrupt and absolute power corrupts absolutely.”
On January 1, 2012, no doubt aware of this potential for abuse by insurers, the California legislature decided to put an end to discretionary provisions in disability and life insurance contracts. It enacted California Insurance Code section 10110.6, which made void and unenforceable any grant of discretionary authority to an insurer or agent of the insurer in “a policy, contract, certificate, or agreement” that provides or funds disability or life insurance coverage for California residents. More than a dozen states have similar laws, as noted in Standard Ins. Co. v. Morrison, 584 F.3d 837, 841 (9th Cir. 2009) (upholding Montana Insurance Commissioner’s practice of disapproving disability insurance policy forms with clauses vesting discretion in insurers). These states include California, Connecticut, Hawaii, Idaho, Illinois, Indiana, Kentucky, Maine, Maryland, Montana, New Jersey, New York, South Dakota, Texas, Utah, Vermont, Washington, Wyoming and perhaps others (some bar discretionary clauses in health insurance or other types of policies, not just in disability and life insurance policies). Several of these states banned or limited discretionary clauses in response to a notorious example of one insurer who, to boost its profits, had intentionally used discretionary clauses to repeatedly deny claims it knew were valid. See Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008).
Despite California’s statutory ban on insurer discretionary clauses, group disability and life insurers have steadfastly challenged the statute’s application to ERISA-governed policies and related employee welfare benefit plan documents. They routinely argue that ERISA preempts the State law, the statutory ban applies just to insurance policies but not plan documents, and other creative arguments, all to sustain the status quo of their mostly unfettered power to decide claims with little scrutiny by courts. Their arguments have been repeatedly rejected by most California federal district courts. A few rogue courts in the minority have agreed with the insurer’s creative arguments. This left, until now, some uncertainty about what the law in the 9th Circuit is for California employees.
On May 11, 2017, the 9th Circuit put the final nail in the coffin for grants of discretionary authority to insurers in ERISA-governed insurance policies and employer plan documents. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, No. 14-55919, 2017 DJDAR 4376 (9th Cir. May 11, 2017). In that case, The Boeing Company (“Boeing”) offered its employees long-term disability coverage through an ERISA-governed plan. Boeing purchased a group disability insurance policy from Aetna Life Insurance Company (“Aetna”) to fund the plan’s disability benefits and vested Aetna with discretion to decide the merits of benefit claims. Aetna’s policy granted it discretionary authority to “review all denied claims,” “determine whether and to what extent employees and beneficiaries are entitled to benefits,” and “construe any disputed or doubtful terms of the policy.” The policy further specified that, “Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously.” Boeing’s principal plan document, The Boeing Company’s Master Welfare Plan (“Master Plan”), similarly contained a broad grant of discretionary authority delegated to Aetna which included the power to “determine all questions that may arise including all questions relating to the eligibility of Employees and Dependents to participate in the Plan and amount of benefits to which any Participant or Dependent may become entitled.” In short, the group policy and employer’s plan document each gave Aetna fairly unchecked power to decide the merits of claims, the claims Aetna was responsible to pay.
A Boeing employee, Talana Orzechowski, submitted a claim for disability benefits under the plan because she suffered from physical illnesses, chronic fatigue syndrome and fibromyalgia, and could no longer perform her job duties as a result. After paying the claim for two years, Aetna decided to terminate her benefits based upon the plan’s 24-month limit for disabilities primarily caused by mental illness. Aetna determined Ms. Orzechowski’s condition was not physical but only mental based upon the opinions of medical consultants it hired to review her medical records. Aetna disagreed with Ms. Orzechowski’s treating physicians. They concluded after examining her in-person that she had a physical disability and that her mental illness, depression and anxiety, was secondary to her physical problems, chronic fatigue syndrome and fibromyalgia.
Ms. Orzechowski filed suit in federal district court under ERISA to recover her disability benefits. Following a bench trial, the trial court upheld Aetna’s benefit decision. It reviewed Aetna’s decision for an abuse of discretion (because Boeing’s Master Plan gave Aetna discretionary authority), rather than de novo, the default standard in an ERISA case.
The 9th Circuit held the district court should have applied a de novo standard of review to Aetna’s claim decision. It ruled that California Insurance Code section 10110.6 voided the discretionary provisions in both Aetna’s insurance policy and Boeing’s plan documents, including in the Master Plan. It reversed the district court’s decision and remanded the case for it to review the insurer’s claim denial de novo, with instructions to focus on Ms. Orzechowski’s physical illnesses that Aetna had ignored when terminating her benefits.
ERISA Preemption and Savings
The 9th Circuit rejected Boeing’s argument that ERISA preempts the California statute. The Court reasoned that while the California law comes within ERISA’s broad preemption clause, which preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan,” 29 U.S.C. § 1144(a), ERISA’s savings clause saved the California law from preemption. The savings clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A). For the savings clause to apply, the State law must satisfy a two-part test set forth in Kentucky Association of Health Plans v. Miller, 538 U.S. 329, 342 (2003). First, the State law must be specifically directed toward entities engaged in insurance, and second, the law must substantially affect the risk pooling arrangement between the insurer and insured. After some very technical arguments, the Orzechowski Court held the California statute meets both prongs of the Miller test, “regulates insurance,” and, therefore, is saved from ERISA preemption.
Statute Interpretation Arguments
The Court rejected Boeing’s other arguments that section 10110.6 did not void the discretionary clause in the Master Plan because it (1) only voids discretionary clauses in insurance policies but not in employer plan documents, and (2) is not retroactive and became effective on January 1, 2012 after the January 1, 2011 Master Plan. The Court reasoned the California statute, by its terms, covers not only “policies” that provide or fund disability insurance coverage but also “contracts, certificates, or agreements” that do so. It cited to 9th Circuit precedent holding that an ERISA plan is a “contract” and concluded Boeing’s Master Plan falls under section 10110.6, not just Aetna’s policy.
The Court rejected Boeing’s second argument because the California statute, while not retroactive, voids discretionary provisions in any policy “or contract” that renews after the statute’s effective date of January 1, 2012. The statute defines “renewed” as “continued in force on or after the policy’s anniversary date.” The policy’s anniversary date was January 1, 2012 and the Master Plan continued in force thereafter. The Master Plan, a contract, thus “renewed” after the statute’s effective date.
Conclusion
While Orzechowski marks the end of an era – that had allowed discretionary clauses in insurer-funded employee benefit plans providing disability and life coverage to California residents – there is still an open question whether California’s statutory ban will be extended to self-funded plans. Orzechowski did not reach that issue. Many large employers fund their benefit plans with their own money rather than through an insurance policy. Thus, even after Orzechowski, employers and their self-funded plans will continue to argue California’s ban does not apply to them. The debate remains alive and well in California (for self-funded plans) and, for both insurer- and self-funded plans, in most states because they have not enacted similar laws to California’s statute.
One thing we know for certain based on the 9th Circuit’s Orzechowski decision: discretionary clauses are void and unenforceable in insurer-funded ERISA employee benefit plans providing disability or life coverage for California residents, whether the clause appears in the insurer’s group policy, the employer’s separate plan document or both. Federal judges will thus have to start applying a standard of review more favorable to claimants, de novo, in insurer-funded ERISA plans. This will probably lead to better results for claimants in litigated cases and, potentially, less claim denials from group disability and life insurers in the first instance.
