When litigating ERISA-governed short-term disability, long-term disability, life and medical insurance claims, a major consideration is which “standard of review” will apply to the Court’s review of the insurer’s decision – abuse of discretion or de novo. The de novo standard of review is more claimant friendly. When applying the abuse of discretion standard of review, the Court is required to give some deference to the insurer’s decision. Under the de novo standard of review, the Court does not give any deference to the insurer’s decision, but simply makes a determination as to whether available evidence establishes that the insured was disabled under the terms of the Plan.
The abuse of discretion standard of review, which is friendlier to insurers, only applies if the ERISA plan contains “discretionary language” generally stating that the insurer has total discretion to interpret the terms of the Plan and decide whether the claimant is entitled to policy benefits. However, in 2011, California enacted Insurance Code section 10110.6, which banned discretionary clauses in ERISA plans issued or renewed on or after January 1, 2012. Since that time, District Courts in California and the Ninth Circuit have repeatedly ruled that Insurance Code section 10110.6 was valid and enforceable, most recently in Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 856 F.3d 686 (9th Cir. 2017). See our article on this case here. Unfortunately, with this ruling, the Ninth Circuit opened the door for the abuse of discretion standard of review to apply in a limited number of cases where employers provide group disability insurance and life insurance coverage which they fund.
Williby v. Aetna Life Insurance Co., 2017 WL 3482390 (9th Cir. August 15, 2017) involved a claim for short-term disability benefits made under a self-funded group short-term disability insurance plan. “Self-funded” means that the employer (here, Boeing) did not purchase an insurance policy to cover its plan obligations, instead committing to pay any benefits “from its own coffers.”
After Williby’s STD claim was denied, she filed a lawsuit seeking past-due benefits. At trial, the District Court Judge ruled that Insurance Code section 10110.6 invalidated the discretionary language in the STD Plan, and applied the de novo standard of review when ruling that Williby was entitled to STD benefits.
Aetna, the company Boeing hired to administer the ERISA plan, appealed the District Court’s decision, arguing that ERISA preempted the application of Section 10110.6 to self-funded plans. In considering Aetna’s argument, the Ninth Circuit offered a brief discussion of three interrelated ERISA provisions governing the preemption of state law – the “preemption clause,” the “saving clause,” and the “deemer clause” – before indicating that the issue would turn on the “presence or absence of traditional insurance.”
Specifically, the Court noted that in FMC Corp. v. Holliday, 498 U.S. 52 (1990), the Supreme Court set forth a “simple, bright-line rule: ‘if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it.’” Thus, because the Boeing Plan was self-funded and not insured, state insurance regulations operating on a self-funded plan – like Section 10110.6 – are preempted. The Court accordingly ruled that the District Court applied the incorrect standard of review, and remanded the case back to the District Court for further consideration.
While this ruling does give limited life to the abuse of discretion standard in some California-litigated ERISA cases, in reality, the McKennon Law Group does not believe this will significantly harm insureds’ ability to successfully recover ERISA benefits through litigation. First, only a small number of group insurance plans are self-funded, so the reach of this ruling will be small. More importantly, we believe that, in practice, there is not much difference between the two different standards of review. Not only does the abuse of discretion standard of review gives claimants the ability to obtain helpful information through discovery, but 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.