With Discretionary Language Even Barred in Self-Funded ERISA Plans, is This the Death of The Abuse of Discretion Standard of Review In California?

Recently, we explained that District Courts within the state of California, applying California Insurance Code section 10110.6, ruled that, even if an insurance Plan contains language giving discretion to a claim administrator, that language is unenforceable, and de novo is the proper standard of review.  See The Death of the Abuse of Discretion Standard of Review in ERISA Disability Insurance Cases in CaliforniaA recent ruling expanded the application of California’s anti-discretionary language statute to self-funded plans, further signaling the end of the abuse of discretion standard of review in California Federal Courts.

In Williby v. Aetna Life Insurance Company, 2015 WL 5145499 (C.D. Cal. August 31, 2015), the plaintiff initiated the lawsuit after Aetna denied her claim for short-term disability (“STD”) benefits.  The facts of the benefits dispute are fairly straightforward, and the District Court eventually ruled that Aetna’s decision to deny the plaintiff’s claim for STD benefits was improper, regardless of the standard of review.  What is unique about the ruling is the District Court’s application of California Insurance Code section 10110.6.

The ERISA Plan in Williby was a self-funded plan.  This means that the employer, not Aetna, was responsible for paying any disability benefits due under the Plan.  Aetna argued that Insurance Code section 10110.6 did not apply to self-funded plans, but only insured plans (where the claims administrator/insurer, not the employer, is responsible for any benefits payable under the Plan).  This argument was based on the language in the statute that bars provisions which “reserve[] discretionary authority to the insurer.”  See Insurance Code section 10110.6(a).  The Court disagreed with Aetna’s interpretation of the statute, instead holding that the California State Legislature intended for the statute to apply, not only to insurance policies, but also insurance contracts.  Specifically, the Court explained:

[P]rovisions that reserve discretionary authority to insurers to determine eligibility for benefits in contracts or policies in effect after January 1, 2012, are void and unenforceable under California Insurance Code § 10110.6.

Defendant argues that the insurance code does not apply because (1) the STD benefits are self-funded by Boeing, and (2) Aetna is granted discretion by the Plan, which is not an insurance policy, and thus, not regulated by the insurance code. Several district courts have found, although not in the context of self-funded plans, that Section 10110.6 applies to ERISA plan documents because the statute expressly applies to contracts and insurance policies. A federal court interpreting a state statute gives the language of the statute its “usual, ordinary import,” but if the statute’s wording is ambiguous, it may consider extrinsic evidence of legislative intent. In re First T.D. & Inv., Inc., 253 F.3d 520, 527 (9th Cir. 2001). Section 10110.6 by its plain language applies to any insurance policy, contract, certificate or agreement, and “an ERISA plan is a contract.”Harlick v. Blue Shield of Cal., 686 F.3d 699, 708 (9th Cir. 2012). The statute’s legislative history reinforces its application to employer-sponsored ERISA plans. A report from a June 22, 2011, hearing refers to an opinion letter from the Insurance Commissioner’s counsel that explained: “in group, employer-sponsored disability contracts that are governed by ERISA, the presence of a discretionary clause has the legal effect of limiting judicial review of a denial of benefits to a review for abuse of discretion. . . .[t]his standard of review deprives California insureds of the benefits for which they bargained, access to the protections of the Insurance Code[,] and other protections in California law.” See June 22, 2011, Senate Bill No. 621. The Court finds that the provisions conferring discretionary authority to Aetna are void and unenforceable pursuant to Cal. Ins. Code § 10110.6. Because the Court finds the provisions conferring discretionary authority to Aetna are void and unenforceable, the Court reviews whether Aetna correctly or incorrectly denied benefits de novo. See Firestone, 489 U.S. at 957; see also Abatie, 458 F.3d at 963. (Emphasis added.)

This ruling is further proof that the abuse of discretion standard of review will no longer apply in a vast majority of the ERISA cases filed in Federal Courts in California.

If your claim for short-term disability insurance or long-term disability insurance was 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.

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