Tuesday, October 27, 2009

Ninth Circuit Issues Published Opinion On ERISA Preemption Of State Laws Preventing Discretionary Clauses In Insurance Policies

In Standard Insurance Co. v. Morrison (08-35246), the Ninth Circuit affirmed the district court's decision that the decision by the Montana Commissioner of Insurance to forbid so called "discretionary clauses" in insurance contracts was not preempted by the Employee Retirement Income Security Act of 1974.  The court stated:
Under the Employee Retirement Income Security Act of 1974 (“ERISA”), insureds who believe they have been wrongfully denied benefits may sue in federal court. The court determines the standard of review by checking for the presence of a discretionary clause. Such a clause might read: “Insurer has full discretion and authority to determine the benefits and amounts payable [as well as] to construe and interpret all terms and provisions of the plan.” If an insurance contract has a discretionary clause, the decisions of the insurance company are reviewed under an abuse of discretion standard. Absent a discretionary clause, review is de novo. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989).
The Montana Commissioner of Insurance made it his practice to refuse to approve any form submitted by an insurance company that contained such a discretionary clause.  When he rejected a form submitted by Standard Insurance, the carrier filed suit claiming his decision was preempted by ERISA.
With certain exceptions, ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any [covered] employee benefit plan.” 29 U.S.C. § 1144(a). Relevant here, the so-called savings clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” Id. § 1144(b)(2)(A). Thus, while ERISA has broad preemptive force, its “saving clause then reclaims a substantial amount of ground.” Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 364 (2002).
The court then provided the test to be applied:

Here, no one disputes that Commissioner Morrison’s practice “relate[s] to any [covered] employee benefit plan.” 29 U.S.C. § 1144(a). It is thus preempted unless preserved by the savings clause. To fall under the savings clause, a regulation must satisfy a two-part test laid out in Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003). “First, the state law must be specifically directed toward entities engaged in insurance.” Id. Also, it “must substantially affect the risk pooling arrangement between the insurer and the insured.” Id. We now turn to those two prongs.
The court held:
Accordingly, the Commissioner’s practice is “specifically directed toward entities engaged in insurance,” Kentucky Ass’n, 538 U.S. at 342, and it “substantially affect[s] the risk pooling arrangement between the insurer and the insured,” more so than other laws which have been upheld by theSupreme Court. The practice of disapproving discretionary clauses is thus saved from preemption under 29 U.S.C. § 1144(a) by the savings clause in section 1144(b).
The court then held that the Commissioner's practice is not preempted by ERISA's "exclusive remedial scheme for insureds who have been denied benefits. 29 U.S.C. § 1132(a)."

Finally, the court rejected Standard Insurance's argument "that a state’s forbidding discretionary clauses is inconsistent with the purpose and policy of the ERISA remedial system, which emphasizes a balance between protecting employees’ right to benefits and incentivizing employers to offer benefit plans." 
It relies on the Supreme Court’s decision in Metropolitan Life Insurance Co. v. Glenn, 128 S. Ct. 2343 (2008). There, the Court noted that a conflict of interest exists when the entity determining eligibility for benefits also bears the financial burden of paying for them. Id. at 2348. However, the Court rejected a call to repudiate Firestone Tire and instead retained the abuse-ofdiscretion standard (albeit tempered by consideration of the conflict), saying that it “would [not] overturn Firestone by adopting a rule that in practice could bring about near universal review by judges de novo—i.e., without deference—of the lion’s share of ERISA plan claims denials.” Id. at 2350. “Had Congress intended such system,” the Court continued, “it would not have left to the courts the development of review standards but would have said more on the subject.”
Glenn involved an exercise of the Court’s power to make federal common law, as evidenced by its frequent reference to trust law and the absence of any applicable state insurance regulation. The Court’s refusal to create a system of universal de novo review does not necessarily mean that states are categorically forbidden from issuing insurance regulations with such effect. After all, the states have retained power to institute quite a number of rules affecting ERISA plans pursuant to their savings clause powers. See, e.g., Kentucky Ass’n, 538 U.S. at 329; Rush Prudential, 536 U.S. at 355; UNUM Life, 526 U.S. at 358; Metro. Life, 471 U.S. at 724.
We decline to create an additional exception from the savings clause here. Like the regulatory scheme in Rush Prudential, the Commissioner’s practice “provides no new cause of action under state law and authorizes no new form of ultimate relief.” Id. at 379. The Rush Prudential court emphasized that the scheme in that case “does not enlarge the claim beyond the benefits available” and does not grant relief other than “what ERISA authorizes in a suit for benefits under § 1132(a).” Id. Neither does the Commissioner’s practice.
I am sure a petition for rehearing en banc is forthcoming. 

The first point I noticed, which may be addressed if I looked further into it, is as follows: Page five of the opinion states "the so-called savings clause saves from preemption 'any law of any State which regulates insurance, banking, or securities'.” The issue here was not a law of the state but a practice of the insurance commissioner. The court stated "We will call this his 'practice,' as there is no specific Montana law forbidding discretionary clauses."  The savings clause relates to any law of any state but the court indicates this is not a law.


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