California Court Rejects Discretionary Language in ERISA Plan
Another federal judge in California has rejected an insurer’s argument to follow discretionary language stated in an employer’s disability plan, but not the insurance policy which funds the benefits paid under the plan. In Nagy v. Group Long Term Disability Plan for Employees of Oracle America Inc., Hartford Life and Accident Insurance Company argued that a California law which bans discretionary provisions should not apply to Oracle’s plan, because the language attempting to delegate discretion to Hartford was found in a plan document, not its disability policy.
Why is Discretionary Language Important in ERISA Claims?
Since a 1989 U.S. Supreme Court case called Firestone v. Bruch, ERISA plans have been inserting clauses which grant discretionary authority into to their terms, because it gives the plan administrator a huge advantage over employee participants. In Firestone, the Supreme Court held that the method a court uses to review an ERISA plan (called the “standard of review”) is decided by whether discretion is given to the administrator in the plan documents.
Before Firestone, most plans did not grant discretion to administrators, and the Supreme Court said in that situation, a standard called “de novo” should apply. Under de novo review, courts do not defer to the administrator’s decision in any way. Instead, a court using de novo review in an ERISA case looks at the evidence fresh and makes an independent decision about whether a participant is entitled to the benefits at stake.
However, after Firestone, plans were amended to grant discretion to administrators over various things, including interpreting plan terms and making benefit decisions. “Discretion” is a very old concept drawn from trust law. An administrator vested with discretion, just like the trustee of a trust, will not have their decision overturned without a showing that it was overwhelmingly wrong. The legal phrase is “unreasonable,” as in no reasonable person could agree with it. Using discretionary language in ERISA plans gives the administrator a leg up, because a reviewing court cannot reject the claim decision simply because the judge does not agree with it; the plan participant must prove that the administrator’s decision was not supported by substantial evidence.
California Law Bans Discretionary Language
Seeing abuses in the administration of plans with discretion, California and other states have adopted laws which ban the use of discretionary clauses for insurance claim administrators. These states have recognized that companies insert discretionary clauses into plans to put insured employees at a disadvantage. States are allowed to impact what happens to ERISA plans when they adopt laws as part of their insurance statutes, because ERISA allows states to have their own insurance laws that can apply to insured ERISA plans.
California Insurance Code Section 10110.6 specifically voids any language that applies to insurance claims which attempts to give discretion to an insurance company. The law reads:
10110.6. (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
(b) For purposes of this section, “renewed” means continued in
force on or after the policy’s anniversary date.
(c) For purposes of this section, the term “discretionary
authority” means a policy provision that has the effect of conferring
discretion on an insurer or other claim administrator to determine
entitlement to benefits or interpret policy language that, in turn,
could lead to a deferential standard of review by any reviewing
(g) This section is self-executing. If a life insurance or
disability insurance policy, contract, certificate, or agreement
contains a provision rendered void and unenforceable by this section,
the parties to the policy, contract, certificate, or agreement and
the courts shall treat that provision as void and unenforceable.
This law became effective in January 2012, and it generally applies to claims that were denied after its effective date.
Whether the Discretionary Language is the Plan or the Policy, California Law Voids It.
Hartford argued to the court that its insurance policy did not contain any discretionary language. Instead, the Oracle Disability Plan document stated that it had delegated discretion, and Hartford was relying upon that discretionary clause for its position that it was entitled to abuse of discretion review by the court. In making its argument, Hartford cited to a case decided by a judge in another one of California’s federal district courts. The judge rejected Hartford’s argument, noting that Hartford had actually agreed that the the ERISA plan and the insurance agreement “are a single composite agreement.” The court held that “Hartford cannot sidestep California’s clear prohibition on discretionary clauses simply because it placed that clause in a document that is incorporated by reference into a policy where such provision is void.”
TAKEAWAY: In California and other states that have adopted laws banning discretionary clauses, life and disability insurance companies should not be allowed to move discretionary clauses out of their insurance policies and into a side agreement or plan document as a means to get around the law. Discretionary bans still apply if a plan seeks to give its insurance company discretion through its plan document.