ERISA Did Not Preempt A Court's Evaluation of State Law Damages

ERISA preemption cases can be pretty technical and, frankly, quite boring.  This case deserves mention for the novel argument made by the employee in his lawsuit for damages.  His lawsuit claimed that his employer or someone with the plan misrepresented facts about one of two benefits plan he was to choose between.  The fundamental problem with the employee's lawsuit is that he picked the richer benefit plan and suffered no damages as a result of the misrepresentation.  

To get around this problem, he claimed that that ERISA preempted the court from evaluating whether he suffered any damages.  (As an aside, I don't understand his argument and the court's opinion does not provide any elaboration.)  The court rejected the preemption argument holding that the court's evaluation of damages in this case is not preempted by ERISA because it did not implicate the structure or administration of the plan, did not affect the type of benefits offered or impose rules for calculating benefits.  To review this case, see Carroll v. Los Alamos Nat'l Security, LLC et al., 2011 U.S. App. LEXIS 1267 (10th Cir. Jan. 19, 2011). 

ERISA Preempts Utah Insurance Regulation Governing Discretionary Review Clauses

In Hancock v. Metropolitan Life Ins. Co., 590 F.3d 1141 (10th Cir. 2009), the Tenth Circuit Court of Appeals held that ERISA preempts a Utah regulation governing the format of clauses in insurance policies that give an employee benefit plan administrator discretion when interpreting the plan terms and awarding benefits. The Utah regulation imposed a ban on such "reservation-of-discretion clauses" in insurance policies with an exception for employee benefit plans governed by ERISA.  The regulation provided that ERISA employee benefit plans must contain certain language and be in at least 12 point bold font.  

The Tenth Circuit held that ERISA preempted the Utah regulation because it did not meet the second part of the Miller test for determining whether a state law regulates insurance.  See Kentucky Ass'n of Health Plans v. Miller, 538 U.S. 329, 342.  If both parts of the Miller test are met, the rule falls within ERISA's savings clause, 29 U.S.C. § 1142(b)(2)(A), exempting from ERISA preemption states laws relating to employee benefit plans that regulate insurance, banking or securities.  The second part of the Miller test requires a state law to substantially affect the risk pooling arrangement between the insurer and the insured in order for the state law to be found to regulate insurance.  The court in Hancock held that the Utah regulation did not substantially affect the risk pooling arrangement because it related more to the form, not the substance of the discretionary clause.  The Utah rule did not remove the option of insurer discretion and thus did not affect who gets the risk pool or prescribe conditions under which insurers must pay for assumed risks. As a result, the court held that the Utah rule was preempted by ERISA.  The Court noted that if the Utah rule had imposed a blanket prohibition on the use of discretion-granting clauses, this would be a different case.

Colorado Insurance Statute Prohibits Discretionary Clauses in Employee Benefit Plans Issued in Colorado by Insurers

Colorado Revised Statute Section 10-3-1116, which governs regulation of insurance companies, prohibits an insurance policy, insurance contract or plan that is "issued" in Colorado and that offers health and disability benefits from containing a provision that reserves discretion to the insurer, plan administrator, or claim administrator to interpret the terms of the plan or determine eligibility for benefits.

Based on federal case law, it appears that this statute is not preempted by ERISA and falls within ERISA's savings clause.  29 U.S.C. § 1144(b)(2)(A).



Insurer's Discretionary Review Clauses May Be Subject to State Law Prohibiting Same

The United States Supreme Court declined to review a decision from the Ninth Circuit Court of Appeals, Standard Ins. Co. v. Morrison, 584 F.3d 837 (9th Cir. 2009), holding that a state's practice (though its insurance commissioner) of disapproving insurance policies that give insurers discretion to determine benefits and construct the terms of an employee benefit plan is not preempted by ERISA. 

Several states have laws that prevent an insurer from adding such a discretionary clause to an policy governing employee benefits.  As a result of the Supreme Court's decision not to review the Standard Ins. Co. case, courts faced with the question whether these state laws are preempted by ERISA may be inclined to hold that they are not  thereby legislating a de novo  standard of review when insurers companies may employee benefit decisions.


ERISA Preemption of Laws Regulating Insurance

In general, ERISA does not preempt state laws regulating insurance, see 29 U.S.C. § 1144(b).  A state law regulates insurance if it is: (1) specifically directed toward entities engaged in insurance and (2) substantially affects the risk pooling arrangement between the insurer and the insured.  See Kentucky Ass'n of Health Plans, Inc. v. Miller, 538 U.S. 329, 242 (2003).

ERISA Preemption of State Laws

With some exceptions, ERISA preempts state laws that "now or hereafter relate to any employee benefit plan."  29 U.S.C. § 1144(a). The exceptions are set forth in 29 U.S.C. § 1144(b).