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).

 

 

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).