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.


Plan Administrator Entitled to Deference on Second Attempt to Construe Plan After Error on First Attempt

The United States Supreme Court held in Conkright v. Frommert, No. 08-810 (Apr. 21, 2010), that a plan administrator who is given discretionary authority in the plan documents to interpret the plan is entitled to deference when making a second attempt at interpreting the plan terms after a court concludes that the plan administrator violated ERISA when initially interpreting the plan and remands for a second interpretation.  At issue in Conkright was the plan administrator's interpretation of a retirement plan as allowing a certain method of calculating retirement benefits when employees who left the company and received a lump sum distribution of retirement benefits are rehired.  After an appellate court concluded that the plan administrator erred in interpreting the plan and remanded for consideration of other interpretations, the district court declined to apply a deferential standard of review to the plan administrator's second attempt at interpreting the plan.  On appeal to the Supreme Court, the Court held that the plan administrator's second attempt at interpreting the plan was entitled to a deferential standard of review.

Arbitratory and Capricious Standard of Review under ERISA

In Te’O v. Morgan Stanley & Co., 2009 U.S. App. LEXIS 2770 (10th Cir. Feb. 11, 2009), the Tenth Circuit Court of Appeals articulated the standard of review for a third-party administrator who, under the plan, has discretion to determine eligibility for benefits.  A decision to deny benefits is reviewed under the arbitrary and capricious standand.  Applying this standard, a court will consider only the arguments and evidence presented to the third-party administrator at the time the decision was made and whether substantial evidence supported that decision.  The decision does not need to be the only logical one or even the best decision.  It need only be sufficiently supported by facts within the third-party administrator's knowledge to counter a claim that the decision was arbitrary and capricious.  The decision will be upheld unless it is not grounded on any reasonable basis. 

Where No QDRO Exists, Plan Administrator Should Follow Plan For Distribution of Benefits

The United States Supreme Court held in Kennedy v. Plan Administrator for Dupont Savings & Investment Plan, No. 07-636 (Jan. 26, 2009), that the plan administrator correctly relied on the plan language to determine that the deceased plan participant's former spouse was entitled to the plan benefits even though the spouse disclaimed the right to the benefits in her divorce decree but did not have a QDRO.

Insurer's Interpretation of Plan Language Concerning What Constitutes Working as a Full-Time Employee Was Arbitrary and Capricious

In Weber v. GE Group Life Assurance Co., 541 F.3d 1002 (10th Cir. 2008), the Tenth Circuit reversed an insurer’s denial of life insurance benefits holding that it’s interpretation of the plan was arbitrary and capricious. In this case, a full-time employee signed up for life insurance and then was unable to work full time, dying approximately two weeks later.   The insurer denied life insurance benefits concluding that the deceased did not meet the definition of an “eligible employee” because she had not worked at least thirty-hours after signing up for benefits. The plan defined an eligible employee as, among other things, someone who regularly works at least 30 hours per week. Applying the sliding-scale arbitrary and capricious standard of review applicable where the insurer also is the plan administrator, the Court held that since the employee had regularly worked 40 hours prior to signing up for insurance, she met the requirements of regularly working 30 hours.

Court Finds that Plan's Denial of Benefits Was Arbitrary and Capricious

If a plan provision regarding benefits is unambiguous, a court will review the plan administrator's decision regarding benefits as a matter of law.  In Brown v. Workforce Stabilization Plan, No. 06-4133 (10th Cir. July 3, 2007), the court held that the plan administrator's denial of benefits was arbitrary and capricious because it conflicted with the unambiguous plan provisions regarding benefits.

The plan administrator had determined that certain union employees were not eligible for benefits guaranteed under an employee benefit plan governing employees who are laid off as the result of a company merger.  The plan administrator's articulated rationale for denying the benefits was that the list of benefits available to those employees under their collective bargaining agreement did not specifically include the plan at issue.  The court found that the plan administrator's decision conflicted with the plain language of the collective bargaining agreement in that the list of available benefits was not exhaustive and had language including the benefit plan at issue.


Denial of Benefits Reviewed De Novo if No Discretion

A court reviewing a plan administrator or fidicuary's decision to deny benefits will apply a de novo standard of review if the plan does not give the plan administrator of fiduciary discretion in the determination of whether to grant or deny benefits.

 Under a de novo standard, the court will take a fresh look at the decision without regard for the decision made by the plan administrator or fiduciary.



Standard of Review of Plan Administrator's Decision on a Benefits Request - Generally

If a benefit plan gives discretion to the plan administrator regarding benefit determinations, a court typically will review that decision applying the stringent arbitrary and capricious standard.  Under this standard, the court reviews the plan administrator's decision and analyzes whether the plan administrator's interpretation of the plan was "reasonable" and made in "good faith."

In cases where the plan administrator operates under an inherent or proven conflict of interest or there is a serious procedural irregularity in the administrative process, a court will adjust the standard of review applying a sliding scale approach.  Under this approach, the court continues to apply the arbitrary and capricious standard but decreases the level of deference given in proportion to the seriousness of the plan administrator's conflict.

If the individual seeking benefits can establish a serious conflict of interest or the existence of a serious procedural irregularity, then the burden shifts to the plan administrator to prove the reasonableness of its decision under the arbitrary and capricious standard.  The plan administrator must show that that its interpretation of the terms of the plan is reasonable and that its application of those terms to the individual seeking benefits is supported by substantial evidence.

ERISA Sliding Scale Standard of Review When Insurer Also Is Plan Administrator

When an ERISA defendant is both the insurer and plan administrator, the court will apply a less deferential standard of review to a plan administrators’ decision.  Due to the conflict of interest, courts apply a sliding scale decreased level of deference to the arbitrary and capricious standard. In Loughray v. Hartford Group Life Ins., No. 05-CV-01450-CBS-BNB (D. Colo. Apr. 2, 2007), Magistrate Judge Shaffer carefully and thoroughly analyzed the standard of review to be applied to an administrator’s denial of benefits and provides a detailed review of how to apply the standard. The court held that the standard of review to be applied to the conflicted defendant insurance company’s denial of benefits would be the “sliding scale” approach employing the arbitrary and capricious standard of review with a decreased level of deference given to the administrator’s decision in proportion to the seriousness of the conflict. The court found that the insurance company, Hartford, was conflicted because it served as both an insurer and plan administrator. Under the sliding scale approach, the court shifted the burden to Hartford “to establish that its interpretation of the terms of the plan is reasonable and its application of the terms of the plan is supported by substantial evidence.” The court defined substantial evidence as “such evidence that a reasonable mind might accept as adequate to support the” conclusion reached by the decision maker. The court noted that a lack of substantial evidence often indicates that the decision was arbitrary and capricious. After carefully reviewing the record, the court found that Hartford’s denial of benefits was not arbitrary and capricious. This decision provides an excellent analysis of how to apply the standard of review.