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.

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. 

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.