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 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.


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.