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.


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.

Standard for Interference Claim Under Section ERISA 510

In order to show that a person interfered with an individual's right to receive an employee benefit, the individual must show that the person had a "specific intent" to interfere with the receipt of those benefits.  Fitzgerald v. Action, Inc., 521 F.3d 867, 871 (8th Cir. 2008).  This showing may be made with direct or circumstantial evidence.

In the absence of direct evidence, a court will apply the McDonnell Douglas burden shifting analysis applied to Title VII and ADEA cases.




Attorneys' Fees Not Available Under ERISA for Pre-Litigation Administrative Proceedings

In Hahnemann University Hospital v. All Shore, Inc., 514 F.3d 300 (3rd. Cir. 2008), the court held that the provision permitting awards of attorneys' fees in an ERISA action, 29 U.S.C. § 1132(g)(1), restricts a court to awarding attorneys' fees incurred in formal judicial actions only, and not attorneys' fees incurred for the pre-litigation process.

The court's holding is consistent with that of five other circuit courts of appeals:  the 2nd, 4th, 6th, 8th, and 9th circuits.



Individuals Can Sue for Damages to Individual Account for Plan Fiduciary's Breach

In a much anticipated decision, the United States Supreme Court held yesterday that an individual participating in a defined contribution plan, such as a 401(k), can sue under ERISA section 409(a) for individual damages caused by breach of fiduciary duty by the plan administrator, when such fiduciary breach impaired the value of the assets in the individual's account.  See LaRue v. DeWolff, Boberg & Assocs., Inc., No. 06-856 (S. Ct. Feb. 20. 2008).

In this case, the plaintiff claimed that the plan administrator failed to make requested changes to his investment choices, causing approximately $150,000 in losses.  Section 409(a) imposes fiduciary duties for management, administration, and investment of fund assets.  

Prior to this case, it was generally believed that under ERISA Section 502(a)(2) individuals could not sue for individual monetary relief for a breach of fiduciary duty, as compared to suing for equitable relief awarded to the plan.  The Supreme Court made held that in circumstances involving a defined contribution plan (such as a 401(k)), as compared to a defined benefit plan (such as a pension), individuals can sue in circumstances involving the statutory duties imposed by section 409(a).