:: District Court Applies Discretionary Clause Ban To ERISA Self Funded Plan

For these reasons, the Court concludes that section 10110.6 applies to self-funded plans in the same way it applies to insured plans and effectively bars the Court from applying the abuse of discretion standard of review. The Court will therefore review Aetna’s decision on a de novo basis.

Thomas v. Aetna Life Ins. Co., No. 215-CV-01112-JAM-KJN, 2016 WL 4368110, at *7 (E.D. Cal. Aug. 15, 2016)

This opinion addresses two issues: first, the adequacy of the plan document’s delegation of discretionary authority to the claims administrator and, second, whether state law prohibiting discretionary clauses may apply to a self funded ERISA plan.

In a poorly reasoned opinion, the district court reached the wrong conclusion on both issues.  The mistake in the ERISA preemption analysis is the most troubling. In fact, this is at least the second time that a California district court has incorrectly applied a state law regulation to a self funded ERISA plan.

Delegation of Authority

The plaintiff (Thomas) argues that:

. . . the abuse of discretion standard would be inappropriate here because Aetna was never unambiguously granted discretion by the Benefits Committee. Thomas concedes that the Benefits Committee was granted discretion for its determination of whether Thomas was disabled but contends that “there is no language in the Plan granting Aetna discretion and Defendants have not cited anything evidencing that the Benefits Committee expressly delegated its discretion to Aetna.”

In short, while the plan grants the “Benefits Committee” discretionary authority, it does not grant that authority to the claims administrator (Aetna) – and, significantly, the Benefits Committee never delegated its authority to Aetna.  This argument should be viewed in context of the historical and prevailing ERISA jurisprudence that ERISA plan terms must be in writing and enforced accordingly.

Inexplicably, the Court rules against the plaintiff on the issue, finding that, “[r]ead as a whole, the Plan sufficiently delegates the Plan Administrator’s discretionary authority to Aetna.”  (emphasis supplied).

ERISA Preemption

The Court then turned its attention to the ERISA preemption issue.  The Court saw the issue as merely one of whether the state law ban conflicted with ERISA’s administrative scheme.

. . . the Ninth Circuit has concluded that state laws that bar discretionary clauses (such as section 10110.6) are not preempted by ERISA because they do not “authorize any form of relief in state courts nor serve as an alternative enforcement mechanism outside of ERISA’s civil enforcement provisions.” Standard Ins. Co., 584 F.3d at 846 [Standard Ins. Co. v. Morrison, 584 F.3d 837, 846 (9th Cir. 2009)] (rejecting claim that ERISA preempted a policy implemented by the Montana insurance commissioner of disapproving any insurance contract containing a discretionary clause).

On this view,  state law bans on discretionary clauses “merely force [ ] ERISA suits to proceed with their default standard of review,” which is de novo, and therefore do not “duplicate, supplement, or supplant the ERISA remedy.”

The Problem With the Court’s Reasoning

The problem with the Court’s reasoning lies in its careless reading of Ninth Circuit authority, i.e., the Standard Ins. Co. v. Morrison opinion.

That opinion involved two arguments, each of which would have been fatal to the application of the discretionary clause ban.   The Court ignored the first argument in Morrison which involved application of ERISA’s savings clause and went straight to the second argument of whether the law conflicted with ERISA remedies.

Let’s review the first argument as presented in Morrison.  The Ninth Circuit opinion began by asking:
Is Commissioner Morrison’s practice of denying approval to insurance forms with discretionary clauses preempted by ERISA? Here, no one disputes that Commissioner Morrison’s practice “relate[s] to any [covered] employee benefit plan.” 29 U.S.C. § 1144(a). It is thus preempted unless preserved by the savings clause.
Only after resolving this issue in favor of applying the savings clause did the Ninth Circuit reach the second argument.  And the second argument was essentially advancing an exception to the savings clause –
We decline to create an additional exception from the savings clause here. Like the regulatory scheme in Rush Prudential, the Commissioner’s practice “provides no new cause of action under state law and authorizes no new form of ultimate relief.” Id. at 379, 122 S.Ct. 2151. The Rush Prudential court emphasized that the scheme in that case “does not enlarge the claim beyond the benefits available” and does not grant relief other than “what ERISA authorizes in a suit for benefits under § 1132(a).” Id. Neither does the Commissioner’s practice.

Standard Ins. Co. v. Morrison, 584 F.3d 837, 848 (9th Cir. 2009)

By failing to appreciate the significance of the self funded status of the plan, the Court reached the wrong result.   Without benefit of the savings clause (which could not apply since it only extends to laws regulating the business of insurance), the state law discretionary ban is preempted since it relates to an ERISA plan.

Note – The Court appears to have relied in part on the decision by another district court which also reached the wrong conclusion on this issue:

During the hearing, however, Defendants conceded that the only court that has directly addressed the issue of whether the application of section 10110.6 to self-funded plans is preempted by ERISA concluded that there is no preemption. Williby v. AETNA Life Insurance Company, 2015 WL 5145499, *5 (C.D. Cal. Aug. 31, 2015).1 The defendant in Williby argued just as Defendants argue in this case “that the insurance code does not apply because (1) the STD benefits are self-funded … and (2) Aetna is granted discretion by the Plan, which is not an insurance policy, and thus, not regulated by the insurance code.” Id. at *5. The Williby court rejected this argument.

Thomas v. Aetna Life Ins. Co., No. 215CV01112JAMKJN, 2016 WL 4368110, at *6 (E.D. Cal. Aug. 15, 2016)

Deemer Clause – Since the overarching issue here is the application of state insurance law to self funded ERISA plans, note that states may not treat self funded plans as “insurance” so as to avoid ERISA preemption:

We read the deemer clause to exempt self-funded ERISA plans from state laws that “regulat[e] insurance” within the meaning of the saving clause. By forbidding States to deem employee benefit plans “to be an insurance company or other insurer … or to be engaged in the business of insurance,” the deemer clause relieves plans from state laws “purporting to regulate insurance.” As a result, self-funded ERISA plans are exempt from state regulation insofar as that regulation “relate[s] to” the plans.

FMC Corp. v. Holliday, 498 U.S. 52, 61, 111 S. Ct. 403, 409, 112 L. Ed. 2d 356 (1990)