Ban on Discretionary Clauses in Health and Disability Insurance Policies Upheld; Discovery Still Limited in Benefit Denial Cases

Ever since the Supreme Court issued its opinion in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), nearly every employee benefit plan and insurance policy covered by the Employee Retirement Income Security Act (“ERISA”) includes a clause granting the plan administrator “discretion” to interpret the terms of the plan. Not surprisingly, many of these plans were written vaguely, so that the administrator’s interpretation would upheld unless it was not reasonable. See Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 105 (2008).

Following apparent abuses by the insurance industry with respect to health insurance plans, disability plans and life insurance plans, the National Association of Insurance Commissioners proposed legislation in many states that would ban such discretionary clauses from insurance policies, as such clauses have incented insurers to craft vague policies, and then “reasonably” interpret said policies in their own favor. Illinois enacted such a ban. 50 Ill. Admin. Code § 2001.3 (2005).

Whether or not Illinois’ ban on such discretionary clauses is preempted by the Employee Retirement Income Security Act (“ERISA”) was addressed recently in Chicago’s federal court. Ball v. Standard Ins. Co., 2011 U.S. Dist. LEXIS 19146 (N.D. Ill. Feb. 23, 2011). Standard Insurance vehemently argued the clause was preempted by ERISA because it was designed to dictate a standard of review in ERISA cases. Id. at *9. Judge Keys, however, disagreed. Though ERISA has broad preemption of state laws, ERISA § 514(a), it saves from preemption laws that regulate insurance. ERISA § 514(b)(2)(A). A state law regulates insurance if (1) the state law is “specifically directed towards entities engaged in insurance” and (2) the law “substantially affect[s] the risk pooling arrangement between the insurer and insured.” Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329, 341-42 (2003). Judge Keys held the Illinois ban on discretionary clauses met the test in Miller, and that a de novo standard of review applies.

Earlier in the case, Ms. Ball propounded broad discovery requests, but the court entered an order limiting discovery to the administrative record. Upon motion to reconsider that ruling, Judge Keys upheld the court’s earlier ruling. This case made clear that even with an opportunity to encounter a de novo standard of review in the U.S. District Court, it is imperative that a lawyer representing a claimant during the administrative claims process knows how to create a record. If you have a claim for health, disability, or life insurance benefits, make sure to consult an attorney learned in ERISA.