Discretionary Clauses in Long Term Disability Plans Are Unenforceable Even When Not in the Insurance Policy

Chicago area employees with coverage under an employer-sponsored long term disability insurance plan, health insurance plan, or life or accidental death insurance plan often do not know or think about how a standard of review affects their rights until after they have submitted a claim. It dramatically can affect how the insurer handles the claim, and the outcome in any litigation if the insurer upholds its denial of a claim. Although Illinois has enacted a regulation banning insurers of these types of plans from having discretionary authority to make benefit determinations or to interpret the terms of the plan, insurers are persisting in trying to find loopholes in the regulation, or a way around it. Most active in this endeavor appears to be Cigna, appearing in litigation under its subsidiary’s name, Life Insurance Company of North America.

In 2005, the Illinois Department of Insurance enacted 50 Ill. Adm. Code § 2001.3, which bans insurers offering or issuing long term disability, health, or life or accidental death insurance policies in Illinois from having a discretionary clause in any “policy, contract, certificate, endorsement, rider application or agreement”. Long ago, courts determined that this regulation was not preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”) in cases where the insurance policies themselves continued to contain such clauses. The next wave of cases considered whether insurance policies originally issued prior to the regulation’s enactment, but renewed after it, were affected by the ban. Courts issued mixed rulings, but the Department of Insurance issued guidance stating that the regulation applied to policies renewed after its enactment. Now, employers’ master welfare plan documents and summary plan descriptions contain the discretionary clauses, while the insurance policies do not, and the insurers are arguing that such a plan structure evades the regulation. Cigna has been the most active in advancing this argument, but it has failed now in every case in Chicago.

Most recently, Cigna made this argument in Borich v. Life Insurance Company of North America, 2013 U.S. Dist. LEXIS 59674 (N.D. Ill. Apr. 25, 2013). There, Judge John Tharp ruled that the regulation applies even where the discretionary granting language is in plan documents other than the insurance policy, and that ERISA does not preempt the regulation. A similar holding was reached in Ehas v. Life Insurance Company of North America, 2012 U.S. Dist. LEXIS 169151 (N.D. Ill. Nov. 29, 2012). The very same issues are pending before another judge in the same district in Novak v. Life Insurance Company of North America.

If you have a claim for long term disability, health, or life insurance benefits, call an experienced ERISA attorney today to learn about how discretionary clauses can affect your claim.