In the long anticipated ruling in Fontaine v. Metropolitan Life Ins. Co., No. 14-1984, 2015 U.S. App. (7th Cir. Sept. 4, 2015), the Seventh Circuit affirmed that Illinois’s anti-discretionary clause regulation in 50 Ill. Admin. Code §2001.3, that prohibits discretionary clauses in insured employee benefits plans offered or issued in Illinois, was outside the scope of the preemption power of the Employee Retirement Income Security Act of 1974 (ERISA). The decision makes clear that the judicial standard of review for all benefits determinations under ERISA plans offered or issued in Illinois is de novo. This ruling confirms a trend of recent court decisions in favor of statutory and regulatory bans of discretionary language in group policies and is in line with the Sixth and Ninth Circuits.

ERISA and Benefits Determinations

In the now familiar decision in Firestone Tire & Rubber Co. v. Bruch, 449 U.S. 101, 115 (1989), the Supreme Court held that in suits challenging benefits determinations under ERISA that unless the plan reserved discretionary authority to an administrator or fiduciary, a reviewing court should apply a de novo standard of review. Under de novo review the court is to afford no deference to previous determinations regarding a claimant’s eligibility for benefit but make its own independent decision on a claimant’s eligibility.

After Firestone insurance companies began including discretionary language in their policies, attempting to reserve application of a deferential standard of review unless the court found the determination to be arbitrary and capricious. In response many states, among them Illinois, enacted laws prohibiting these discretionary provisions in group insurance policies.

The enactment of these prohibitory statutes provoked the question whether the state laws would take precedence over these so-called Firestone clauses. Generally, ERISA preempts any state law “relating” to any employee benefit plan, but will not preempt a state law “regulating” insurance. To “regulate insurance,” a law has to “be specifically directed toward entities engaged in insurance … [and] the state law must substantially affect the risk pooling arrangement between the insurer and the insured.” Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003). As such, whether the de novo standard would be applied to benefit determinations in the State of Illinois depends on whether section 2001.3 merely “relates” to employee benefit plans or if it actually “regulates” insurance.

Case Background

Fontaine was an equity partner at Mayer Brown LLP where it offered a long-term disability plan insured by The Metropolitan Life Insurance Company (MetLife). Fontaine retired after 30 years of law practice due to vision problems that prevented her continuing to perform at the high level and pace expected in her work as a structured finance attorney. Two days after retiring she filed a claim for LTD benefits with MetLife, who denied her claim finding Fontaine did not meet the policy definition of disabled. Fontaine then filed suit against MetLife under ERISA for wrongful denial of benefits.

Both Fontaine and MetLife moved for entry of judgment by the district court, essentially a trial on the papers where the court reviews a closed record. Both sides presented extensive medical evidence. The standard of review was the pivotal issue. MetLife argued that since the plan provided that MetLife’s benefit determination is to be given full force and effect unless shown to be “arbitrary and capricious,” the court should apply deferential review.

However, Illinois insurance regulation prohibits such terms in health and disability insurance policies. Specifically, 50 Ill. Admin Code §2001.3 prohibits discretionary clauses “purporting to reserve discretion to the health carrier to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent” with Illinois law. The district court reviewed Fontaine’s eligibility for benefits de novo and found that she had proven by a preponderance of the evidence that she was disabled and entitled to LTD benefits.

Seventh Circuit Decision

MetLife appealed, challenging the district court’s findings under the de novo standard of review, arguing that §2001.3 is preempted by ERISA and that the denial was not arbitrary and capricious. Fontaine contended that §2001.3 is not preempted and even if it were, the denial of benefits was still arbitrary and capricious.

The Seventh Circuit held that ERISA does not preempt section 2001.3. Relying on Miller the Seventh Circuit applied its two-part test for determining whether a law “regulates insurance.” The court determined that §2001.3 was (1) “specifically directed toward entities engaged in insurance” and (2) “substantially affect[ed] the risk pooling arrangement between the insurer and the insured.” Therefore, the court concluded that §2001.3 regulated insurance and was outside of ERISA’s preemption power.

The court also disagreed with MetLife’s argument that §2001.3 should not apply because Fontaine’s disability insurance policy was offered not by MetLife, but by her employer. The court noted that Fontaine’s disability policy states that the employer (Mayer Brown) is the policyholder and therefore, her policy was not offered by her employer as MetLife claimed.

The Seventh Circuit rejected MetLife’s “too-clever” argument that the discretionary clause is not actually in an insurance policy but in an ERISA plan document as it created an “artificial distinction.” The court also rejected MetLife’s contention that the regulation does not affect risk pooling because it does not “determine whether a class of risks is covered, does not extend coverage to a class of previously excluded risks, and does not mandate new claim review procedures.” Instead, the Seventh Circuit joined the Sixth and Ninth Circuits concluding “that a state law prohibiting discretionary clauses squarely satisfies” the risk pooling requirement.

The court also rejected MetLife’s additional argument that §2001.3 conflicted with ERISA’s civil enforcement scheme based on Aetna Health Inc. v. Davila, 542 U.S. 200 (2004). Finding that Illinois’s regulation does not duplicate, supplement or supplant ERISA’s civil enforcement remedy, but that instead that it restores in Illinois “ERISA’s own default rule of de novo review in court cases challenging” a denial of benefits.

Conclusion

The decision is welcome news to plaintiffs and their attorneys in the Seventh Circuit as it makes clear that for insured ERISA plans offered or issued in Illinois after July 1, 2005, the judicial standard of review for plan administrators’ benefits decision is de novo. After Fontaine plaintiff’s attorneys can devote attention, and valuable space, to demonstrating disability and why a plan’s unreasonable determination lacks merit in fact and law.