Seyfarth Synopsis: The Ninth Circuit Court of Appeals recently confirmed that ERISA preempts state insurance law bans on discretionary clauses for self-funded ERISA plans.
The Ninth Circuit has weighed into the national debate over discretionary clauses in ERISA plans, holding that ERISA preempts a state-law ban on discretionary clauses for self-funded disability plans, but not for fully-insured plans. Williby v. Aetna Life Ins. Co., No. 15-56394, Aug. 15, 2019 (9th Cir.).
In Williby, an employee of The Boeing Company sought disability benefits. Boeing provided its employees with a self-funded short-term disability program, administered by Aetna. The plan included a so-called discretionary clause, providing Aetna with “full discretionary authority to determine all questions that may arise,” including determination of benefits eligibility and scope. Discretionary clauses effectively make an administrator’s determinations subject to a higher standard of review (abuse of discretion), rather than a de novo review.
The employee sought short-term disability benefits, which Aetna granted in part but denied in part. The employee then sued, accusing Aetna of wrongful denial. The trial court reviewed Aetna’s determination de novo, finding in part that Cal. Ins. Code § 10110.6 — a ban on discretionary clauses in life or disability insurance — prohibited application of a more stringent standard of review. The trial court then held that plaintiff was entitled to more benefits than what Aetna had originally granted. Aetna appealed.
The Ninth Circuit reversed and remanded. The Court ruled that ERISA preempted § 10110.6, as applied to the self-funded plan at issue. The Ninth Circuit focused its analysis on the difference between a fully-insured and a self-funded benefit plan. The Court held that there “is a simple, bright-line rule: if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it. . . . Thus, for a self-funded disability plan like Boeing’s, the saving clause does not apply, and state insurance regulations operating on such a self-funded plan are preempted.”
The Court then held that, because § 10110.6 was preempted, Aetna’s decisions were entitled to an abuse of discretion standard, and remanded for further proceedings.
Thus, while the national battle over the force of state discretionary clause bans continues to be fought, self-funded plans in the Ninth Circuit can point to Williby as setting a clear and bright line limit on the interplay of state insurance regulations and ERISA. In the coming years, we expect to see many more cases presenting ERISA preemption issues in the near future, as it remains a very hot-button and heavily litigated issue.