Denial Of Insurance Claims Under ERISA Are Reviewed De Novo In California

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A California law gives insureds the right to have a Court independently review insurance company denials of policy benefits under the Employment Retirement Security Act (“ERISA”). This is a right which often does not exist in other states. This unique California law significantly improves the insured’s odds when challenging the denial of insurance benefits under ERISA.

When a disability or life insurance policy is issued as a group plan through an employer, unless the employer is the government or a church, the insurance policy is governed by ERISA. This has significant ramifications for an insured challenging a denial of policy benefits. A plan governed by ERISA has more limited remedies and is subject to federal court jurisdiction. In addition, to file suit over the denial of benefits under an ERISA plan, an insured must first exhaust administrative remedies, which means complying with the appeal procedures under the insurance plan.

Many insurance plans state that, when an insurance claim is denied by the insurance company, that denial can only be overturned by a Court if the decision was an abuse of the insurance company’s discretion. Abuse of discretion is the most lenient standard of review under the law. The abuse of discretion standard of review of insurance company denials under ERISA has historically imposed a significant hurdle to recovery of policy benefits under ERISA.

In California, however, there is a recent statute that makes discretionary review provisions in an insurance policy void. Thus, under California Insurance Code §10110.6(a), if life or disability coverage, including for an ERISA policy, “contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, . . . that provision is void and unenforceable.” (California Insurance Code §10110.6(a).)

The practical effect of this law is that an insurance company denial of benefits under ERISA is reviewed de novo by a Court in California under most circumstances. A de novo review standard means that the reviewing Court evaluates the record anew, and makes its own decision, without regard or deference to the insurance company’s decision.

A recent California federal district court case decided in October 2016, Murphy v. California Physicians Service (N.D. Cal. 2016) 2016 WL 5682567, illustrates the effect of California’s statute voiding discretionary review provisions under ERISA. Murphy involved a motion “to determine the standard or review” by the Court in California of an ERISA denial. (Id. at *1.) Analyzing section 10110.6, the Murphy Court stated that a “grant of discretion provision would be void” under the statute. (Id. at *5.) Murphy noted that “nearly every federal district courts” that has analyzed the issue held that discretionary clauses in an ERISA plan were voided by section 10110.6. (Id. at *6.) Murphy also held that section 10110.6 was not preempted by ERISA. (Id. at *8.)

California’s law prohibiting abuse of discretion provisions in ERISA policies is unique and recent. It provides California residents who are denied policy benefits under ERISA with a major advantage in challenging those denials and pursuing benefits.