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Ninth Circuit Rules ERISA Preempts California’s de Novo Standard of Review for Self-Funded Insurance Plans

Bringing a disability claim in California for improperly denied policy benefits under an insurance plan governed by the Employee Retirement Income Security Act (ERISA) can provide unique advantages to insureds.

The potential advantages include application of California Insurance Code §10110.6, which states that if an insurance plan 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).)

In Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 856 F.3d 686, 692 (9th Cir. 2017), the Ninth Circuit ruled section 10110.6 was not preempted by ERISA, and its effect was that the court reviewed insurance company denials of disability claims under a de novo standard.

On August 15, 2017, in Williby v. Aetna Life Ins. Co., — F.3d —, 2017 WL 3482390 (9th Cir. 2017), the Ninth Circuit revisited section 10110.6 and the standard of care for review of a denial of benefits in California under an ERISA plan, this time in the context of a “self-funded plan.”

The court ruled that ERISA preempts section 10110.6 for “self-funded” plans, and therefore, clauses providing for discretionary review of insurance company denials were enforceable. This potentially has significant impact for persons seeking disability benefits under self-funded plans.  It may also create incentives for employers and insurers to convert plans from insurance-funded to self-funded.

The plaintiff in Williby worked for Boeing and was insured under an ERISA plan administered by Aetna Life Insurance Company, but which was “self-funded” by Boeing.  (Id. at *1.)  Williby explained that, with a self-funded plan, the employer “does not purchase an insurance policy to cover its plan obligations; rather, [it] pays benefits from its own coffers and retains Aetna to administer the plan.” (Id.)

The plaintiff in Williby began receiving disability payments following “a stroke or stroke-like episode.” Id. The insurance plan in Williby contained a clause, as many disability plans or policies do, vesting the insurer with “full discretionary authority to determine all questions,” including entitlement to benefits. Id.

When disability benefits were terminated by Aetna, the insured brought suit under ERISA. The trial court, applying a de novo standard of review to Aetna’s decision to deny the claim, ruled that benefits were owed under the policy. Aetna appealed, arguing that because the ERISA plan was self-funded by Boeing, ERISA preempted California Insurance Code §10110.6 and that an abuse of discretion, not de novo, standard of review applied.

Orzechowski had previously held that section 10110.6 was not preempted by ERISA because it fell within ERISA’s “savings clause,” saving it for preemption. Williby addressed the question of “whether ERISA preempts § 10110.6 insofar as it applies to Boeing’s plan.” Williby, supra, at *4. This question turned on whether ERISA’s “deemer clause” applied to the plan. Id. at 5. Williby explained that the deemer clause “qualifies the scope of the savings clause, reviving preemption for certain laws that the savings clause might otherwise carve out from the preemption clause.” Id.

Williby noted that there was a key distinction between the plan addressed in Orzechowski and the plan in Williby for purposes of the deemer clause, specifically that the plan analyzed in Orzechowski was “not self-funded . . . [but] funded by insurance policies.” Id. Williby explained that this distinction controls whether section 10110.6 is preempted because “the deemer clause’s scope turns on the presence or absence of traditional insurance.” Id.

Williby concluded that “for a self-funded disability plan like Boeing’s, the savings clause does not apply, and state insurance regulations operating on such a self-funded plan [including section 10110.6] are preempted.” Id.

Under Williby, self-funded ERISA plans that have a discretionary review provision will be permitted to enforce those provisions, while insurance-funded plans are subject to de novo review and cannot enforce discretionary review provisions. This can have a significant, and potentially dispositive, impact on an insured’s claim and ability to receive policy benefits.

It may also incentivize employers and insurers to move toward self-funded plans instead of insurance-funded plans in order to take advantage of the law upholding discretionary review of denials for self-funded plans. Insureds who have a disability claim should carefully consider whether the plan they have is self-funded and what standard of review is applicable if the claim is denied and a lawsuit is necessary.

(This is an attorney advertisement by Joshua Haffner)

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