Montana’s Disapproval of Employee Benefit Plans with a “Discretionary Clause” Upheld: Supreme Court Denies Cert

In Standard Ins. Co. v. Morrison, 584 F.3d 837 (9th Cir. 2009), cert. denied sub nom. Standard Ins. Co. v. Lindeen, 2010 U.S. LEXIS 4079 (May 17, 2010), a panel of the Ninth Circuit unanimously affirmed the decision of Judge Molloy of the District of Montana, which rejected Standard Insurance Company’s (“Standard”) challenge to the Montana Insurance Commissioner’s disapproval of any employee benefit plan that contains a “discretionary clause”  (537 F. Supp. 2d 1142 (D. Mont. 2008)).  Judge O’Scannlain, writing for the Ninth Circuit panel, affirmed, finding that although the Commissioner’s practice relates to a covered employee benefit plan (29 U.S.C. §1144(a)), it was not preempted on account of ERISA’s clause that expressly saves from preemption any state law that “regulates insurance, banking, or securities” (29 U.S.C. § 1144(b)(2)(A) (the so-called “savings clause)).  Applying the two-part test set forth in Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003), the court found that the Montana practice was specifically directed towards entities engaged in insurance (prong one of the two-part test) and substantially affected the risk-pooling arrangement between the insurer and the insured (the second prong).

The federal courts review ERISA benefit determinations deferentially so long as the plan confers discretion upon the plan administrator to interpret its provisions in making benefit determinations.  Firestone & Rubber Co. v. Bruch, 489 U.S. 101, 110 (1989).  If the plan does not contain a discretionary clause, benefit determinations are then reviewed de novo.  Id. at 115; see also Roy F. Harman III, The Debate Over Deference in ERISA—Judicial Review of Decisions by Conflicted Fiduciaries, 54 S.D. L. Rev. 1 (2009); Joshua Foster, ERISA, Trust Law, and the Appropriate Standard of Review:  A De Novo Review of Why the Elimination of Discretionary Clauses Would Be an Abuse of Discretion, 82 St. John’s L. Rev. 735, 739 (2008).  As a result of the deferential review that pertains in most cases, many state insurance commissioners have campaigned to create a de novo review standard.  The National Association of Insurance Commissioners (“NAIC”) has adopted a model law prohibiting discretionary clauses in medical insurance contracts.  See 1 Proceedings of the National Association of Insurance Commissioners 4, 12-13 (2002).  Thereafter, NAIC also included disability insurance policies in its model act, available here.  Numerous states have adopted bans on discretionary clauses.  See Texas Advocate Seeks Ban on Insurers’ Blanket Clauses, Dallas Morning News (Dec. 17, 2009) ("Twenty-two states have banned the practice, either through state law or new regulations."); see also Me. Rev. Stat. Ann. tit. 24-A § 4303; Ill. Admin. Code tit. 50, § 2001.3; Mich. Admin. Code § 500.2201-2202; N.J. Admin. Code § 11:4-58 (2007); Notice, Cal. Dep’t of Ins., Notice to Withdraw Approval and Order for Information (Feb. 27, 2004), available at www.insuranee.ea.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notiees-eommissopinion/upload/Notiee-February-27-2004.pdf; Commissioner’s Memorandum 2004-13H from the Hawaii Dep’t of Ins. On Discretionary Clauses in HMSA’s Agreement for Group Health Plan and Guide to Benefits (Dec. 8, 2004), available at http://hawaii.gov/dcca/ areas/ins/commissioners_memo; Bulletin 103 - Full and Final Discretion Clauses in Group Health Contracts (Ind. Dep’t of Ins. June 8, 2001), available at http://www.in.gov/idoi/lookAtTheLaw-/pdfs/Bulletin 103.pdf; Circular Letter No. 14 (State of N.Y. Ins. Dep’t June 29, 2006), available at www.ins.state.ny.us/cl06_14.htm; Idaho Dep’t of

Insurance Rule IDAPA 18.01.29; Wash. Admin. Code § 284-44-015; Wyo. Stat. § 26-13-301; S. Dak. Admin Code § 20:05:52:02.

While the Supreme Court’s denial of cert is silent as to the Justices’ reasons for declining to review this case, it is noteworthy that there is no circuit split, the Sixth Circuit having determined that the states’ power to regulate insurance authorizes the exclusion of policies containing discretionary clauses.  American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009); see also Hancock v. Metropolitan Life Ins. Co., 590 F.3d 1141 (10th Cir. 2009) (Utah’s prohibition on the use of discretionary clauses was approved; Utah’s rule provided that plans governed by ERISA were exempt from the prohibition).

See our earlier post on this subject here.

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