Since 2009, twenty-three states, including Texas, New York, New Jersey, Illinois, Colorado, Michigan, and Montana have successfully passed controversial regulations preventing insurance companies from including discretionary clauses in their respective disability policies. Notably, in 2010, the California legislature attempted to pass a measure prohibiting discretionary clauses, but this provision was vetoed by Governor Arnold Schwarzenegger. However, California's Department of Insurance announced this month that it will introduce another bill attempting to prohibit discretionary clauses.
Proponents for this measure argue the use of discretionary clauses has been abused and inappropriately used as a shield by insurance companies. They also contend that prohibiting discretionary clauses will mitigate the conflict of interest present when the claims adjudicator also pays the benefits. Opponents for this measure argue the prohibition of discretionary clauses will lead to more cases being filed and an increase in costs of each case. Opponents also share a concern that employers will be discouraged from offering employee benefit programs.
On September 5, 2009, Washington state passed such a regulation. Specifically, Washington's insurance regulation was amended to provide: "[n]o disability insurance policies may contain a discretionary clause." WAC 284-96-012. The regulation defines "discretionary clauses" to mean "a provision that purports to reserve discretion to an insurer, its agents, officers, employees, or designees in interpreting the terms of a policy or deciding eligibility for benefits, or requires deference to such interpretations or decisions, including a provision that provides for any of the following results: . . . That the standard of review of an insurer's interpretation of the policy or claim decision is other than a de novo review." Id., emphasis added.
This past month, the United States District Court of Western Washington had an opportunity to address at first impression the insurance regulation as it affected an already established insurance disability policy. The insurance disability policy at issue contained discretionary language. Under existing caselaw, this discretionary language would have afforded (unless there was an alleged conflict) the review of the denial of benefits under an abuse of discretion standard. However, after considering the arguments asserted by both parties, the Washington court sided with the plaintiff, and ruled that pursuant to the recently amended insurance regulation the discretionary clause was prohibited and, therefore, the appropriate standard of review was de novo. See Murray v. Aderson Bjornstad Kane Jacobs, Inc., et al., No. C10-484 RSL, 2011 U.S. Dist. LEXIS 13962 (February 10, 2011).
In Murray, the plaintiff successfully argued that under the new regulation, discretionary clauses are now prohibited in disability insurance policies in Washington. Therefore only the de novo standard of review should apply. The defendant insurance company argued the Washington insurance regulation was preempted by ERISA. The Court was not persuaded by defendant's argument. Rather, the Court relied upon the Ninth Circuit decision in Standard Insurance Co. v. Morrison, 584 F.3d 837 (2009), where the Ninth Circuit held that a Montana insurance regulation prohibiting discretionary clauses in insurance policies satisfied the savings clause, and therefore there was no preemption. In addition, the regulation substantially affected the risk pooling arrangement between insurer and insured, because removing the deferential standard of review from insurers would likely "lead to a greater number of claims being paid. More losses will thus be covered, increasing the benefit of risk pooling for consumers." See id. at 845. The Ninth Circuit also noted that the Sixth Circuit recently upheld an identical provision in Michigan. See id. (referring to American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009)). Notably, neither the Ninth Circuit nor the Murray Court, commented on the preemption issues of prohibiting discretionary clauses for employer's self-funded plans, and the current state regulations do not reference such plans. Therefore, as of now, the status of the law does not effect self-funded employer's plans.
In Murray, the defendants also argued that the Washington insurance regulation should not apply retroactively to this specific Plan because the Plan had been in effect, and initially approved by the Washington Insurance Commissioner, prior to the enactment of the September 5, 2009 regulation. In support of its argument, the defendants relied upon the Ninth Circuit decision in a California case, Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008), where the Ninth Circuit held that the California law did not authorize the commissioner to nullify an ERISA plan's grant of discretionary authority retroactively. The Murray Court concluded the Washington state regulation did not establish the same parameters, however. Therefore, the Washington insurance regulation would apply contemporaneously to the application of the insurance regulation, i.e., the date the claim was denied
As a result of the Murray decision, any denial of a disability insurance policy in Washington, that is not an employer's self-funded plan, and that took place after September 5, 2009, will be precluded from applying its discretionary clause. Instead, a de novo standard of review will most likely to be applied in ERISA matters.
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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the Ninth Circuit. These events would render the opinion unavailable for use as legal authority.
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