Crs Section 10-3-1116, Erisa Preemption, and the Standard of Review
| Publication year | 2010 |
| Pages | 75 |
2010, July, Pg. 75. CRS section 10-3-1116, ERISA Preemption, and the Standard of Review
July 2010
Vol. 39, No. 7 [Page 75]
Tort and Insurance Law articles provide information concerning current tort law issues and insurance issues addressed by practitioners representing either plaintiffs or defendants in tort cases. They also address issues of insurance coverage, regulation, and bad faith.
Coordinating Editor
William P. Godsman of the Law Office of William Godsman, Denver-(303) 455-6900, wgodsman@qwestoffice.net
About the Author
Shawn McDermott runs a small law firm in Denver devoted to representing individuals in matters of insurance disputes and bad faith; employee benefits law; disability, life, and accident insurance claims (involving ERISA, non-ERISA, and Colorado PERA disability claims); and personal injury-(303) 964-1800, shawn@mcdermottlaw.net.
In 2008, the Colorado Legislature passed a new law guaranteeing the right of an ERISA claimant to have his or her denied insurance benefit reviewed without giving any deference to the insurer's adverse determination. This article addresses the purpose behind this new law and whether it will survive ERISA's broad preemptive strokes.
This article is intended to supplement "CRS §§ 10-3-1115 and -1116: Providing Remedies to First-Party Claimants," which appears on page 69 of this issue. This article addresses in greater detail the preemption of state law causes of action under the Employee Retirement Income Security Act of 1974 (ERISA).(fn1) It also discusses the standard of review to be applied by a reviewing court.(fn2) This article focuses on subsections (2) and (3) of CRS § 10-3-1116 (statute), which were intended to ban the use of discretionary clauses in group life,(fn3) health, and disability policies, and which will lessen the claimant's burden of proof requirement to overturn an insurer's adverse benefit determination.
Discretionary Clauses and Deferential Review
A discretionary clause is any provision in an insurance policy or contract that purports to confer on the insurance carrier sole discretionary authority to determine eligibility for benefits or to interpret the terms or provisions of the policy. These types of clauses became popular after the U.S Supreme Court decided Firestone Tire and Rubber Co. v. Bruch,(fn4) which held that, unless the plan specifically reserved discretion by inclusion of a "discretionary clause," a court should perform a de novo review of a decision by a self-funded employee benefit plan and not give deference to the plan administrator's determination. When performing a de novo review, the court asks not whether the fiduciary's construction of the plan was arbitrary and capricious, but whether it was correct.(fn5)
In Firestone, the Court noted that had the plan included a discretionary clause, the plan administrator's decision could have been overturned only if it was arbitrary and capricious. Under the deferential or "abuse of discretion" standard, the court's review is limited to determining whether the interpretation of the plan was reasonable and made in good faith.(fn6) Further, if the plan is insured, the court may apply the so-called heightened abuse of discretion standard, which gives the administrator less deference because it has a conflict of interest-that is, it benefits financially if it denies claims.
The Court's ruling in Firestone applied to all employee group benefit plans subject to ERISA regulation, regardless of whether they were offered through insurance or self-funded by the employer-sponsor of the plan. Since that ruling, courts must review the plan documents or insurance policy to determine whether discretion has been granted to the claim administrator (which is the insurance company in the case of an insured employee benefit) to interpret the plan or to render benefit determinations. The analysis will determine whether the court's review of the denied benefit will be deferential or de novo. The arbitrary and capricious standard is a difficult one for consumers to meet when challenging eligibility, benefit, or contract interpretation decisions in court. Consequently, the decisions rendered by insurance carriers are more frequently upheld in legal actions involving policies that contain discretionary clauses, as compared to policies without discretionary clauses, which are reviewed de novo.
Discretionary clauses have become more controversial since the decision in Firestone. The National Association of Insurance Commissioners (NAIC)(fn7) opposes their use in light of the conflict of interest present when the claims adjudicator is also the insurer that pays the benefit. The NAIC adopted the Prohibition on the Use of Discretionary Clauses Model Act,(fn8) (Discretionary Clause Model Act), which bans discretionary clauses in health insurance and disability income protection coverage, partly because of the inherent conflict of interest that exists when an insurer responsible for providing benefits has discretionary authority to decide what benefits are due. Section 2 of the Discretionary Clause Model Act states:
The purpose of this Act is to assure that health insurance benefits and disability income protection coverage are contractually guaranteed, and to avoid the conflict of interest that occurs when the carrier responsible for providing benefits has discretionary authority to decide what benefits are due.
Section 4(A) provides:
No policy, contract, certificate[,] or agreement offered or issued in this state providing for disability income protection coverage may contain a provision purporting to reserve discretion to the insurer to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of this state.
Several states have reached the conclusion that deferential review of a denial of an employee benefit deprives a claimant of the right to a meaningful and fair judicial review of an insurance company's decision. The use of discretionary clauses, according to at least one author, may result in insurers engaging in inappropriate claim practices and relying on the discretionary clause as a shield.(fn9) As of 2010, approximately twenty states have limited or barred the use of discretionary clauses in some forms of insurance, whether by statute, administrative rule, or insurance commissioner interpretation.(fn10)
Colorado's Statutory Ban on Discretionary Clauses
CRS §§ 10-3-1115 and -1116 provide specific rights and remedies to insureds whose claims have been "unreasonably delayed or denied." Such a finding results...
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