California Insurance Law Survives ERISA Preemption Challenge

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By Jacklyn Wille

Oct. 5 — Another federal judge has upheld California’s law banning discretionary clauses in insurance contracts, finding that the law doesn’t run afoul of the federal Employee Retirement Income Security Act ( Murphy v. Cal. Physicians Serv. , 2016 BL 329950, N.D. Cal., No. 4:14-cv-02581-PJH, 10/3/16 ).

More than half the states have enacted or are in the process of implementing laws banning discretionary clauses in insurance contracts, and such clauses have become a hot topic in ERISA litigation. Many cases ask whether ERISA preempts the state statutes, which are aimed at raising the level of scrutiny applied to insurers that deny claims for benefits. A decision that upholds a statute is usually a loss for the insurer, because it means that its decision denying benefits will be subject to a lower level of judicial scrutiny.

In the latest case, a judge Oct. 3 rejected Blue Shield of California’s attempt to paint California’s ban on discretionary clauses as ERISA-preempted. The California law has been upheld by multiple federal judges in decisions involving Aetna Life Insurance Co., Metropolitan Life Insurance Co., Principal Life Insurance Co. and United of Omaha Life Insurance Co. The U.S. Court of Appeals for the Ninth Circuit hasn’t yet ruled on the California law, but it approved a similar practice by the Montana Insurance Commissioner in 2009.

As a result of this ruling, Prudential Insurance Co. of America’s decision denying long-term disability benefits to a Blue Shield employee will be subject to more rigorous judicial scrutiny.

In addition to finding the California law enforceable, the judge also found that the disability policy in question didn’t contain an unambiguous grant of discretionary authority in favor of Prudential—a common prerequisite for an insurer seeking favorable judicial review of a benefit denial. In the judge’s view, language conditioning benefits on Prudential finding “satisfactory proof of disability” wasn’t a sufficient grant of authority to the insurer.

The judge also refused to consider language in a summary plan description that gave discretionary authority to Prudential, reasoning that statements in summary plan descriptions don’t, by themselves, constitute the terms of a given ERISA plan.

Judge Phyllis J. Hamilton of the U.S. District Court for the Northern District of California wrote the decision.

Kantor & Kantor LLP represented the Blue Shield employee. Meserve Mumper & Hughes LLP represented Blue Shield and Prudential.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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