California Insurance Law Gets Another Look in 9th Cir.

Pension & Benefits Daily™ covers all major legislative, regulatory, legal, and industry developments in the area of employee benefits every business day, focusing on actions by Congress,...

By Jacklyn Wille

A California law making it harder for benefit plans to insulate themselves from judicial scrutiny applies differently depending on whether the plan is fully insured or funded by the employer, a federal appeals court ruled ( Williby v. Aetna Life Ins. Co. , 2017 BL 284683, 9th Cir., No. 15-56394, 8/15/17 ).

The U.S. Court of Appeals for the Ninth Circuit ruled on Aug. 15 that California’s ban on discretionary clauses in employee benefit plans doesn’t apply to plans that are funded by the employer because the law is preempted by the Employee Retirement Income Security Act. This decision appears to clarify a decision the court issued in May, which held the California insurance law to be preempted by ERISA.

The different outcomes are because the benefit plans at issue in the two cases—both sponsored by Boeing Co. and administered by Aetna Life Insurance Co.—have different sources of funding, the Ninth Circuit said. Boeing’s long-term disability plan is fully insured by Aetna and thus subject to the California law making it easier for participants to challenge benefit denials in court, according to the Ninth Circuit. Boeing’s short-term disability plan is funded by Boeing’s general assets, which means the California law doesn’t apply to it because of ERISA preemption, the court said.

Christian J. Garris, the Los Angeles attorney who represented the Boeing employee in this case, told Bloomberg BNA he is considering whether to ask the Ninth Circuit to rehear this case in front of all the court’s judges. Garris said there’s a “good shot” the court may be willing to rehear this case, given the very different results reached in two cases decided just three months apart.

Counsel for Aetna referred Bloomberg BNA to an Aetna spokeswoman who wasn’t immediately available to comment.

Only Applies to Small Number of Plans

Michelle Roberts Bartolic, a partner with Roberts Bartolic LLP in Alameda, Calif., who represents individuals in disability benefits disputes, called the decision “unsurprising” and noted that it wasn’t likely to affect large numbers of disability plan participants. That’s because most employers opt to insure their disability plans, rather than funding the plans themselves, Roberts Bartolic told Bloomberg BNA.

However, Roberts Bartolic cautioned that this decision could create a difficult hurdle for employees of companies that hire the insurer of their long-term disability plan as the claims administrator for their self-funded short-term disability plan—as Boeing appears to do with Aetna. In those cases, Roberts Bartolic said, the administrator will have an incentive to terminate an individual’s short-term benefits right before they’re set to expire, because that decision will be harder to overturn in court than a decision denying long-term benefits.

Discretionary Clause Bans

The California law and others like it are commonly referred to as bans on discretionary clauses because they prevent insurers from adopting plan language giving them discretion to decide benefit claims. The bans are a response to federal courts’ practice of reviewing insurer decisions more leniently when a discretionary clause is present. Banning these clauses is an attempt by states to ensure that an insurer’s decision denying benefits is reviewed more closely by the courts.

Several states, including Illinois and Texas, have adopted these types of laws. A federal appeals court upheld the Illinois law from an ERISA preemption challenge in 2015.

In drawing a distinction between self-funded and insured plans, the Ninth Circuit focused on ERISA’s preemption provision, which the court said allows state regulations to survive or fail based on whether they reach traditional insurance arrangements.

“The result is a simple, bright-line rule: ‘if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it,’” the Ninth Circuit said, quoting a 1990 U.S. Supreme Court decision.

As a result of the Ninth Circuit’s decision, a federal judge will have to reconsider a Boeing employee’s request for short-term disability benefits while giving more deference to Aetna’s decision denying benefits.

District Judge Gary Feinerman, sitting by designation from the U.S. District Court for the Northern District of Illinois, wrote the decision. Judges Milan D. Smith Jr. and N. Randy Smith joined.

Law Offices of Christian J. Garris represented the Boeing employee. Gordon & Rees LLP represented Aetna.

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

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Pension & Benefits Daily