The states fight back – a little

As we’ve discussed previously one of the biggest problems with ERISA is that it prevents the states from providing suitable protections for people who have “insurance” through their employers.

The ERISA prohibition of state regulation is not across-the-board, however. ERISA does preserve some state regulatory authority (in fact a lot of us think it was intended to preserve all state authority when it came to insurance companies, but that got mucked up in the judicial interpretation process over the years). One of the recurring battles in ERISAworld is whether some particular state regulation can survive ERISA and actually, you know, regulate insurers.

Now, in the most important area – the consequences an insurance company faces if it defrauds you or kills you – the states remain powerless to improve on ERISA’s ridiculously stingy approach. But the states do retain some ability to regulate the content of insurance policies sold within their borders, and that’s where a lot of these arguments arise.

Yesterday the Ninth Circuit issued Standard Insurance Company v. Morrison, a case about whether Montana could prohibit so-called “discretionary clauses” in insurance policies. These clauses are what insurance companies use to shield themselves from any but the most cursory and deferential judicial scrutiny of their benefits denials, and to pretend they are something they are not, like courts or administrative agencies. Yesterday the Ninth Circuit said Montana could indeed prohibit these provisions.

As we’ve discussed previously "discretionary authority," which leads to the weak judicial scrutiny the insurers are so fond of, is supposed to come from someone who sets up a trust, and wants the trustee to have such powers. It is not something the trustee just unilaterally confers on itself – except of course in ERISAworld where insurance companies stick this language into the insurance policies for their own benefit, and without so much as checking with the putative “trustor,” i.e. the employer purchasing the policy for its employees.

If you want some corroboration about how pernicious these provisions are, just consider what Montana and some other states have done to try and prohibit them. Montana’s Insurance Commissioner banned them (and the Ninth Circuit said yesterday he had the authority to do so) by invoking his authority to disapprove “any inconsistent, ambiguous or misleading clauses or exceptions and conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract” (you can find that in the trial court decision in the Morrison case, which is at 537 F.Supp.2d 1142 (D.Montana 2008)), a long way of saying he can disapprove language which renders the coverage supposedly provided by the policy a big fat lie.

Montana is not alone. California, for example, has disapproved “grants of administrative discretion in insurance policies and ERISA plan documents” because they “render insurance contracts ‘illusory’ and ‘unsound insurance,’” (Mitchell v. Aetna Life Ins. Co., 359 F.Supp.2d 880 (C.D.Cal. 2005)) and so has Michigan, concluding discretionary clauses “unreasonably reduce the risk purported to be assumed in the general coverage of the policy.” (American Council of Life Insurers v. Watters, 536 F.Supp.2d 811 (W.D.Mich. 2008)). All in all, as of now sixteen states have taken similar actions.

The National Association of Insurance Commissioners, a, um, national association of insurance commissioners of the various states, has also weighed in, issuing the Discretionary Clauses Model Act, which it urges the states to adopt, in 2002. The “NAIC membership believed that discretionary clauses were inconsistent with basic consumer rights," (page 9 of the linked brief) and issued the Model Act “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” (page 11).

The insurance industry, of course, is not willing to give up their little cash cow without a fight. Let’s see what MetLife, a big ERISA insurer, has come up with – if the states can ban discretionary clauses in insurance policies, we’ll just stick them somewhere else:

To date no court has held that state insurance laws can regulate the employer’s plan documents, like the federally mandated summary plan description (SPD) or master plan document, if it has one. ... As a result of the battle over discretionary clauses, an ERISA plan sponsor who wants plan determinations to receive deferential judicial review may be unable to purchase an insurance policy containing a discretionary clause. ... Plan sponsors who want deferential judicial review should include a discretionary clause in their SPDs or other formal plan documents.

Wanna bet MetLife won’t volunteer to draft an employer’s SPD? I’ll take that bet.

The upshot of all this is that the states, as of now, do retain some ability to ameliorate the absurd effects of these pernicious “discretionary” provisions. That may not last forever; as we’ve seen the insurance industry will fight tooth and nail not to lose this unfair advantage. If your state has not yet addressed this problem then it’s time to call your legislators and get them on the stick.