Self-Funded Employee Benefit Plans in California Retain their Discretion to Decide Benefits and Are Less Likely to be Subject to Discovery in ERISA Litigation

    The Ninth Circuit Court of Appeals[1] recently held that the Employee Retirement Income Security Act of 1974 (“ERISA”) preempts application of California’s anti-discretionary clause law to self-funded employee benefits plans.[2] From a practical standpoint, the decision: (1) prevents courts from reviewing evidence outside the plan administrator’s decision, (2) limits claimants’ (plan participants or beneficiaries) ability to seek discovery in ERISA cases, and (3) requires courts to give greater deference to administrative decisions.

    Employee benefit plans often contain “discretionary clauses” that give a plan administrator the full authority and discretion to interpret the plan and decide whether to grant or deny benefits. Federal courts give plan administrators the utmost deference where a plan has a discretionary clause and will overturn the plan’s decision only if the plan administrator abused its discretion. The discretionary standard is a major hurdle to plan participants who want to challenge denial-of-benefits decisions in federal court.

    In Williby v. Aetna Life Insurance Co., the Ninth Circuit considered the validity of a California state statute that prohibits discretionary clauses.[3] California ERISA lawyers who represent claimants hoped the Williby case would allow courts to engage in their own analysis—based upon evidence that the claimant would put forth in court—of whether employee benefits were appropriately denied, instead of having to base that decision upon reviewing the paper record of the plan administrator’s decision. Plaintiffs’ lawyers also hoped Williby would allow for discovery—depositions, interrogatories, and document requests—in ERISA cases, which is typically not allowed under governing law.[4] 

    Several other states have enacted statutes or regulations, like California’s, that bar or disapprove of discretionary clauses in insurance contracts,[5] based on the belief that such clauses are unfair to plan participants. As in Willibly, ERISA plans argue that such state laws are preempted by ERISA.”[6]

    Previously, two federal appellate courts have found that laws similar to California’s are not preempted by ERISA.[7] Employers with self-funded plans in states in these circuits[8] may encounter more challenges to plan administrators’ decisions, as well as attempts by plaintiffs’ attorneys to seek discovery in ERISA cases.

Practical Takeaways

    The Williby decision resolves a much-litigated issue in California ERISA litigation and, arguably, provides legal support for self-funded plans in other states with similar laws as California’s. Employee benefit plans in the Ninth Circuit now have the benefit of a bright-line rule: state discretionary clause bans do not apply to self-funded employee benefit plans, but may apply to benefit plans that are not self-funded and are instead insured.

[1] The Ninth Circuit Court of Appeals considers appeals of federal court decisions from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.

[2] In Williby v. Aetna Life Insurance Co., 867 F.3d 1129, 1131, 1137 (9th Cir. 2017) (citing 29 U.S.C. § 1144(b)(2), the Ninth Circuit emphasized that although ERISA has an extremely broad preemption clause, the statute expressly does not preempt state laws that regulate “insurance.” Accordingly, the court considered what plans are properly considered “insurance” under ERISA, and held that self-funded plans—that is, plans in which the sponsoring company pays benefits “from its own coffers” and does not purchase an insurance policy to cover plan obligations—are not traditional “insurance” policies for purposes of preemption. As a result, the court held that ERISA preempted the California discretionary clause ban to the self-funded short-term disability plan at issue in Williby.

[3] Williby, 867 F.3d at 1131.

[4] ERISA cases allow discovery in only limited situations, including where there is an alleged conflict of interest between the entity paying benefits claims and also making the decisions to grant or deny benefits.  See, e.g., Johnson v. UMWA Health and Retirement Funds, 125 F. App’x 400, 405-06 (3d Cir. 2005) (stating that the record for arbitrary and capricious review of ERISA benefits denial is the record made before the plan administrator, which cannot be supplemented during litigation, and that a court may consider additional evidence on the issues of what standard applies or whether a potential conflict of interest exists).

[5] See Cal. Ins. Code § 10110.6. Other states with laws or regulations on discretionary clauses include Connecticut, Hawaii, Idaho, Illinois, Indiana, Kentucky, Maine, New York, Texas, Utah, Vermont, Washington, and Wyoming. 

[6] FMC Corp. v. Holliday, 498 U.S. 52, 57-58 (1990); ERISA § 514(a), 29 U.S.C. § 1144(a).

[7] Fontaine v. Metropolitan Life Ins. Co., 800 F.3d 883, 891 (7th Cir. 2015); American Council of Life Insurers v. Ross, 558 F.3d 600, 609 (6th Cir. 2009).

[8] The Sixth Circuit Court of Appeals considers appeals of federal court decisions from Kentucky, Ohio, Michigan, and Tennessee; and the Seventh Circuit Court of Appeals considers appeals of federal court decisions from Illinois, Indiana, and Wisconsin.

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