Williby v. Aetna Life Ins. Co., 2017 WL 3482390 (9th Cir. 2017)
The Ninth Circuit has again considered a California law barring enforcement of discretionary clauses for certain types of benefit coverage, ruling this time that it does not apply to self-insured arrangements. A participant sued after benefits were denied under her employer’s short-term disability (STD) plan. The plan contained a discretionary clause, which would normally result in deferential review by the court, but the trial court determined that the clause was made void by the California law. Applying de novo (non-deferential) review, the trial court ruled in the participant’s favor, concluding that the STD benefit denial was improper. On appeal to the Ninth Circuit, the plan administrator argued that the trial court should have applied deferential review because the law barring discretionary clauses applies to “insurance” and thus not to self-insured plans or, alternatively, because ERISA preempts its application to self-insured plans.
First, the Ninth Circuit concluded that the STD plan falls within the scope of the law voiding discretionary clauses. The court determined that the self-insured plan qualifies as insurance under California law because it shifts risk from employees to the employer and spreads that risk over the employer’s workforce. According to the court, the only notable difference between a self-insured plan and an insured plan is the source of funding, which is not relevant for this analysis. However, turning to ERISA preemption, the court concluded that the STD plan, as a self-insured ERISA plan, is exempt from this state insurance regulation. The court distinguished its recent ruling that, due to ERISA’s “savings” clause, this same law was not preempted (see our Checkpoint article). It explained that the previous case involved an insured plan and did not address the “deemer” clause (under which an ERISA plan cannot be deemed to be an insurer for purposes of state insurance laws), which turns on the presence or absence of traditional insurance. Finally, although the trial court had opined that it would have overturned the benefit denial even applying deferential review, the Ninth Circuit sent the case back for further consideration because it wasn’t clear that the trial court had correctly applied the deferential review analysis.
EBIA Comment: There has been some uncertainty regarding this law’s application to self-insured plans (see, e.g., our Checkpoint article). This ruling provides a resolution that will be welcomed by self-insured plan sponsors and administrators in California and beyond. For more information, see EBIA’s ERISA Compliance manual at Sections XI.B (“Discretionary Authority to Interpret Plan and Determine Facts”), XXXIX.E (“ERISA Plans Cannot Be ‘Deemed’ to Be Insurers Under State Law”), and XXXIX.H.3 (“State Laws Involving Discretionary Language in Insurance Policies”). See also EBIA’s Self-Insured Health Plans manual at Sections V.E (“ERISA Preemption and the Application of State Mandates”) and IX.E.1 (“Recommended Plan Provisions: Discretionary Authority Language”).
Contributing Editors: EBIA Staff.