Sep 07, 2010
General
Ninth Circuit Upholds Ban on Discretionary Authority Clauses
Yesterday the U.S. Court of Appeals for the Ninth Circuit issued Standard Ins. Co. v. Morrison, upholding the Montana State Insurance Commissioner's ban on discretionary authority clauses in that state. I've posted a copy of Morrison in the website library. I blogged about the underlying district court decision in Morrison here.The opinion analyzes how the Commissioner's ban qualifies under both prongs of ERISA's savings clause test outlined by the Supreme Court in Kentucky Ass'n of Health Plans v. Miller, 538 U.S. 329 (2003). It concurs with the conclusion of the Sixth Circuit in American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009), where that court upheld a Michigan state ban on discretionary authority clauses. In Morrison the Ninth Circuit spends time discussing and rejecting the insurer's argument that to allow states to ban discretionary authority clauses sets up an alternative remedy that conflicts with ERISA's exclusive scheme for redressing improper denial of benefits. The Ninth Circuit rightly swats that away. First, banning discretionary authority clause grants no additional remedy to insureds. And second, prior Supreme Court precedent makes clear that plan sponsors and administrators are not automatically entitled to deferential review of their decisions under ERISA. They dearly want that privilege. But the language of the statute provides no reason to think Congress intended that ERISA plan sponsors and administrators are automatically granted such a significant advantage in dealing with plan participants and beneficiaries.
I don't think there is much questionable analysis in either Morrison or ACLI v. Ross. I expect that few, if any, courts in the future will find that state bans of discretionary authority clauses are preempted by ERISA.
American Council of Life Insurers v. Ross: A Victory for Consumers
Earlier this week the Sixth Circuit affirmed that Michigan’s Commissioner of Insurance has the regulatory power to ban discretionary authority clauses and that ERISA does not preempt that action. The case is American Council of Life Insurers v. Ross, 2009 U.S. App. LEXIS 5748, ___ F.3d ___ (6th Cir. 2009).
Ross is important. Say you are about to enter a financial transaction involving a significant amount of your money. You are dealing with someone who knows a lot more about the ins and outs of finance than you do. He asks you to let him insert language in the contract that gives him alone the ability to interpret the terms of that contact and determine whether you and he have performed the obligations under it. He also tells you that if a dispute arises, that same language will allow a court to reverse his decision only if the Judge determines he has been completely unreasonable in his interpretation of the contract or his determination about whether the contract has been performed as required.
Would you agree to do a deal with that person? Of course not. Yet that is what insurance companies do every day with employee benefits. Fortunately, the Sixth Circuit decision makes it clear that the state insurance commissioners in Michigan, Ohio, Kentucky and Tennessee can prohibit these types of overreaching discretionary authority clauses in an insurance contract.
