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De Novo Review

De Novo Review After California Insurance Code Section 10110.6

Since the U.S. Supreme Court decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989), the standard of review for ERISA cases has typically focused on the abuse of discretion standard. (If plan documents do not grant discretion to the administrator, the de novo standard applies; if plan documents do grant discretion, the abuse of discretion standard applies).

The grant of discretion in plan documents is referred to as the “discretionary clause.” In 2012, California enacted Insurance Code section 10110.6 to prohibit discretionary clauses in life, health, and disability plans. California's anti-discretion statute effectively implemented a de novo review over cases that otherwise might be subject to abuse of discretion review. Other states, such as New Jersey, Maryland, Texas, Vermont, and Washington, are passing laws that prohibit delegation of discretion provisions in insurance contracts.

In Orzechowski v. The Boeing Company Non-Union Long-Term Disability Plan (9th Circ. 2017) 856 F.3d 686, the Ninth Circuit held that California Insurance Code section 10110.6 applies to any group life, disability, or health plan, even if the plan is otherwise subject to ERISA.

The ERISA-governed disability plan in Orzechowski included a “broad grant of discretionary authority” to the insurer to determine eligibility for benefits.  The insured developed fibromyalgia and chronic fatigue syndrome and applied for long-term disability (LTD) benefits under the plan. After initially approving benefits, the plan later terminated them and the claimant appealed, but the insurer denied the appeal.  In the legal action that followed, the trial court “applied an abuse of discretion standard of review . . . rather than a de novo standard,” and affirmed the insurance company's denial.

In an appeal by plaintiff to the Ninth Circuit, the insurer maintained that section 10110.6 was federally preempted by ERISA.  The Ninth Circuit disagreed by noting that California Insurance Code section 10110.6 falls into the savings clause of ERISA and is saved from federal preemption. (“Any law of any State which regulates insurance” is not preempted.)

An ERISA “plan” is an “employee welfare benefit plan,” and it is not an insurance policy. However, most ERISA plans (“insured plans”) are administered by an insurance company, which also pays claims. Some plans (“self-insured plans”) use an insurance company to administer claims, but they pay their own claims. If a benefit plan is self-insured, the anti-discretion statute will not affect the standard of review. Williby v. Aetna Life Ins. Co., 867 F.3d 1129, 1133 (9th Cir. 2017). Insurance Code section 10110 applies to insured plans.

De novo is a non-deferential standard of review, meaning the court will not defer to the insurer's previous finding and accords the plan no factual or legal deference.  In effect, the district court undertakes a bench trial on the administrative record. The court “must conduct an independent, thorough analysis of the entire administrative record,” determine the persuasiveness of conflicting testimony, and make findings of fact. The district court is required to “evaluate the persuasiveness of conflicting testimony and decide which is more likely true.” The district court will make “reasonable inferences, “when appropriate, based on a specific set of facts.” Abatie v. Alta Health Ins. Co., 458 F.3d 955, 963, 969 (9th Cir. 2006); Kearney v. Standard Ins. Co., 175 F.3d 1084, 1095 (9th Cir. 1999).

The court will consider the evidence in the administrative record and may consider other “extrinsic” evidence outside the administrative record if circumstances clearly establish that additional evidence is necessary to conduct an adequate de novoreview. In fact, the district court may take deposition testimony to help resolve claims that medical reports are inaccurate or to evaluate the credibility of medical opinions.

The insured has the burden of proof by a preponderance of the evidence to establish entitlement to benefits under the terms of the governing policy or plan. Muniz v. Amec Constr. Mgmt., 623 F.3d 1290, 1294 (9th Cir. 2010).  Under de novo review, the judge then decides if the insurance company was right or wrong in denying the claim. Neither party has an advantage under a de novostandard. “The court simply proceeds to evaluate whether the plan administrator correctly or incorrectly denied benefits.” Abatie v. Alta Health & Life Ins. Co. (9th Cir. 2006) 458 F.3d 955, 983.

This is a very important development that helps plaintiffs seeking benefits under an ERISA-governed, insured LTD plan, by allowing the court to substitute its decision for that of the plan administrator. Under de novo, the insurer is barred from arguing, as it would routinely do in a case subject to the discretionary standard of review, that the District Court must uphold the insurer's denial under an abuse of discretion standard, even if that decision was “wrong.” If there was some reasonable basis to support an insurer's denial decision, the court was obliged to find for the defendant, even if the evidence overwhelmingly supported a finding of disability. 

The Orzechowski case illustrates the importance of applying the de novo standard of review rather than the abuse of discretion review, in that under the latter standard, plaintiff lost, while under the former standard, plaintiff won.

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