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Discretionary Clauses in LTD policies

LTD and ERISA Lawyers: Riverside, North San Diego & Orange Counties

Discretionary Clauses After Cal Ins. Code §10110.6

California Insurance Code § 10110.6 prohibits discretionary clauses in long-term disability plans that require deference to a plan administrator's decision. In Orzechowski v. Boeing Co. Non-Union LTD Plan,No. 14-55919, 856 F.3d 686 (9th Cir. 2017), the court upheld the application of § 10110.6 to ERISA cases.

The California legislature passed § 10110.6 in 2012. It provides that all discretionary clauses in California insurance contracts are null and void in insurance policies or plans that were “renewed” as of January 1, 2012.

Cal. Ins. Code §10110.6(a) states that:

“If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.”

It should be noted that this law applies to only insured plans, and not self-funded plans.

However, where it applies, this law levels the playing field. California courts will no longer be required to give deference to a plan administrator's decisions. ERISA cases may be decided under a de novostandard and by a preponderance of the evidence. Plaintiffs seeking long-term disability benefits will not be required to show that an insurer abused its discretion or that's its denial decision was arbitrary and capricious.

In Orzechowski, Boeing argued that §10110.6 didn't apply to its ERISA Group LTD Plan because Boeing was not an insurance company, and the discretionary clause was not contained in the Aetna insurance policy itself.  Boeing argued that ERISA, which does not ban discretionary clauses, preempts California state law. Boeing also argued that the Aetna policy hadn't “renewed” since January 1, 2012. 

The 9th Circuit rejected these arguments and held that §10110.6 applies to ERISA. The court observed that while the Boeing Plan was not a policy of insurance per se, Boeing engaged in the business of insurance and that it fell within the savings clause set forth in 29 U.S.C. § 1144(b)(2)(A). Boeing underwrote its LTD Plan with an insurance policy, which placed it within the scope of §10110.6. The Ninth Circuit further held the policy renewed after the statute's effective date and therefore applied to the claim.

California's ban on discretionary clauses has survived the Ninth Circuit. But stay tuned.

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