After spending many years representing Bay Area claimants in ERISA disability benefit claims, I have seen it all. I have seen insurance companies deny truly meritorious claims for no good reason, except, that they can get away with it. Until California passed California Insurance Code 10110.6, most denial of ERISA claims were reviewed for “abuse of discretion,” which is a tough standard to overcome. If you strip an insurance company of its discretion, and a court has the freedom to review a denied disability benefit claim de novo, a claimant is more likely to prevail. This is because a court does not have to defer to a claim denial that is arguably “reasonable.” Thanks to the California legislature, discretionary clauses are banned from disability policies. Yet, insurance companies continue to try to find away around the California ban, including by relying on “choice-of-law” provisions in the policy or by putting discretionary language in a Plan document that is not the actual insurance policy. Unfortunately, they have had some success.
In Bain v. United Healthcare Inc., No. 15-CV-03305-EMC (N.D. Cal. Aug. 30, 2016), the court held that California Insurance Code Section 10110.6 does not apply because the Plan is governed by New York law. This decision reached the opposite conclusion in my case, Hirschkron v. Principal Life Ins. Co., 141 F. Supp. 3d 1028, 1031 (N.D. Cal. 2015), where the court held that the plain language of Section 10110.6 voids discretionary provisions even if the relevant policy, contract, certificate or agreement contains a choice of law provision that ultimately results in the substantive rights and obligations of the parties being governed by the laws of a state other than California.
Although Bain involved a health plan claim, the analysis could be extended to a long-term disability claim dispute. It is important to review all policy and plan documents to ascertain whether there is a choice-of-law provision and whether it would override California’s ban on discretion.
ERISA is an ever-changing terrain. Eventually, discretionary clauses in disability policies will be banned nationwide. Until then, we have to deal with discretion in piecemeal fashion.