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State Law Prohibiting Discretionary Clauses Not Preempted by ERISA

On Behalf of | Jul 20, 2017 |

The Ninth Circuit Court of Appeals, in Orzechowski v. The Boeing Co Non-Union Long-Term Disability Plan, has ruled that ERISA preemption does not apply to a California law prohibiting discretionary clauses in insured plans. Moreover, the Ninth Circuit determined that the law applied to the plan even though the plan document containing the provision became effective before the legislation.

Law. In general, ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” However, ERISA’s “savings clause” says ERISA does not preempt “any law of any State which regulates insurance, banking, or securities.” With regards to insurance laws, a law is not preempted if it satisfies the following two elements: (i) it must be “specifically directed toward entities engaged in insurance”; and (ii) it “must substantially affect the risk pooling arrangement between the insurer and the insured.”

Background. In Orzechowski, an employee who participated in her employer’s insured long-term disability (“LTD”) plan took a leave of absence due to multiple chronic illnesses. The insurer initially approved her LTD claim for two years. However, it denied the employee’s request to extend benefit payments after it determined the medical evidence did not support her extension request. The insurer’s adverse determination was based on a plan provision that granted it discretion to make plan interpretations.

The district court hearing the matter dismissed the employee’s claim, finding that the law, which became effective in 2012, did not apply retroactively to the LTD plan, which was established in 2011. In making this determination, the court used an abuse of discretion standard to review the claim and found that there was substantial evidence in the record to support the insurer’s adverse determination. Consequently, the court dismissed the employee’s claim, and in turn, the employee appealed the adverse decision to the Ninth Circuit.

Ninth Circuit. On appeal, the insurer argued that: (i) ERISA preemption applied to the California law; and (ii) the law should not be retroactively applied to the LTD plan. The Ninth Circuit disagreed and reversed the district court’s decision, remanding the matter to the district court for de novo review.

In reversing the district court, the Ninth Circuit rejected the insurer’s ERISA preemption argument, finding that the law satisfied both elements of ERISA’s savings clause. Specifically, the Ninth Circuit concluded that the law regulated insurance and that it significantly impacted risk-pooling arrangements between the insurer and the insured.

The Ninth Circuit next determined that the law applied to the LTD plan, even though the LTD plan originated before the law became effective. The court reasoned that the plan’s LTD insurance policy was renewed on an annual basis and became subject to the law when it was renewed in 2012.

Orzechowski is available at: