The Wagner Law Group | Est. 1996

Sophisticated Legal Solutions And Boutique-Style Service

ERISA Doesn’t Preempt Montana’s Mental Health Parity Law

On Behalf of | Jan 25, 2018 |

A federal district court, in Sand-Smith v. Liberty Life Assurance Company of Boston, determined that ERISA did not preempt Montana’s mental health parity law and that the state law was therefore applicable against long-term disability insurer.  The court reached this conclusion  because the state law regulated health insurance policies and was directed at entities that engage in insurance.

Law.  In general, mental health parity laws prevent group health plans and health insurance issuers that provide mental health (or substance use disorder) benefits from imposing less favorable benefit limitations than those on medical benefits.

ERISA preempts state laws relating to employee benefit plans, but state laws regulating insurance are saved from ERISA preemption and enforceable.  The Supreme Court applies the “savings clause” test to determine whether a state law governs insurance practices (and not merely insurance companies) and is, therefore, saved from ERISA preemption.  Specifically, the savings clause test provides that a state law regulates insurance if it:

  1. Is specifically directed at entities engaged in insurance, and
  2. Substantially affects the risk pooling arrangement between the insurer and the insured.

Facts.  In Sand-Smith, the plaintiff, who was disabled due to bipolar disorder, sued after benefits from her employer’s long-term disability plan were terminated based on applicable insurance policy terms that limited benefits for mental illness to 24 months.  In particular, the plaintiff asserted that the policy’s limitation violated Montana’s mental health parity law.  Conversely, the insurer argued that ERISA preempted the state law.

District Court.  In reviewing the matter, the court determined that Montana’s mental health parity law satisfied both prongs of the Supreme Court’s savings clause test because it: (i) regulates health and disability insurance policies and is directed at entities that engage in insurance; and (ii) increases the benefit of risk pooling by ensuring that consumers will  receive the same level of benefits for mental and physical illnesses.

After concluding that Montana’s mental health parity law was not preempted by ERISA, the court reviewed whether the law applied to the disability policy at issue.  The insurer argued that the Montana law addressed benefits for care of mental illness and not lost wages.  However, the court concluded that under the law, “disability insurance” encompasses both health insurance against bodily injury or disablement and income replacement relating to disability.  The court noted that although most states’ mental health parity laws apply only to health insurance, Montana’s law specifically applied to disability insurance, and income replacement is typically a component of disability insurance.

In reaching this conclusion, the court observed that the Montana law was expressly inapplicable to certain types of insurance benefits (e.g., workers’ compensation) and that the state legislature would have expressly excluded disability income benefits if it so intended.  Accordingly, the court ordered the disability insurer to comply with the Montana law and provide the same benefits to the participant as it would provide if her disability were physical in nature.