In Fontaine v. Metropolitan Life Ins. Co., No. 14-1984, 2015 U.S. App. (7th Cir. Sept. 4, 2015), the Seventh Circuit affirmed a U.S. District Court for the Northern District of Illinois decision holding that Illinois’s anti-discretionary clause regulation in 50 Ill. Admin. Code §2001.3, prohibiting discretionary clauses in insured employee benefits plans offered or issued in Illinois, was outside the scope of the preemption power of the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA and Benefits Determinations

Section 1132, the civil enforcement provision of ERISA, provides for a person “to recover benefits due to him under the terms of his plan. …” In the 1989 decision in Firestone Tire & Rubber Co. v. Bruch, 449 U.S. 101, 115 (1989), the Supreme Court held that in suits regarding challenges to benefits determinations under section 1132, unless the benefit plan gave or reserved discretionary authority to an administrator or fiduciary, courts should apply a de novo standard of review. Under this default de novo standard, the reviewing court is to afford no deference to previous determinations relative to a claimant’s benefit eligibility but render its own independent decision on a claimant’s eligibility.

Accordingly, insurance companies began including Firestone discretionary language in their policies, ensuring application of a deferential standard of review to their claim determinations, which thus stood, unless the court found them to be arbitrary and capricious. In response to insurance companies altering the default de novo standard of review, many states, including Illinois, began enacting laws prohibiting these discretionary provisions in group insurance policies.

Illinois insurance regulation section 2001.3 provides that:

No policy, contract, certificate, endorsement, rider application or agreement offered or issued in this State, by a health carrier, to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services or of a disability may contain a provision purporting to reserve discretion to the health carrier to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of this State. (Emphasis added).

The resulting issue is whether these state laws and regulations would take precedence over the Firestone clauses. Generally, ERISA preempts any state law “relating” to any employee benefit plan, but will not preempt a state law “regulating” insurance. To “regulate insurance,” a law has to “be specifically directed toward entities engaged in insurance … [and] the state law must substantially affect the risk pooling arrangement between the insurer and the insured.” Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003). As such, whether the de novo standard would be applied to benefit determinations in the State of Illinois depends on whether section 2001.3 merely “relates” to employee benefit plans or if it actually “regulates” insurance.

Case Background

As equity partner in a Chicago law firm, Mary Fontaine participated in its employee welfare benefit plan with long-term disability insurance benefits funded through a group policy issued by the Metropolitan Life Insurance Company (MetLife). MetLife’s group policy contained a discretionary clause granting express discretionary authority to MetLife to interpret the terms of the plan and determine eligibility for benefits.

In 2011, Fontaine retired after 30 years at the firm, claiming she had a disability preventing her from working, and subsequently submitted a claim for disability benefits. MetLife denied her claim, finding that Fontaine did not satisfy the definition of disability in the group policy. MetLife affirmed its initial denial in an internal administrative appeal. Following MetLife’s final denial, Fontaine filed this suit against MetLife under ERISA for wrongful denial of benefits in the U.S. District Court for the Northern District of Illinois.

Seventh Circuit Decision

After the District Court ruled against MetLife, finding the group policy’s discretionary clause was barred by section 2001.3 and the plaintiff was entitled to benefits, MetLife appealed the ruling to the Seventh Circuit Court of Appeals, arguing that section 2001.3 was preempted by ERISA and, accordingly, the group policy’s discretionary clause controlled, triggering an arbitrary and capricious standard of review.

While both parties agreed that section 2001.3 “related” to an employee benefit plan, MetLife argued that the law does not regulate insurance and should, therefore, not be subject to the savings clause, but be preempted.

Following similar previous rulings in the Sixth and Ninth Circuits, the Seventh Circuit agreed with the District Court and held that ERISA does not preempt section 2001.3. (See American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009); Standard Ins. Co. v. Morrison, 584 F.3d 837 (9th Cir. 2009).) Relying on Miller, the Seventh Circuit in Fontaine applied its two-part test for determining whether a law “regulates insurance.” The court stated that section 2001.3 was (1) “specifically directed toward entities engaged in insurance” and (2) “substantially affect[ed] the risk pooling arrangement between the insurer and the insured.”

Accordingly, the court concluded that section 2001.3 regulated insurance and was, therefore, outside of ERISA’s preemption power. The court rejected MetLife’s “hyper-technical” argument that “the discretionary clause in this case is not actually in an insurance policy but in an ERISA plan document,” as it created an “artificial distinction.” Similarly, it declined to follow the argument that the regulation does not affect risk pooling because it does not “determine whether a class of risks is covered, does not extend coverage to a class of previously excluded risks, and does not mandate new claim review procedures.” Instead, it followed the Sixth and Ninth Circuits in concluding “that a state law prohibiting discretionary clauses squarely satisfies” the risk pooling requirement.

The Seventh Circuit further rejected MetLife’s argument that section 2001.3 conflicted with ERISA’s civil enforcement scheme based on Aetna Health Inc. v. Davila, 542 U.S. 200 (2004). The court explained that the regulation does not duplicate, supplement or supplant ERISA’s civil enforcement remedy and instead only restores “ERISA’s own default rule of de novo review in court cases challenging” a denial of benefits, given that the “text of the statute” did not require “a deferential standard for reviewing benefit denials.”

The Seventh Circuit also disagreed with MetLife’s arguments relative to the applicability of the regulation to the discretionary clause in the case at issue “according to its terms.” The Seventh Circuit clarified that the distinction between the discretionary clause not being inserted in the group policy by MetLife but rather by agreement with the employer did not change the fact that it was a policy provision purporting to reserve discretion, which was all that mattered. Moreover, it declined to follow MetLife’s argument that the regulation only applied to discretionary clauses that reserved discretion “to interpret the terms of the contract, or to provide standards of interpretation of review that are inconsistent with the laws of this state,” reasoning that the Supreme Court in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989) “rejected this artificial dichotomy between ‘benefit determination’ and ‘contract interpretation.’”

As such, the Seventh Circuit affirmed that a de novo standard was appropriate and upheld the District Court’s grant of judgment to Fontaine.

Conclusion

Along with the rulings in the Sixth and Ninth Circuits, this case confirms a trend of recent court decisions in favor of statutory and regulatory bans of discretionary language in group policies. The decision makes clear that the judicial standard of review for all benefits determinations under insured ERISA plans offered or issued in Illinois after 2005 is de novo. In light of its detail and discussion of various arguments raised, it will likely inform other circuit court decisions addressing the same issue in the future.