ERISA Does Not Preempt State Law Prohibiting Discretionary Clauses

In Fontaine v. Metropolitan Life Ins. Co., The Seventh Circuit affirmed a U.S. District Court for the Northern District of Illinois that Illinois’ anti-discretionary clause regulation prohibiting discretionary clauses in insured employee benefits plans offered or issued in Illinois was outside the range of the preemption power of ERISA (Employee Retirement Income Security Act of 1974).

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

In 2011, Fontaine retired after 30 years from the firm, claiming she had a disability that prevented her from working, and then filed a claim for disability benefits. Met Life denied the claim on the grounds that Fontaine did not meet the definition of disability in the group policy. This was then affirmed in Met Life’s internal administrative appeal. Following this, Fontaine sued Met Life under ERISA for wrongful denial of benefits in the U.S. District Court for the Northern District of Illinois.

The Supreme Court has held that unless the benefit plan gave or reserved discretionary authority to an administrator or fiduciary, courts should apply a de novo standard of review. With the de novo standard, the reviewing court is to pay no attention to administrative decisions relative to a claimant’s benefit eligibility.

After that decision, insurance companies began including discretionary language in their policies, guaranteeing application of a deferential standard of review to their claim determinations, which would apply unless the court found them to be arbitrary and capricious. Many States started passing laws disallowing these discretionary provisions in group insurance policies.

The question became whether these State laws and regulations would take precedence over the discretionary clauses.

The district court ruled against Met Life, Finding the group policy’s discretionary clause was prohibited by Illinois regulations and the plaintiff was entitled to benefits. Met Life appealed the ruling to the Seventh Circuit Court of Appeals arguing that the Illinois regulation was preempted by ERISA. The Seventh Circuit agreed with the district court and held that ERISA does not preempt the Illinois regulation prohibiting discretionary clauses. It affirmed that a de novo standard was appropriate and upheld the district court’s grant of judgment to Fontaine. This case confirms a trend of recent court decisions in favor of statutory and regulatory bans of discretionary language in group policies.

About John Garner

John Garner has over thirty five years of experience in employee benefits. He specializes in compliance, health care reform, the Health Insurance Portability and Accountability Act (HIPAA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), and the Employee Retirement Income Security Act (ERISA). He helps clients with life, health, and disability benefits, cost containment, flexible benefits, and claim consulting.

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