Does your administrator have discretion to resolve claims?
Your group health and welfare plan documents most likely contain a clause that grants the administrator the discretion to interpret plan terms and determine eligibility for benefits. In Firestone v. Bruch, the Supreme Court held that an administrator’s decisions will be reviewed de novo in a court proceeding unless the plan explicitly contains a discretionary grant. When a plan contains a discretionary grant, the administrator’s decisions will be reviewed by a court using an “arbitrary or capricious” or “abuse of discretion” standard. In other words, a court will not second guess an administrator’s decisions if the plan grants the administrator the discretion to make such decisions.
Believing that deferential court review is unfair to consumers, many states have barred health and disability insurers from incorporating discretionary grants into policies sold or delivered in their states. Although the Employee Retirement Income Security Act (ERISA), which governs group health and welfare plans, generally preempts state laws, it saves from preemption state laws that regulate insurance (generally referred to as ERISA’s savings clause). Thus, courts have generally found that ERISA does not preempt state laws and regulations that prohibit discretionary grants.
Nonetheless, even if your state bars discretionary grants, that does not necessarily mean that your administrator’s decisions can not receive deferential treatment. There are certain conditions under which an administrator’s decisions may nonetheless be granted deference.
First, although there has been a recent trend in California to the contrary, bans on discretionary grants should not apply to self-insured benefits. ERISA provides that self-insured plans are not to be deemed to be engaged in the business of insurance for purposes of any state law purporting to regulate insurance companies. Accordingly, state laws and regulations banning discretionary grants should not apply to self-insured plans.
Second, where the discretionary grant language is located may affect whether a court will allow it to apply. Group health and welfare plan documents should consist of a plan document, a summary plan description (SPD) and the relevant insurance booklets/certificates. While some courts have found that state insurance laws and regulations barring discretionary grants apply to any document related to the coverage at issue, others have not. Thus, while a state’s anti-discretionary grant statute might void a discretionary grant in the insurance policy; some courts have found that it does not necessarily void similar language in a separate plan document or SPD. Accordingly, which of these documents contains the discretionary grant language and how the documents interact may affect whether a court will allow the discretionary grant to apply.
Furthermore, the Supreme Court has yet to weigh in on whether state laws barring discretionary grants are permitted under ERISA’s savings clause. In the past, the Supreme Court has defended the deferential review standard, and it’s very possible that they will ultimately decide that bars on discretionary grants are preempted by ERISA.
Because this issue remains largely unsettled, plan sponsors should maximize the likelihood that their plan administrator’s decisions will be granted discretion. Thus, plan sponsors should not rely solely on an insurance company’s documents to establish the plan’s terms. Instead, plan sponsors should ensure that their insurance policies, plan document, and SPD collectively contain appropriate discretionary grants.