A number of state insurance commissioners, goaded by their non-governmental lobbying group NAIC, have passed insurance regulations that prohibit discretionary clauses in life, health, or disability policies or certificates issued within their states. These regulations have enormous political appeal for state officials seeking higher office (or a renewal of their current term), for the regulations are promoted as championing the rights of employees against the interests of insurance companies. The goal of these regulations is to mandate de novo judicial review, without any deference to the administrator’s interpretation. De novo review is perceived as increasing the employee’s chances of winning benefits in court, though it is difficult to reliably test the truth of that perception.
Two federal courts of appeal have upheld state insurance prohibitions on discretionary clauses against ERISA preemption challenges: the Sixth in American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009) (addressing Michigan’s regulation banning discretionary clauses in disability insurance policies) and the Ninth in Standard Ins. Co. v. Morrison, 584 F.3d 837 (9th Cir. 2009), cert. denied, 130 S. Ct. 3275 (2010) (addressing the Montana insurance commissioner’s practice of refusing to approve disability insurance policies containing discretionary clauses).
But Congress intended for the federal judiciary to develop review standards governing ERISA claims. The Supreme Court stated that Congress delegated to the courts the authority to develop federal standards of review governing ERISA claims. Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 116 (2008) (“Had Congress intended such a system of [de novo] review, we believe it would not have left to the courts the development of review standards….”).
By prohibiting discretionary clauses, state insurance commissioners are displacing the congressionally sanctioned role of the federal judiciary to establish federal standards of review governing ERISA claims, in violation of Congress’s intent. These discretion-banning insurance regulations are not laws that “regulate insurance,” which are exempt from preemption under ERISA’s savings clause, 29 U.S.C. §1144(b)(2)(A). They are laws that regulate the power of the federal judiciary to establish standards of judicial review. By attempting to dictate de novo review of ERISA claims, state insurance commissioners have usurped a power granted by Congress to the Judicial Branch. And the Ninth and Sixth Circuits gave their blessing. Has the federal judiciary fallen asleep, not noticing that state regulators have diminished a federal judicial power under the guise of regulating insurance?
Ross and Morrison are not the final word on this issue. Courts continue to evaluate the enforceability of insurance regulations that ban discretionary clauses. So in future blogs, the Pundit will continue to address why these state regulations are preempted and must be struck down.