The Ninth Circuit recently held discretionary clauses in a self-funded plan were valid and that California Insurance Code § 10110.6, banning discretionary clause relating to insurance, was preempted by ERISA when applied to a self-funded plan. Williby v. Aetna Life Ins. Co., 867 F.3d 1129 (9th Cir. 2017).
The employee benefit at issues was Boeing’s self-funded short-term disability plan (STD Plan), because it contained a discretionary clause. The Court held that the district court erred by applying the de novo standard of review, rather than the abuse of discretion standard when it reviewed Aetna’s denial of benefits decision.
You may recall that this past May, the Ninth Circuit held that discretionary clauses in fully insured ERISA plans were voided by California Insurance Code § 10110.6. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan 856 F.3d 686 (9th Cir. May 2017). See our Blog “Benefit Plan Discretionary Clauses Dealt A Blow In California” for discussion of the Orzechowski decision. California Insurance Code § 10110.6 provides that:
(a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed ... that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage ... that provision is void and unenforceable.
In Williby, Aetna made two arguments: (1) Section 10110.6 did not apply to Boeing’s self-funded STD plan because it was not insured, and (2) even if Section 10110.6 applied to self-funded plans, ERISA preempted Section 10110.6.
Aetna’s first argument was unpersuasive. The Ninth Circuit concluded that Section 10110.6 applied to entities engaged in insurance and those that were not insurance companies. The question became “whether Boeing provided ‘insurance’ through its STD plans.” The answer was yes. The self-funded STD Plan shifted the risk of financial loss due to injury from employees to Boeing and the risk was spread to Boeing’s workforce. Because the self-funded STD plan operated as insurance, it was within the scope of Section 10110.6.
However, the Ninth Circuit agreed with Aetna that ERISA preempted Section 10110.6 as applied to self-funded plans. The Court distinguished the Orzechowski case on the ground that Orzechowski dealt with an insured plan. In that case, ERISA’s saving clause—which except from preemption State laws regulating insurance, banking, or securities—prevented preemption of Section 10110.6.
Self Insured Plans Fall Under ERISA Deemer Clause
According to the Ninth Circuit, a self-funded ERISA plan falls within ERISA’s deemer clause, which provides that no “employee benefit plan [covered by ERISA] … shall be deemed to be an insurance company or other insurer … for purposes of any law of any State purporting to regulate insurance companies [or] insurance contracts.” Thus, Boeing did not become an insurance company when it self-funded the STD plan. In such a situation, Section 10110.6 would operate on self-funded plan and not on an insurance company, and thus was preempted.
The Ninth Circuit established a bright-line rule: “if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it.” Because the district court applied the wrong standard of review, the Court remanded the case.
Takeaway: In the Ninth Circuit, for a self-funded disability plan, the Savings Clause does not apply, and state insurance regulations operating on such a self-funded plan are preempted.
Plan sponsors should seek counsel regarding the application of California Insurance Code § 10110.6 to their self-insured and fully-insured plans in order to understand what steps they should take during claims administration so that if their denial of benefits decisions are challenged in court, they are be prepared for the appropriate standard of review.
 The district court held that even under the deferential review, Aetna’s denial of benefits was improper. The district court’s reasoning had a hint of the application of the “treating physician rule,” which was overruled by the Supreme Court. The court, therefore, remanded the case for proper application of the abuse of discretion standard.