California, one of the first states to ban discretionary clauses in disability insurance policies, is home to a recent decision by a federal court judge finding that the state statute banning discretionary clauses does not affect policies issued or renewed before January 1, 2012; and although the statute may void discretionary clauses in the insurance policy, it did not invalidate the discretionary clause in the Boeing Long-term Disability Plan.
California’s Statute Banning Discretionary Clauses
California Insurance Code § 10110.6, effective January 1, 2012, states in relevant part:
(a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed whether or not in California, 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, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable…
Section 10110.6 Enactment of this statute means that the California legislature determined that it was unfair for an insurance company to give itself “discretion” – essentially give itself carte blanche authority to make any decision it wants without being susceptible to questioning or contradiction by a higher authority – since its financial stake in the claim creates a huge conflict of interest.
California’s Statute Banning Discretionary Clauses Does Not Apply To Disability Insurance Policies Issued Before January 1, 2012
Talana Orzechowski sued Aetna Life Insurance Company and her employer, Boeing Company’s, Long-Term Disability Plan, after Aetna, the disability plan’s Plan Administrator, terminated her disability benefits upon reaching the 24 month limitation for mental-nervous conditions. Ms. Orzechowski appealed Aetna’s termination claiming that she remained disabled from any gainful occupation due to physical conditions; however, Aetna refused to overturn its decision.
Ms. Orzechowski’s long-term disability lawyers disputed that Aetna’s decision should be given any deference because any grant of discretionary authority contained in the long-term disability plan was rendered void by California’s statute banning discretionary clauses.
The Court disagreed for two reasons. First, the Court determined that California’s statute did not apply retroactively, which in Ms. Orzechowsks case was prior to January 1, 2012. The Boeing Long-term Disability Plan was last renewed on January 1, 2011, a year before the statute became effective. The Court reasoned, “[e]ven if section 10110.6 applies to benefit plans that issue after the statute’s effective date, it has no application to preexisting benefit plans, such as the Plan here. Accordingly, the statute doesn’t render any provision of the Plan void.”
California’s Statute Banning Discretionary Clauses May Void Language in Disability Insurance Policy But Does Not Void Language in Boeing’s Plan Document
Second, the Court held that California’s anti-discretionary clause statute could possibly void the discretionary language in Aetna’s disability insurance policy document, but did not void the language in Boeing’s Plan Document, which is where Aetna’s discretionary authority originates from. Like many employers, Boeing maintained a Master Welfare Plan, an agreement to fund disability insurance coverage, and other welfare benefits, for its employees, as well as a Summary Plan Description, which communicated those benefits to the employees. Both documents contained discretionary clauses. The Court reasoned that since Ms. Orzechowski sued for denial of benefits under the Plan and was not suing for breach of the Aetna insurance policy, and because the insurer’s discretionary authority derived from the Plan, not the insurance policy, “[t]he Plan’s language unambiguously provides discretion to Aetna, and that language is not void by California law.”
Court Finds that Aetna Did Not Abuse It’s Discretion By Denying Ms. Orzechowski’s Claim For Long-term Disability Benefits
Following its finding that Aetna’s decision to deny Ms. Orzechowski’s long-term disability benefits should be afforded deference, the Court reviewed the merits of Ms. Orzechowski’s claim. Under the “deferential” abuse-of-discretion standard a plan administrator’s decision will not be disturbed if the plan administrator acted reasonably. This means that unless the judge finds that the administrator’s benefit decision was (1) illogical, (2) implausible, or (3) without support in inference that may be drawn from the facts in the record, then the judge must find in favor of the insurance company/plan administrator. Unfortunately for Ms. Orzechowski the Court found that Aetna’s decision to terminate her LTD benefits under the Plan’s mental-nervous limitation was reasonable, and disallowed recovery of benefits beyond the 24 months that she was paid.