ERISA Does Not Take Precedence Over State Law to Allow Discretionary Clauses

State Law & Discretionary Clauses

The Seventh Circuit Court of Appeals refused to hear a case that involved Mary C. Fontaine, a retired equity partner from Mayer Brown LLP, who accused Metropolitan Life Insurance Co. of wrongfully denying her disability benefits.

According to a Bloomberg BNA report, the court ruled that Employee Retirement Income Security Act did not preempt state law which restricted discretionary clauses, and therefore Fontaine was owed disability benefits under the plan. This decision was significant because the court asserted that insurance companies do not have the right to revise health and disability insurance policies based on discretionary clauses listed in ERISA plans.

The background of the case

In the case, Fontaine stated that she was forced to retire due to problems with her vision. Law 360 reported that she claimed that her vision problems qualified under the disability plan listed in the insurance policy. However, when Metropolitan Life Insurance denied her claim because her condition did not fit its disability criteria of the insurance policy, Fontaine sued the company. Her lawsuit alleged that Metropolitan Life Insurance’s determination of ineligibility was conducted at random, and therefore should be subject to an impartial review.

The initial ruling by the Illinois federal court was that state law permitted Fontaine to receive benefits de novo because she had provided enough evidence that proved her disability. Metropolitan Life Insurance argued that ERISA overruled Illinois state law because the denial of disability and insurance benefits was not done at random. Furthermore, MetLife argued that it was entitled to a deferential review and it decision should be given full force and effect because it had discretionary authority under the plan. Therefore, the company sought an appeal of the initial decision.

The appeals court rules in favor of Fontaine

Illinois administrative regulation §2001.3 prohibits discretionary clauses in insurance contracts of the kind relied on by MetLife. The court cited the previous Ninth and Sixth Circuit court decisions which argued that ERISA did not override state laws that prohibit insurance companies to use discretionary clauses in determinations of insurance contracts. Metropolitan Life Insurance opposed the decision because it cited language under the ERISA plan that enabled such discretionary determinations to be made by the insurer. This point was refuted by the court because it determined that if discretionary clauses like this one were allowed to preempt state laws, then there would be nothing to prevent insurance companies from denying all disability claims. It also asserted that such language needed to be in the ERISA plan documents at the time the claimant signed off on them.

Whether Illinois administrative regulation §2001.3 regulates an insurance contract or an ERISA plan determined the level of deference given the decision of MetLife on Fontaine’s claim. The court held §2001.3 regulated an insurance contract issued in the State of Illinois, thus MetLife was not entitled to deference and the matter would be subject to de novo review.

The court ultimately ruled that Metropolitan Life Insurance conducted a negligent denial of Fontaine’s disability claim, and that she should receive the benefits under the terms of the insurance policy.

The significance of the case from a national perspective

The decision follows other cases which hold that an insurance contract may be regulated by a state despite being issued to an ERISA plan. This means that decision of an insurance company denying a claim under an insurance contract will not receive deference that a decision of an ERISA plan administrator might otherwise receive.