9th holds state's practice of disapproving insurance policies containing "discretionary clauses" not preempted by ERISA

Standard Insurance Co v Morrison, ___F.3d___(9th Cir. October 27, 2009), is an interesting ERISA preemption decision. Many employers have insurance policies which provide discretion to administrators in interpreting those policies. This is because under Firestone and Met Life, if litigation erupts, the decisions of those administrators would be given judicial deference.

What if a state refuses to approves insurance policies that contain such discretionary clauses? Is it preempted? No says the 9th Circuit. The Ninth Circuit found that, while ERISA preempts almost all state laws relating to employee benefit plans, it does not preempt those state laws that regulate insurance. The disputed practice, specific to the insurance industry, was directed at ERISA plans, a form of insurance, and limited what insurance companies could and could not include in their policies. Additionally, the circuit court found that, in removing the discretionary clause, the practice would likely lead to a greater number of paid claims, thereby increasing the benefit of risk pooling. The company also argued that the practice would conflict with ERISA's exclusive remedial scheme, but the court found that the practice did not create an additional remedy, but instead merely pushed ERISA suits to "proceed with their default standard of review." Lastly, the court found that the practice, which was intended to eliminate insurer advantage, was consistent with the savings clause of ERISA. As the practice did not create a new substantive right, offered no additional remedies and did not institute any procedures opposed to ERISA, the Ninth Circuit ruled that it was not preempted by ERISA.

Mitchell H. Rubinstein