Exorcising Discretion: The Death of Caprice in ERISA Claims Handling

I. INTRODUCTION The Employee Retirement Income Security Act of 1974 (ERISA) (1) was enacted rectify mismanagement of union-sponsored pension plans. (2) To that end, the Act sought protect participants in employee benefit plans and their beneficiaries ... by imposing fiduciary duties on persons responsible for management of benefit plans. (3) More than 130 million Americans receive health coverage and other employee benefits under plans governed by ERISA. About 64 million of them are covered under insurance policies purchased by their employers. (4) ERISA permits person who is denied benefits under contest the denial in federal court, subject various limitations. (5) Nearly all ERISA plans contain clauses, which bestow discretion on the plan interpret language in the policy and otherwise determine eligibility for benefits. These clauses proliferated in the early 1990s when they were construed by the federal courts confer such authority upon insurers and employers that benefit denials can only be reversed when they are found be arbitrary and capricious. After more than decade of litigation among private parties in every federal circuit, state insurance regulators stepped in, banning the clauses and restoring the rights of tens of millions of Americans go court enforce their insurance contracts. (6) Challenged by the insurance industry, states have prevailed in two key legal battles. In Standard Insurance Co. v. Morrison and American Council of Life Insurers v. Ross, the federal courts ruled that ERISA does not preempt the power of state insurance regulators prohibit discretionary clauses from insured group health and disability insurance policies. (7) The cumulative effect of state regulatory action in this area, now judicially affirmed, can hardly be overestimated. Standard Insurance declared in its unsuccessful petition for Writ of Certiorari the United States Supreme Court, [t]his issue affects massive number of cases, as there are nearly two million ERISA benefits denials annually that are potentially subject challenge in federal court.... (8) In broader sense, the elimination of discretionary clauses in ERISA plans makes health and disability coverage more meaningful by restoring level of fairness claims handling. Under the arbitrary and capricious standard of review, federal court could not overturn denial of benefits even if the court would have reached different conclusion based on the evidence. Without that standard of review, insureds are entitled their health or disability benefits when the evidence shows they are so entitled. This article reviews the history and effect of the discretionary clause, traces the movement among state insurance commissioners that led its successful ban, and examines the judicial decisions that affirmed this historic exercise of state administrative power. II. EVOLUTION AND PERVASIVENESS A discretionary clause is provision that grants authority the administrator to interpret the and resolve all questions arising under it. (9) Such clause might read: Insurer has full discretion and authority determine the benefits and amounts payable [as well as] construe and interpret all terms and provisions of the plan. (10) Nearly all ERISA sponsors have written discretionary language into their plans ensure that if participant or beneficiary files an ERISA lawsuit, the court will be required give deference the administrator's decision. (11) This deferential standard is a feature of judicial review highly prized by benefit plans[.] (12) ERISA does not mention discretionary clauses or the standard of review expected of courts examining denials of claims, or in ERISA parlance, benefits. (13) The notion that language in or policy giving discretion the administrator, often an insurer, leads deferential standard of review stems from the Supreme Court's 1989 opinion in Firestone v. …