Are Discretionary Clauses In Employee Welfare Benefit Plans Prohibited In Kentucky?

by Baker Donelson
Contact

    The Employee Retirement Income Security Act ("ERISA") is a federal law that sets minimum standards for most group employee benefit plans and pension plans in the private industry. ERISA requires plans to establish a grievance and appeals process for participants to obtain benefits from the plan and gives participants the right to sue for wrongful denial of benefits under the terms of the plan.

    One unique aspect of ERISA is that it also allows plans to determine the judicial standard of review for benefit denials, which is often critical in ERISA litigation. The scope of judicial review for denial of benefits turns on whether the claim administrator is given discretion under the plan to determine eligibility for benefits or to construe the terms of the plan. Miller v. Metro. Life Ins. Co., 925 F.2d 979, 983 (6th Cir. 1991). If so, the court must apply an arbitrary and capricious standard in reviewing the administrator's decision. Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989); Perez v. Aetna Life Ins. Co., 150 F.3d 550, 555 (6th Cir. 1998). Under the arbitrary and capricious standard of review, an administrator's decision "must be upheld if it is the result of a deliberate principled reasoning process, and if it is supported by substantial evidence." Baker v. United Mine Workers of Am. Health & Ret. Fund, 929 F.2d 1140, 1144 (6th Cir. 1991).  If it is "possible to offer a reasoned explanation, based on the evidence" for the denial of benefits, and if the decision was based "on a reasonable interpretation of the plan," the decision is not arbitrary and capricious. Shelby Cnty. Health Care Corp. v. Southern Council of Indus. Workers, 203 F.3d 926, 933 (6th Cir. 2000); Davis v. Kentucky Fin. Cos. Ret. Plan, 887 F.2d 689, 693 (6th Cir. 1989), cert. denied, 495 U.S. 905 (1990).

    In the last several years, participants in group employee welfare benefit plans have begun attacking the judicial standard of review in the context of Employee Retirement Income Security Act ("ERISA") § 502(e) claims, arguing that the Kentucky Department of Insurance no longer permits discretionary clauses in insurance policies. Participants rely on Advisory Opinion 2010-01 from the Kentucky Department of Insurance and Kentucky Revised Statute § 304.14–120. In pertinent part, Advisory Opinion 2010-01 provides "[i]t is the Department’s position that discretionary clauses deceptively affect the risk purported to be assumed in any policy and as such, any forms containing discretionary clauses may be disapproved." Kentucky Revised Statute § 304.14–120 requires an insurer to file its policy with Kentucky's Insurance Commissioner.

    Both the Sixth Circuit Court of Appeals and the United States District Court for the Western District of Kentucky have addressed the impact of Advisory Opinion 2010-01 and Kentucky Revised Statute § 304.14–120 on the standard of review in the context of ERISA claims. Most recently, the Sixth Circuit Court of Appeals found that the standard of review was not altered by Kentucky Revised Statute § 304.14–120, and it was not bound by Advisory Opinion 2010-01 "due to the mere possibility that the Department of Insurance could have disallowed the policy." Hogan v. Life Ins. Co. of N. Am., 2013 WL 1316542, at * 5 (6th Cir. Apr. 3, 2013). The Court also noted that the participant "should not be able to have her cake and eat it too—either the policy is valid or it is not. She cannot seek the benefits contained in the policy while rejecting procedural language adverse to her." Id. This holding reaffirmed the Court's prior finding that Advisory Opinion 2010-01 "does not expressly prohibit the use of discretionary clauses, but rather provides guidance as to how such clauses will be reviewed." Moss v. UNUM Life Ins. Co., 2012 WL 3553497, at * 13 (6th Cir. Aug. 17, 2012).

    What does this mean for employers and plan administrators? The clear language in these cases should thwart future claimants from attacking the judicial standard of review. Employers and/or plan administrators, however, should continue filing their insurance policies with Kentucky's Insurance Commissioner in order to comply with Kentucky Revised Statute § 304.14–120. They should also maintain records of their filing in a readily accessible place so that they can produce this documentation to their counsel at the advent of any litigation related to the policy. Employers and plan administrators should also keep apprised of Kentucky's insurance laws to ensure that Kentucky does not ban discretionary clauses in the future as other states have done.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson
Contact
more
less

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!