The U.S. Supreme Court recently denied Standard Insurance Company’s writ of certiorari in the case Standard Insurance Company v. Morrison. The Supreme Court’s denial leaves in place the decision from the Ninth Circuit Court of Appeals, holding that the Montana Commissioner of Insurance’s practice of disapproving all insurance contracts with discretionary clauses is not preempted by the Employee Retirement Income Security Act (ERISA). For the time being, existing state laws, regulations and practices prohibiting discretionary clauses in insurance contracts appear safe and, as a result, more and more states are likely to pass similar prohibitions.

The viability of state laws, regulations and practices prohibiting the use of discretionary clauses in insurance contracts has significant implications for the standard of review applicable to claims decisions made by plan administrators. ERISA does not expressly address the applicable standard of review. However, the Supreme Court long has held that district courts should apply a de novo standard of review to a plan administrator’s claims decisions unless the plan document contains language giving the plan administrator discretionary authority to determine eligibility for benefits. If the plan document contains discretionary language, then the decisions of the plan administrator are generally subject to review under the deferential arbitrary and capricious standard of review. As a result, discretionary clauses are common in insurance contracts in an effort to give the insurance companies reviewing the claims the benefit of the deferential standard of review.

Insurers argue that the deferential standard of review keeps costs down for insurers and insureds alike. They also argue that allowing courts to review claims decisions de novo will result in a deluge of benefits litigation and inconsistent decisions. On the other hand, plaintiff’s lawyers, state insurance commissioners and other groups argue that the deferential standard of review gives insurers an unfair advantage because it tips the balance too far in favor of the insurer’s claims decision.

In recent years, several states have attempted to level the playing field for insureds by imposing prohibitions on the use of discretionary clauses. Insurers have not willingly accepted these new prohibitions and have challenged the new prohibitions in court, arguing, among other things, that they are preempted by ERISA. To date, the insurers’ efforts have had minimal success.

As discussed above, in Standard Insurance Company v. Morrison, the Ninth Circuit Court of Appeals affirmed the Montana Commissioner of Insurance’s practice of disapproving insurance contracts containing discretionary clauses. Likewise, in American Council of Life Insurers v. Ross, the Sixth Circuit Court of Appeals affirmed rules promulgated by the Michigan Office of Financial and Insurance Services prohibiting insurers from marketing products containing discretionary clauses. In both cases, the courts of appeals concluded that the practices/regulations at issue were not preempted because they fell within ERISA’s savings clause for state insurance laws – the practices/regulations were directed at the insurance industry and substantially affected the risk-pooling arrangement between insurers and insureds. The Supreme Court’s decision to deny review of the Ninth Circuit’s decision in the Standard Insurance case settles the issue, at least for now, and leaves the door open for other states to enact prohibitions similar to those in Montana and Michigan.