Opinion
No. C 03-03898 SI.
November 2, 2004
ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY ADJUDICATION ON STANDARD OF REVIEW
On September 10, 2004, this Court heard argument on plaintiff's motion for summary adjudication on standard of review. Having carefully considered the argument of counsel and the papers submitted, the Court hereby GRANTS plaintiff's motion.
DISCUSSION
This is an appeal from a denial of disability benefits under a disability plan governed by ERISA. The plan is sponsored by Cowden Automotive, a California employer; plantiff Fenberg, Cowden Automotive's former employee, was employed by Cowden Automotive in California. This action will ultimately be decided by cross-motions for summary judgment on the merits of the denial of benefits.
Before the case can be determined on the merits, plaintiff has raised a threshold question regarding the standard of review the Court should apply. The Supreme Court has held that denials of disability benefits under ERISA are reviewed de novo by the district court "unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan." Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). If discretion has been given to the plan administrator or fiduciary, then the case is reviewed under an abuse of discretion standard.
In the current case, the plan documents provide Reliance Standard Life Insurance Company ("the Insurer") with fiduciary discretion to interpret the plan and determine benefit eligibility. See Decl of Larry Fenberg, Ex. 2. The issue before the Court is whether the discretionary clause is effective in this case.
Plaintiff argues that the discretionary clause should be held invalid by this Court. In support of his claim, plaintiff asserts as "persuasive authority" a letter issued by the General Counsel for the California Insurance Commissioner on February 26, 2004, which suggests that the Commissioner will no longer approve such broad discretionary clauses in California insurance policies.See Request for Judicial Notice, Ex. 1. In the letter ruling, the General Counsel asserts that discretionary clauses "render the contract `fraudulent or unsound insurance' within the meaning of California Insurance Code § 10291.5(f)." Letter Opinion at 1. According to the General Counsel, the discretionary clause gives the insurer "unfettered discretion" to deny claims, rendering the promise to pay "illusory." Id.
Defendants respond first that this policy was "issued and delivered" in Rhode Island, as specifically described in the Plan, and is not subject to California laws or the regulation of the California Department of Insurance. According to defendants, the policy was approved in Rhode Island and is to be interpreted under Rhode Island, not California law; therefore, the discretionary clause controls here without further analysis. Defendants respond second that the new ruling would not apply even if California law applies.
1. Application of California law to the policy
Defendants contend that the policy was delivered in Rhode Island and approved by the Rhode Island Insurance Commissioner, making the provisions "valid and binding." Defendants cite no case law in support of their argument that Rhode Island insurance law is binding on a policy for a California employee of a California company. Defendants also provide no showing of a relevant Rhode Island insurance statute. Plaintiff does not provide any case law in support of his argument that the policy must was "issued or delivered" to the plaintiff under California Insurance Code § 10290. Neither party provides the Court with a definition of "delivered," as it applies under California Insurance Code § 10290.
The Court recognizes that the state of California has an interest in protecting its citizens, such as plaintiff, through the California Insurance Code. This creates a conflict with defendants' assertion that Rhode Island law controls, based on the language of the policy. If plaintiff cannot receive the protection of California law, then any insurance company could avoid regulation by the California Insurance Commission simply by filing its policies with another state and inserting language that the policy is "issued and delivered" in that state. Given California's interest in protecting its citizens and defendant's failure to present any citation to case law or a Rhode Island statute in support of their position, the Court finds that California law applies to this policy.
2. Validity of discretionary clause under California law
Given that California law will apply in this case, the Court must now determine whether the policy's discretionary clause is valid for purposes of review. The Court finds that the discretionary clause is invalid for purposes of review based on the letter issued by the General Counsel for the California Insurance Commissioner on February 26, 2004. The Court finds the letter persuasive based on: 1) the thoroughness of the discussion of discretionary clauses; 2)the validity of its reasoning that the clause is invalid under California Insurance Code § 10291.5 because it leaves the determination of payment of benefits to the unchecked discretion of the insurer; and 3) the consistency with other pronouncements, as demonstrated by the General Counsel's letter on February 27, 2004, revoking approval of 5 insurance contracts. See Skidmore v. Swift and Co., 323 U.S. 134, 140 (1944); Request for Judicial Notice, Ex. 3.
The Court GRANTS plaintiff's request for judicial notice.
Defendants assert that ERISA preempts the protections under state law asserted by the General Counsel because they are not limited to insurance law; therefore, the state law fails theKentucky Association test. Under the Kentucky Association test, a state law avoids preemption by ERISA only if: "1) The state law is specifically directed toward entities engaged in insurance and 2) The state law substantially affects the risk pooling arrangement between the insurer and the insured."Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329, 341-2 (2003).
The Court finds that ERISA does not preempt California Insurance Code § 10291.5. See Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 386 (2002) (holding that state prohibition on insurance contract terms granting "unfettered discretion" is not preempted by ERISA). California Insurance Code § 10291.5 regulates the operations of insurance companies and their contractual agreements with customers. It is not a "general" provision of the law. Therefore, the first requirement ofKentucky Association is met. The law also substantially affects the risk pooling arrangement between the insurer and the insured, which satisfies the second Kentucky Association requirement. By preventing discretionary clauses, Section 10291.5 shifts the risk pooling arrangement in favor of the insured because the insurer can no longer review its own decisions on the payment of benefits. This increased oversight over the payment of benefits will lead to increased payments for the insured.
Therefore, the Court will not recognize the discretionary clause for purposes of review in this case.
CONCLUSION
For the foregoing reasons and for good cause shown, the Court hereby GRANTS plaintiff's motion for summary adjudication on standard of review and will review the denial of benefits de novo.
IT IS SO ORDERED.