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9th Cir – Published –Ban on Discretionary Clauses Does Not Apply to Self-Funded Plans

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  • 9th Cir – Published –Ban on Discretionary Clauses Does Not Apply to Self-Funded Plans

    Here’s a new published opinion out of the Ninth Circuit, Yvette Williby v. Aetna Life Insurance Company. This matter involves the Boeing Self-Funded Short Term Disability Plan administered by Aetna. The parties are appealing based upon the District Court’s application of California’s ban on anti-discretionary clauses. The court first determined that Boeing is providing insurance.

    The question then becomes whether Boeing provided “insurance” through its STD plan. “Section 22 has been interpreted as requiring two elements: (1) shifting one party’s risk of loss to another party; and (2) distribution of that risk among similarly situated persons.” Auto. Funding Grp., Inc. v. Garamendi, 7 Cal. Rptr. 3d 912, 915 (Cal. Ct. App. 2003). Boeing’s contractual promise to pay its employees a portion of their usual salary if a medical problem rendered them unable to work fits this definition, for by offering a self-funded STD plan, Boeing (1) shifted risk of financial loss due to injury from employees to itself and (2) spread that risk over its workforce. See Selmon v. Metro. Life Ins. Co., 277 S.W.3d 196, 202 (Ark. 2008) (characterizing a self-funded LTD plan as a “risk-pooling agreement”); Julie K. Swedback, The Deemer Clause: A Legislative Savior for Self-Funded Health Insurance Plans Under the Employee Retirement Income Security Act of 1974, 18 Wm. Mitchell L. Rev. 757, 787 (1992) (“While an employer has the choice to fund its own benefit plan or to purchase a plan from an insurance company, the only distinguishable difference . . . in the nature of the benefit plan is the source of the funding. Even when an employer chooses to fund its own benefit plan, the plan provides a benefit schedule, assumes liability through a contractual document for payment of claims accorded by the benefit schedule, and designates the amount of employee contribution based on insurance principles of risk distribution.”); Introduction—Fundamentals of Self-Funding, Employer’s Guide to Self-Insuring Health Benefits ¶ 200, available at 2001 WL 35727768 (“[H]istorically, self-funding was used primarily by large companies that employed enough workers to establish their own sizeable risk pool and had significant cash flow that would allow them to bear the risk of paying claims without fear that the risk would harm the company substantially.”).

    Aetna retorts that Boeing’s STD plan can constitute “insurance” under California law only if “the risk element of the contract is the principal object and purpose of the agreement.” See Transp. Guar. Co. v. Jellins, 174 P.2d 625, 629 (Cal. 1946) (holding that the relevant question is not “whether risk is involved or assumed,” but rather “whether that or something else to which it is related in the particular plan is its principal object and purpose”) (citation omitted); Garamendi, 7 Cal. Rptr. 3d at 916. The cases on which Aetna relies for this proposition concern risk-shifting provisions that were just one element of a broader contract whose primary object was not risk-shifting. See Jellins, 174 P.2d at 631 (holding that a contractual promise to perform maintenance on and procure insurance for a truck was not “insurance” because “the major part of [Party A’s] service [to Party B] is the supplying of labor”); Garamendi, 7 Cal. Rptr. 3d at 919–20 (holding under Jellins that an optional provision of a used car loan that shifted some risk from the buyer to the seller was not “insurance”); see also Truta v. Avis Rent A Car Sys., Inc., 238 Cal. Rptr. 806, 814 (Cal. Ct. App. 1987) (holding under Jellins that a “tangential risk allocation provision” did not make a rental car contract “insurance” because its “principal object and purpose” remained “the rental of an automobile”). Here, by contrast, the principal purpose of Boeing’s STD plan was to shift risk, and thus Aetna’s cases confirm, rather than refute, our conclusion that the plan is “insurance” under California law.
    However, the court then concludes that the plan is preempted.

    Unlike Boeing’s STD plan, the disability plans at issue in Orzechowski and Morrison were not self-funded; rather, they were funded by insurance policies. See Orzechowski, 856 F.3d at 689; Morrison, 584 F.3d at 840 (noting that the state regulatory practice under review applied only to “insurance contract[s]”). This matters because the Supreme Court in FMC Corp. held that the deemer clause’s scope turns on the presence or absence of traditional insurance. If the state law is applied to a traditional insurance policy, then the state law falls outside the deemer clause and thus within the saving clause—even if the insurance policy backstops an ERISA plan. On the other hand, if the state law is applied to an ERISA plan itself, which is how such laws operate on self-funded plans, the law falls within the deemer clause and thus is preempted, even if it is a bona fide insurance regulation that only incidentally affects ERISA concerns. See FMC Corp., 498 U.S. at 64. The result is a simple, bright-line rule: “if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it.” Id. The Court thus concluded: “We read the deemer clause to exempt self-funded ERISA plans from state laws that ‘regulat[e] insurance’ within the meaning of the saving clause.” Id. at 61; see Scharff v. Raytheon Co. Short Term Disability Plan, 581 F.3d 899, 907 (9th Cir. 2009) (“[U]nder ERISA’s ‘deemer clause,’ state insurance regulation of self-funded plans is preempted by ERISA.”). Thus, for a self-funded disability plan like Boeing’s, the saving clause does not apply, and state insurance regulations operating on such a self-funded plan are preempted.
    Next, the court looks at whether a remand to District Court is necessary and the court concludes that it is.

    The district court’s exclusive reliance on Salomaa leaves us unable to say with the requisite level of certainty that it applied the correct standard. Because a conflict of interest existed in Salomaa, the abuse of discretion review was of the probing variety described in Montour; that level of review is inappropriate here. See id. at 673–76. Moreover, our observation in Salomaa that “every doctor who personally examined [the employee] concluded that he was disabled” was just one factor among many contributing to the court’s skepticism of the administrator’s conclusion that the employee was not disabled; we also noted, among other things, that the plan administrator failed to consider that the plaintiff had been awarded Social Security disability payments and that its shifting explanations were at odds with the medical records. See id. at 676. The district court here did not rely on such circumstances in holding that Aetna abused its discretion.

    Faced with only the district court’s recital of the abuse of discretion standard and a single citation to an inapposite case, we cannot be confident that the district court applied the abuse of discretion standard correctly. We therefore remand to allow the district court to review the benefits denial anew under the correct standard. In remanding, we express no opinion as to what the outcome should be. See Arizona v. City of Tucson, 761 F.3d 1005, 1015 (9th Cir. 2014).
    The opinion is attached below.
    Attached Files
    Last edited by Nathan Bax; 09-08-2017, 09:55 AM.
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