Seventh Circuit Finds That State Insurance Law Applies, Resulting In De Novo Review Of Benefit Claim

On September 4, 2015, the U.S. Court of Appeals for the Seventh Circuit ruled in Fontaine v. Metropolitan Life Insurance Company that the Employee Retirement Income Security Act of 1974, as amended (ERISA), does not preempt an Illinois state insurance regulation that prohibits discretionary authority clauses in health and disability plan insurance policies. The Seventh Circuit upheld the ruling of the U.S. District Court for the Northern District of Illinois, which decided that the Illinois regulation was not subject to preemption under precedent set forth in prior decisions by the Supreme Court of the United States.

In 1989, the U.S. Supreme Court decided Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), a case in which the Court concluded that an ERISA plan administrator's decisions will be reviewed under a de novo standard (which allows a court to take a fresh look at the decision without deference), unless the ERISA plan document confers discretion on that administrator to determine eligibility for benefits and construe the terms of the plan. If the plan document grants the administrator such authority, a much less exacting "arbitrary and capricious" standard of review generally applies. Since Firestone, other Supreme Court decisions have addressed issues related to the proper deference to be afforded a plan administrator under ERISA, including Conkright v. Frommert, 559 U.S. 506 (2010), where the Court reiterated that when a plan document gives the plan administrator discretion to interpret its terms, the administrator's interpretation should be given deference by the courts. As a result of these cases, most employers and insurance companies began including discretionary language in plan documents.

Fontaine centers on the appropriate standard of review that should apply to a court's review of a decision under an insurance policy in Illinois and involved a former equity partner in a large law firm. The Illinois regulation at issue, 50 Ill. Admin. Code § 2001.3, provides that:

No policy, contract, certificate, endorsement, rider application or agreement offered or issued in this State, by a health carrier, to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services or of a disability may contain a provision purporting to reserve discretion to the health carrier to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of...