Seventh Circuit Rules ERISA Does Not Preempt State Law Prohibiting Discretionary Clauses

In Fontaine v. Metropolitan Life Ins. Co., No. 14-1984, 2015 U.S. App. (7th Cir. Sept. 4, 2015), the Seventh Circuit affirmed a U.S. District Court for the Northern District of Illinois decision holding that Illinois's anti-discretionary clause regulation in 50 Ill. Admin. Code §2001.3, prohibiting discretionary clauses in insured employee benefits plans offered or issued in Illinois, was outside the scope of the preemption power of the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA and Benefits Determinations

Section 1132, the civil enforcement provision of ERISA, provides for a person "to recover benefits due to him under the terms of his plan. ..." In the 1989 decision in Firestone Tire & Rubber Co. v. Bruch, 449 U.S. 101, 115 (1989), the Supreme Court held that in suits regarding challenges to benefits determinations under section 1132, unless the benefit plan gave or reserved discretionary authority to an administrator or fiduciary, courts should apply a de novo standard of review. Under this default de novo standard, the reviewing court is to afford no deference to previous determinations relative to a claimant's benefit eligibility but render its own independent decision on a claimant's eligibility.

Accordingly, insurance companies began including Firestone discretionary language in their policies, ensuring application of a deferential standard of review to their claim determinations, which thus stood, unless the court found them to be arbitrary and capricious. In response to insurance companies altering the default de novo standard of review, many states, including Illinois, began enacting laws prohibiting these discretionary provisions in group insurance policies.

Illinois insurance regulation section 2001.3 provides that:

No policy, contract, certificate, endorsement, rider application or...