A federal district court in California, addressing an issue that neither the California Supreme Court nor the 9th U.S. Circuit Court of Appeals had directly considered, has ruled that health insurance plans may not include provisions granting plan administrators discretionary authority to determine eligibility for benefits.
Mahlon D., an employee of RailWorks Corporation, participated in the company’s employee welfare benefit plan, which was governed by the Employee Retirement Income Security Act of 1974 (ERISA). He said that his dependent, Emily D., who also was covered under the plan, was admitted to Change Academy at Lake of the Ozarks (CALO), a residential treatment facility, as part of her mental health care treatment. Mahlon D. asserted that although Emily D. was at CALO for 17 months, the plan administrator, Cigna Health & Life Insurance Company, only approved coverage for seven and a half months.
Mahlon D. and Emily D. contested Cigna’s denial of benefits for the remaining nine and a half months.
Cigna Behavioral Health Inc., a Cigna subsidiary, reviewed and denied the appeal.
Mahlon D. and Emily D. appealed again, and Cigna’s appeals unit upheld the denial of benefits.
Thereafter, Mahlon D. and Emily D. (the “plaintiffs”) sued Cigna, seeking to recover health insurance benefits under ERISA.
Prior to filing their briefs on the merits, the parties asked the district court to determine the applicable standard of review. Cigna contended that the standard of review should be abuse of discretion because the RailWorks plan contained a discretionary clause that gave Cigna, as plan administrator, discretionary authority to determine eligibility for benefits and the standard of review for a plan with a valid discretionary clause was abuse of discretion.
The plaintiffs, on the other hand, contended that the standard of review should be de novo, relying on a California law that banned discretionary clauses in certain insurance policies including disability insurance (the “state ban”) and contending that the Cigna health insurance plan was a form of disability insurance.
California Insurance Code
California Insurance Code Section 10110.6(a) provides:
If a policy, contract, certificate, or agreement . . . that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer . . . to determine eligibility for benefits or coverage . . . that provision is void and unenforceable.
The District Court’s Decision