As readers of this column are well aware, insurance companies are “stodgy” and “old-fashioned” only when it comes to paying claims. When it comes to defending against claims, insurers are swift, inventive and show very little, if any, conscience.
Even experienced disability income lawyers, are amazed at the lengths insurers will go to try to circumvent laws designed to level the playing field for claimants and policyholders.
A case in point is Curtis v. Hartford Life, 2012 WL 138608 (N.D.Ill.) which illustrates the latest tactic of some insurance companies in trying to undo the protection afforded by state legislatures to protect their citizens against the discretionary language rule in ERISA litigation. For more on discretionary language.
A U.S. Supreme Court case, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) holds that employers, by adding a few words in their ERISA plan, can give a plan administrator, which is usually the insurance company which would have to pay the claim, discretion to decide whether or not a claim is valid. More importantly, Firestone requires reviewing courts to give deference to that decision. For more on deference.
Unless the claimant can show the denial by the insurer was “arbitrary and capricious”, a very tough burden, courts are forced by Firestone to go along with the denial of benefits, even if the court feels the denial is wrong.
To make the cheese even more binding, ERISA preempts state action in ERISA matters, one of the few exceptions being the wording of policies.
For too long, Firestone gave insurance companies the best of the bargain. Then, several years ago, the National Association of Insurance Commissioners (insurance officials from the 50 states) drafted a model rule for prohibiting the use of discretionary language in policies. In states which have adopted that rule, discretionary language is no longer permitted in policies issued in that state. Gone is this free ride for insurers.
At first, insurance companies attacked the policy language prohibitions as actually being covered by ERISA and, therefore preempted. This attack was foiled by Standard Ins. Co. v. Morrison, 584F.3d 837(9th Cir. 2009), in which the court upheld the state’s right to determine the language of insurance policies issued in its state and held such power exempt from ERISA preemption.
Since the preemption argument didn’t work, Hartford tried something else:
It used an insurance trust that was set up in Maryland, a state which doesn’t have a rule prohibiting discretionary language in policies (citizens of Maryland, why do you permit this?).
Hartford then had the trust issue the policy to the Curtis’s employer in Illinois, taking the position that the discretionary language prohibition does not apply because the policy is issued in Maryland, not Illinois. For good measure, Hartford added policy language that the policy was to be interpreted according to Maryland law which does not prohibit discretionary language.
However, the court did not buy this “misdirection” ploy, clever as Hartford thought it might be. The court found the tactic a subterfuge, and found that the actual terms of the insurance contract was the relationship between the insured’s employer and the insurance company. Therefore, the policy language was subject to the Illinois discretionary language prohibition.
As to Hartford’s claim that the policy called for Maryland law to prevail, the court said no, citing the Illinois State Supreme Court’s decision in Hofeld v. Nationwide Life, 332 N.E. 2d 454 (1975) , which held that such a choice of law provision would be upheld so long as no provision of the insurance policy was in conflict with the public policy of the state. In this case there was a clear conflict with the public policy of Illinois which prohibits discretionary language.
But, never fear. In their never-ending battle to pay as few claims as possible, insurers are bound to come up with new ways to try to resuscitate the deference “hammer” that Firestone v. Bruch provides for them.