The latest on “Discretionary Clauses” in California (Insurance Code section 10110.6)

On May 11, 2017, the US Court of Appeals for the Ninth Circuit issued a decision in Orzechowski v. Boeing Co. Non-Union LTD Plan, et al., Case No. 14-55919 (9th Circ. May 11, 2017) upholding the application of the California law which invalidates “discretionary clauses” in Long Term Disability (LTD) plans and other life and disability contracts of insurance.

Prior to 2012, insurers in California (and many other states) were allowed to place “discretionary clauses” into their insurance policies. These clauses, while seemingly innocuous, actually made it significantly harder for insureds to challenge wrongful denials of insurance benefits in court. These clauses forced Federal Courts to review denials of insurance benefits under an “abuse of discretion” standard. In order to prevail under this standard, an insured not only had to show that they were entitled to the benefits under the contract, but they also had to show that the insurer’s decision was “arbitrary and capricious.”  The effect of this was that Court’s were routinely deferring to the “discretion” of the insurer thereby upholding their denial. This created is a much more difficult standard of proof for insureds to meet than in an ordinary civil lawsuit, where one need only prove their case by a “preponderance” of the evidence, and where Courts do not give any special weight to the evidence presented by the other side.  The result of the so-called discretionary clauses was that many insureds lost their lawsuits for wrongfully denied benefits even when, technically, they were entitled to benefits under the term of the contract.  Court’s would simply hold they could not find evidence the insurer “abused its discretion” or acted unreasonably enough so as to justify overturning the insurer’s denial of benefits.

In 2012, the California legislature passed California Insurance Code §10110.6, which provides that all discretionary clauses in California insurance contracts are null and void, if the insurance policy or plan “renewed” as of January 1, 2012. As a result, Courts will now look at the evidence anew, or “de novo” to make a determination of whether the insured is entitled to benefits, instead of simply deferring to the insurance company’s conclusions.  This is a much easier burden for insureds to meet than the older “abuse of discretion” standard.

In Orzechowski, the discretionary clause at issue was found in Boeing’s Long Term Disability Plan, but not in the insurance policy Boeing purchased from Aetna Life Insurance Company to insure the disability benefits.   Boeing argued California Insurance Code §10110.6 doesn’t apply to its ERISA Group LTD Plan because Boeing was not an insurance company and the discretionary clause was not contained in the Aetna insurance policy itself.  Essentially, Boeing was saying that the federal laws of ERISA — which do not ban discretionary clauses — pre-empt the California statute.  And, if the Court didn’t buy that argument, Boeing also argued the California statute shouldn’t apply because the Aetna policy hadn’t “renewed” since January 1, 2012.  The 9th Circuit rejected both arguments.   Even though the Boeing Plan was not technically an insurance policy, Boeing was still engaged in the business of insurance, since it underwrote its LTD Plan with an insurance policy, which was enough for it to fall within the ambit of Insurance Code §10110.6.   As to Boeing’s second argument, the Court held that the definition of “renewed” in the statute was broad enough to encompass the Aetna policy, as well as the Boeing LTD Plan itself, since both “continued in force” beyond the effective date of Insurance Code §10110.6. 

Since the passing Insurance Code §10110.6., and similar statutes nationwide, insurers have been hard at work trying to circumvent applicability of statutes barring discretionary clauses. This victory at the 9th Circuit closes yet another door on insurance company abuses, and further cements the application of section 10110.6 , and protects the rights of California insureds.

The Judges who sat on the panel for the Ninth Circuit were Alex Kozinski, Jay S. Bybee and Donald E. Walter.  The attorneys representing Ms. Orzechowski were Glenn R. Kantor and Peter S. Sessions of Kantor & Kantor LLP and Russell G. Petti of the Law Offices of Russell G. Petti.



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