Seyfarth Synopsis: The central tenets of ERISA are to provide as much freedom as possible, within minimal parameters, to draft ERISA plans, and then to honor the terms of the plans. COVID-19 may very well cause increased ERISA plan claim filings, so now is the time for plan sponsors to review their ERISA plans and consider (or reconsider) plan provisions that manage an increased claim risk.
The COVID-19 pandemic seems likely to spawn many claims for ERISA benefits, whether under health, retirement or disability plans, and now is the time to consider anew proactive risk management steps. A recent decision from the Court of Appeals for the Tenth Circuit, Ellis v. Liberty Life, No. 19-1074 (10th Cir. May 13, 2020), illustrates the particular importance of the risk management tool of including a favorable choice of law provision in an ERISA long-term disability plan that provides benefits through an insurance policy.
The issue in Ellis was whether the federal district court’s review of the plan administrator’s denial of long-term disability benefits was subject to an abuse of discretion standard or subject to de novo review. The lawsuit was filed in Colorado. Colorado’s insurance regulations, like those in many states, forbid insurance policies from giving insurers, plan administrators or claims administrators discretion to interpret the policy’s terms in making benefits decisions. Such laws have been challenged by relying on ERISA’s general preemption of state law that relates to an ERISA plan, but that preemption provision contains an exception for state laws regulating insurance.
However, the plan here contained a choice of law provision stating that if there was an issue of state law, then Pennsylvania law governed. The employer was both incorporated and headquartered in Pennsylvania. Unlike Colorado, Pennsylvania does not have an insurance law that prohibits discretionary clauses in insurance policies. The question was whether the choice of law provision should be honored.
The Court held that such a clause should be enforced so long as the chosen state has a valid connection to the plan. As the employer was both incorporated and headquartered in Pennsylvania, the Court found the choice of law provision applied and thus reviewed the claim for abuse of discretion. Applying this standard, the Court affirmed the decision of the insurer.
Employers should take the opportunity now to review their ERISA plans to consider adding risk management provisions. And such provisions may go beyond a choice of law. For example, we cannot but wonder if the Ellis case would have proceeded more smoothly to its ultimate conclusion if there had been a forum selection clause mandating that the litigation be held in Pennsylvania. In addition, the defendant likely could have avoided this entire inquiry if the plan sponsor had drafted a plan document, separate from the insurance certificate, that vested the insurer with discretion. There are other plan-based risk management tools, such as plan limitations or arbitration provisions, which might be applied in other situations. Consult your Seyfarth benefits attorney or other contact for more information.