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A federal district court in California, addressing an issue that neither the California Supreme Court nor the U.S. Court of Appeals for the Ninth Circuit had directly considered, has ruled that health insurance plans may not include provisions granting plan administrators discretionary authority to determine eligibility for benefits.

The Case

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

The district court agreed with the plaintiffs and ruled that the standard of review of Cigna’s decision was de novo.

In its decision, the district court found that, when read in the appropriate context, health insurance was a form of disability insurance for purposes of the California Insurance Code. Thus, the state ban on discretionary clauses applied to the Cigna plan.

The district court explained that disability insurance was defined broadly under the California Insurance Code to “include[] insurance appertaining to injury, disablement or death resulting to the insured from accidents, and appertaining to disablements resulting to the insured from sickness.” Cal. Ins. Code § 106(a). Moreover, the district court continued, health insurance – unlike both life and disability insurance – was not a separate class of insurance listed in the Insurance Code but, instead, was defined under the “disability insurance” chapter as “an individual or group disability insurance policy that provides coverage for hospital, medical, or surgical benefits.” Id. § 106(b) (emphasis added).

Therefore, the district court added, the definition of health insurance indicated that it was a type of disability insurance.

The district court was not persuaded by Cigna’s argument that because the definition of health insurance excluded “[d]isability insurance, including hospital indemnity, accident only, and specified disease insurance that pays benefits on a fixed benefit, cash payment only basis,” health insurance was not a type of disability insurance. In the district court’s opinion, this interpretation “render[ed] meaningless the explicit language” in Section 106(b) that health insurance was a “disability insurance policy.”

The district court added that a “more coherent reading” was that health insurance was a “smaller subset of disability insurance” that further excluded particular other types of disability insurance: namely, disability insurance that paid benefits “on a fixed benefit, cash payment only basis,” such as “hospital indemnity, accident only, and specified disease insurance.”

Accordingly, the district court concluded that the state ban’s reference to “disability insurance” encompassed health insurance as a subset of disability insurance, that it rendered any discretionary provision in the Cigna plan void, and that the default de novo standard of review applied.

The case is Mahlon D. v. Cigna Health & Life Ins. Co., No. 16-cv-07230-HSG (N.D. Cal. Jan. 31, 2018). Attorneys involved include: For Mahlon D, Emily D, Plaintiffs: Katie Joy Spielman, David M. Lilienstein, DL Law Group, San Francisco, CA. For Cigna Health and Life Insurance Company, Defendant: Sean Patrick Nalty, LEAD ATTORNEY, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., San Francisco, CA.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.