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Third Circuit provides useful interpretation of New Jersey regulation on "discretionary" clauses in insurance contracts

April 2009

Overview

In Evans v. Employee Benefit Plan, 2009 U.S. App. LEXIS 3426, 2209 WL 418628 (3d Cir. N.J. Feb. 20, 2009), the Third Circuit Court of Appeals affirmed the New Jersey District Court's decision that the insurance carrier did not abuse its discretion in denying the claimant's long term disability claim. This decision should prove useful in cases in which a claimant under a life, health or disability policy seeks to use New Jersey's regulatory ban on so-called "discretionary" clauses in such policies.

Background

A regulation of the New Jersey Department of Banking and Insurance provides, "No individual or group health insurance policy or contract, individual or group life insurance policy or contract, individual or group long-term care insurance policy or contract, or annuity contract, delivered or issued in this State may contain a provision purporting to reserve sole discretion to the carrier to interpret the terms of the policy or contract, or to provide standards of interpretation or review that are inconsistent with the laws of this State."  N.J. Admin. Code §11:4-58.3.

The regulation was designed to eliminate certain deference afforded to decision makers in connection with, inter alia, benefit plans governed by the federal Employee Retirement and Income Security Act ("ERISA").  Significantly, however, the regulation speaks in terms of "sole discretion," while simultaneously permitting carriers to include a provision stating that it – the carrier – "has the discretion to make an initial interpretation as to the terms of the policy or contract," so long as "such interpretation can be reversed by an internal utilization review organization, a court of law, arbitrator or administrative agency having jurisdiction."  N.J. Admin. Code §11:4-58.3

Decision

In Evans, the Third Circuit addressed the New Jersey regulation in the context of a claim for long term disability ("LTD") benefits under an ERISA plan.  The court in Evans first noted that, persuant to the Supreme Court's decision in the Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), if an ERISA plan gives the administrator of the plan discretion to interpret the terms of the benefit plan, a court reviews the administrator's decision under an "abuse of discretion" standard, rather than engaging in the considerably more probing de novo review.  The plan before it, the Evans court held, granted the carrier (MetLife) such discretionary authority: "MetLife in its discretion has authority to interpret the terms, conditions, and provisions of the entire contract."  The court proceeded to review MetLife's denial of LTD benefits decision under the abuse of discretion standard, upholding it on the facts before it.

Evans had attempted to make an argument against upholding MetLife's decision by pointing to the state regulation, presumably asking the court to undertake a de novo review of MetLife's decision.  The court dismissed Evans' attempt as one that did not "merit fulsome analysis," stating that the regulation by its very terms was inapplicable.

"Evans points to a New Jersey regulation that discretionary clauses are void as contrary to public policy, but the regulation is only applicable as of January 1, 2008, and only prohibits those provisions that claim to reserve sole discretion to the carrier.  See N.J. Admin. Code §11:4-58.4.  MetLife's policy does not reserve sole discretion" (emphasis supplied).

Comment

While the New Jersey regulation clearly never was intended to bar the exercise of all discretion by plans, nor by its terms compel reviewing courts to treat plan decisions with skepticism, the claimants' bar obviously hoped that courts would treat the regulation as mandating de novo review.  Evans' interpretation of the regulation therefore is highly useful in preserving an ERISA plan's ability to have its decisions shown deference by reviewing courts in New Jersey.

Although the court designated its opinion "not precedential" (meaning that other judges of the Third Circuit may, but need not, follow it), the New Jersey claimants' bar is concerned enough of the opinion's effect that it already has started a public effort to have the New Jersey Department of Banking and Insurance revise the regulation to reverse the (correct) result in Evans ("With One Sentence, Third Circuit Clears Path for Discretionary Clause Abuse," 195 N.J. Law Journal 951 (March 30, 2009)).  At this point, however, plans' right of reasonable exercise of discretion has been upheld.

For more information please contact Kevin C. Donovan via e-mail at kevin.donovan@wilsonelser.com or by phone in our New Jersey office at 973.624.0800.

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