Northern District of California finds that California's ban on discretionary clauses applied to health plan

A U.S. District court recently held that California’s prohibition on discretionary authority clauses in certain insurance policies applies to health insurance policies in a decision that has not yet been addressed by either the California Supreme Court or Ninth Circuit Court of Appeals. This ruling has the potential to make it easier for plaintiffs to recover for claims denials in court.

In this case, Mahlon D v. Cigna Health & Life Ins. Co., No. 16-cv-07230-HSG, 2018 U.S. Dist. LEXIS 16332, (N.D. Cal. Jan. 31, 2018), the plaintiffs were an employee covered under an employee welfare plan as well as her dependent. The dependent plaintiff was admitted to a mental health care facility and stayed there for seventeen months. However, the defendant insurer only approved coverage for seven and half months of her stay, leaving the plaintiffs with the remainder of the bill.

Naturally, plaintiffs sued to recover the benefits they were going to have to pay out of pocket.

The court first had to grapple with the appropriate standard with which to review the defendant’s basis for denying the claim. The welfare plan included a discretionary authority clause, attempting to limit a court’s ability to review the defendant’s decision. If the court was forced to follow the discretionary authority clause’s language, then the claims denial would be assessed under an “abuse of discretion” standard, a standard that is extremely deferential to the defendant.

Typically, if there is no discretionary authority clause, the standard of review is “de novo,” which means the court will examine the record and facts very closely and will not be bound by the defendant’s initial decision at all.

In California, Insurance Code section 10110.6 explicitly prohibits discretionary authority clauses in “life insurance or disability insurance coverage” policies and if a plan contains such a clause it will be void.

The defendant argued that the Insurance Code was inapplicable to this case because the health insurance plan was neither life insurance nor disability insurance and that the discretionary authority clause should be respected.

However, the court disagreed, finding, “that when read in the appropriate context, health insurance is a form of disability insurance for purposes of the California Insurance Code. Thus, the state ban on discretionary clauses applies to the Plan in this action.”

The court looked to the overall scheme of the California Insurance Code and found that health insurance is a subset of disability insurance. Thus, Insurance Code section 10110.6 applied and the discretionary clause in the policy was invalid and the court would review the denial under the “de novo” standard.

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