On September 4, 2015, the Seventh Circuit Court of Appeals issued a decision which is a giant victory for long term disability claimants. In Fontaine v. MetLife, the Seventh Circuit joined the Ninth and Sixth Circuits holding that state laws prohibiting discretionary clauses in LTD insurance policies are not preempted by Federal Law. This means that state legislatures can pass laws prohibiting policies that give full discretion to the insurance companies when they determine whether a claimant is eligible for benefits or not.
One of the most common issues in long term disability lawsuits is what standard of review is used by the court to decide a case. In 1989, the Supreme Court held in Firestone v. Brunch, 489 U.S. 101, 115, that courts should apply a de novo standard of review in suits dealing with a denial of benefits governed by ERISA. However, if the LTD plan expressly provides for a different more deferential standard of review, then that specific language in the policy controls. After 1989, insurance companies began including language in their policies, stating that they had discretionary judgment in interpreting the policy or deciding whether to pay benefits. As a result of this move by the insurance companies, some states started adopting laws prohibiting such clauses in insurance policies. This action by state legislatures prompted extensive litigation involving cases such as Fontaine.
In Fontaine, MetLife argued that the Illinois statute banning discretionary clauses was preempted by the Employee Retirement Security Income Act of 1974 (ERISA). In other words it argued that, state statutes were not valid because legislation in this area of the law has been reserved only for Congress. Fortunately, the Appeals Court rejected this argument stating the ERISA law specifically saves from preemption any state law "which regulates insurance". 29 U.S.C. Sec. 1144(b)(2)(A).
Moreover, a more clever argument was made by MetLife in Fontaine. MetLife argued that the discretionary clause in question was not in the insurance policy but in the actual long term disability plan. The insurance company alleged that since the plain was not part of an insurance policy it could not be regulated by state laws. The Seventh Circuit rejected this "hyper-technical argument" and stated: "whether a provision for discretionary interpretation is placed in an insurance policy or in a different document is arbitrary and should make no legal difference", The Court concluded that: "If MetLife's interpretation of ERISA's savings clause were correct, then states 'would be powerless to alter terms of the insurance relationship in ERISA plans; insurers could displace any state regulation simply by inserting a contrary term in plan documents.'"
