Discretionary Authority – A House of Cards?

The U.S. Supreme Court on May 17th declined to review the 9th Circuit Court of Appeal’s 2009 decision that upheld the state of Montana’s ban on discretionary clauses in group health and disability policies. Standard Insurance Company sued in 2006 to challenge the state’s prohibition, arguing that state law in this instance should be pre-empted by ERISA, the primary federal law governing employee benefit plans. The MT ban was supported first by the ruling of the district court, and then by the 9th Circuit Court of Appeals.

The Supreme Court’s recent Conkright decision spoke of the important part that ERISA – and with it, the principal of deference to benefit determinations made by claim administrators - plays in promoting the efficiency, uniformity and predictability that recession-plagued employers need in order to continue benefit programs at current cost levels.

The Supreme Court in Conkright seems in one breath to be holding the line on the importance of deference to the decisions of claim administrators, in instances where the plan includes “discretionary authority” language such as the provision that MT banned. But in the next breath, electing to pass on reviewing the MT discretionary authority prohibition seems to be opening the door to more situations where plans will not have that language because of state laws forbidding it.

Maybe, as a Standard spokesperson stated, the Supreme Court “may feel further development in the lower courts is appropriate before it directly addresses the issue” of whether state bans such as the MT one are pre-empted by ERISA. But as the ranks of states barring discretionary authority provisions grow, how much “further development” will be too much?