United States: Orzechowski v. Boeing Company Non-Union Long-Term Disability Plan

In Orzechowski v. Boeing Company Non-Union Long-Term Disability Plan, 856 F.3d 686 (May 17, 2017), the United States Court of Appeals for the Ninth Circuit reversed and remanded the district court's judgment in favor of a disability insurer, finding California law voided the discretionary authority granted under the Employee Retirement and Income Security Act of 1974 ("ERISA") to plan administrators. On remand, the district court is to review Aetna Life Insurance Company's ("Aetna") decision de novo.

Talana Orzechowski, an employee of The Boeing Company, challenges Aetna's decision to terminate her long-term disability benefits under her employer-created plan. The principal plan document, The Boeing Company Master Welfare Plan ("Master Plan"), "provides general information about the various benefit plans Boeing offers" and "has a broad grant of discretionary authority, which has been delegated to a service representative, Aetna." The Master Plan incorporates numerous other documents by reference, including The Boeing Company's Non-Union Long-Term Disability Plan (PN 625) at issue here. Under the terms of the disability plan:

For the first 24 months, "disabled" is defined as the employee's inability to perform "the material duties of [the employee's] own occupation" due to an injury or illness. (Emphasis added). After 24 months, disability is redefined to that an employee is disabled if she is "unable to work at any reasonable occupation for which [she] may be fitted for training, education, or experience." (Emphasis added). There are exclusions or limitations on the payment of long-term benefits. Relevant here, the long-term benefits plan covers conditions for a maximum of 24 months if the "primary cause" of the disability is "mental illness."

Aetna agreed to fund and administer long-term disability benefits under the Boeing plan.

The Policy includes a grant of discretionary authority to Aetna to "review all denied claims," "determine whether and to what extent employees and beneficiaries are entitled to benefits," and "construe any disputed or doubtful terms of the policy." The Policy further specifies that "Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously."

In 2004, Orzechowski was diagnosed with fibromyalgia and chronic fatigue syndrome.

In January and February 2009, Orzechowski began suffering memory problems and increases in fatigue. Orzechowski suffered from a number of serious symptoms of largely unknown cause, including fatigue, loss of motor control, spinal and joint pain, and loss of cognitive functioning. Some of the symptoms appeared to be psychological in nature, including depression, obsessive compulsions, and suicidal thoughts. Other symptoms were more typical of physical illness, such as profuse sweating, muscle and nerve pains, and lung weakness. She also suffered from a wide range of other physical ailments, including fatigue, headaches, tiredness, extended periods of sleeping, asthma, decreasing muscle tone, and nausea.

In 2009, she applied, and was approved, for short term disability benefits – for the maximum duration of six months. When the six months elapsed, Aetna then approved long-term disability benefits for two years, under the "own occupation" disability standard. Aetna then requested documentation to support her disability claim under the new "any reasonable occupation" standard, and received "substantial medical records prepared by Orzechowski's physicians." Aetna sent the file to two physicians to review: one (a psychiatrist) agreed with Orzechowski's physicians, concluding she could do no work; the other (a neurologist), while "acknowledg[ing] her extensive diagnoses," disagreed, concluding she had no functional limitations and can likely perform her own occupation without limitation or restriction. Aetna denied the claim. Orzechowski's primary physician disagreed, and wrote a formal letter response. Aetna asked the neurologist to review the file again. After a conference with her physicians, the neurologist concluded her symptoms "must be psychiatric in origin because there is no definite evidence of a neurologic diagnosis." "In July 2011, Aetna terminated payment of Orzechowski's long-term disability benefits based on its determination that her disability is caused by a mental condition, more specifically depressive disorder and mood disorder, which falls under the Plan's 24-month mental health limitation. Aetna determined she was physically capable of 'light work.'" Her primary physician again challenged the determination, including Aetna's attempt to evaluate her chronic fatigue through objective evidence. Aetna upheld its decision.

Orzechowski sought district court review under ERISA, 29 U.S.C. § 1132, of Aetna's determination that she fell into the mental health exception and was not totally disabled, as required for a continuation of benefits under Boeing's long term disability plan. Following a bench trial, the district court ruled in favor of Boeing.

The district court applied an abuse of discretion standard of review to Orzechowski's claim, rather than a de novo standard. Orzechowski argued that California Insurance Code § 10110.6 voided the discretionary clause contained in the Plan. The district court, however, held that § 10110.6 does not apply retroactively, and found that the Master Plan was last issued or renewed January 1, 2011, a year before the statute became effective. Therefore, it held that the statute did not render any provision of the Master Plan void and so abuse of discretion was the appropriate standard of review. Applying that standard, the District Court held that "Aetna's decision to terminate Ms. Orzechowski's [long-term] benefits was supported by substantial evidence in the record and was not an abuse of discretion."

Orzechowski appealed. The Ninth Circuit applied a de novo standard of review to the district court's choice and application of standard of review.

In general, a de novo standard of review applies to a challenge to a denial of ERISA benefits. However, if there is a valid discretionary clause, an abuse of discretion standard is used. The Court "observed that discretionary clauses have been the subject of much controversy" and California Insurance Code section 10110.6 is an example of state legislation limiting such clauses. Section 10110.6 provides, in pertinent part:

(a)  If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.

(b)  For purposes of this section, "renewed" means continued in force on or after the policy's anniversary date.

Section 10110.6 is self-executing, rendering any provision covered by the statute void and unenforceable. Orzechowski argued the district court erred in refusing to apply Section 10110.6; Boeing argues (1) ERISA preempts this California statute, and (2) even if it is not preempted, it does not apply retroactively to Boeing's plan. The Court "conclude[d] that § 10110.6(a) is not preempted and applies to Boeing's Plan; the district court should have reviewed Orzechowski's claim de novo."

ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. § 1144(a). Nevertheless, ERISA also has a saving clause that saves from preemption "any law of any State which regulates insurance, banking, or securities." Id. § 1144(b)(2)(A). So, although ERISA has broad preemptive force, its "saving clause then reclaims a substantial amount of ground." Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 364, 122 S. Ct. 2151, 153 L. Ed. 2d 375 (2002).

No one disputes that the California law comes within the broad terms of the preemption clause because it "relate[s] to any employee benefit plan." 29 U.S.C. § 1144(a). In order to take advantage of the saving clause in § 1144(b)(2)(A), California's statute must satisfy the two-part test set forth in Kentucky Ass'n of Health Plans v. Miller, 538 U.S. 329, 342, 123 S. Ct. 1471, 155 L. Ed. 2d 468 (2003). First, the law must be "specifically directed toward entities engaged in insurance," and second, it "must substantially affect the risk pooling arrangement between the insurer and the insured." Id. at 342. Section 10110.6 meets both prongs of the Miller test.

As to the first prong, Boeing asked the Court to read that requirement literally, arguing that Boeing (an aerospace company) is not in the business of insurance. While not illogical, this argument is foreclosed by Miller – which determined that the ERISA savings clause saves laws that regulate insurance, not insurers – and Morrison [Standard Ins. Co. v. Morrison, 584 F.3d 837 (2009)] – which rejected an attempt to distinguish a law directed at insurance companies and a law directed at ERISA plans and procedures, as ERISA plans are "a form of insurance." The Court noted its decision is in line with holdings of other circuits. The Court "conclude[s] that § 10110.6 regulates 'entities engaged in insurance' [ . . . ] even if they are not insurance companies."

As to the second prong:

California's law substantially affects the risk-pooling arrangement between the insurer and the insured, satisfying the second part of Miller. This requirement is aimed at ensuring that the laws in question are "targeted at insurance practices, not merely at insurance companies." Morrison, 584 F.3d at 844.

As we recognized in Morrison, bans on discretionary clauses, such as § 10110.6, clearly alter "the scope of permissible bargains between insurers and insureds." Id. (quoting Miller, 538 U.S. at 338-39). In Morrison, we held that a regulation disapproving of discretionary clauses "substantially affect[ed] the risk pooling arrangement" by narrowing "[t]he scope of permissible bargains between insurers and insureds." Id. at 844-45. Here, as in Morrison, the "disapproval of discretionary clauses 'dictates to the insurance company the conditions under which it must pay for the risk it has assumed.'" Id. at 845 (citation omitted). "By removing the benefit of a deferential standard of review from insurers, it is likely that the [California law] will lead to a greater number of claims being paid. More losses will thus be covered, increasing the benefit of risk pooling for consumers." Id.; see also Fontaine, 800 F.3d at 889 (concluding that "a state law prohibiting discretionary clauses squarely satisfies this requirement"); Am. Council, 558 F.3d at 607 (same).

Section 10110.6(a) satisfies both of the Miller prongs. Having determined that it is saved from ERISA preemption, we must resolve whether the statute applies to Orzechowski's claim against Boeing.

For Section 10110.6 to apply to void the grant of discretion under Boeing's plan, "a policy, contract, certificate, or agreement must have been offered, issued, delivered, or renewed after the statute's effective date of January 1, 2012." (Quotation omitted.) The Master Plan was dated January 1, 2011. However, the Court found it sufficient that Boeing's Policy had an anniversary date of January 1, 2012, and renewed accordingly. The Court found Boeing's Policy "'renewed' when it continued in force beyond its anniversary date of January 1, 2012 and, accordingly, the Master Plan similarly 'renewed' when it continued in force beyond the Policy's anniversary date." The Court rejected Boeing's argument that Section 10110.6 "must refer only to insurance policies and not other plan documents," finding this "is a variation on the proper argument that ERISA's savings clause applies only to insurance companies, and not to insurance provided or funded by other companies."

The Ninth Court remanded for review in accordance with the opinion:

Because California Insurance Code § 10110.6 applies to Boeing's Master Plan and Summary Plan Description, the district court should have voided the discretionary clauses and reviewed Orzechowski's claim de novo. On de novo review, the district court should give appropriate consideration to Orzechowski's fibromyalgia and chronic fatigue syndrome diagnoses, which were ignored by Aetna in its denial of benefits based on file reviews. Aetna demanded that Orzechowski produce objective evidence showing that her disability was caused by a non-psychological condition. But as we have previously acknowledged, fibromyalgia and chronic fatigue syndrome are not established through objective tests or evidence. [Citations.] 

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