The Tenth Circuit developed a new rule under the Employee Retirement Income Security Act of 1974 (ERISA) in Ellis v. Liberty Assurance Company of Boston (case number 19-1074), holding last week that courts should adhere to choice-of-law provisions in ERISA health benefits plans.
In Ellis, the Tenth Circuit considered whether Michael Ellis’ health benefits policy through his employer, Comcast, was governed by Pennsylvania law — as it declared in a choice-of-law provision — or subject to a Colorado statute forbidding insurance policies from giving insurers, plan administrators or claim administrators discretion to interpret the plan’s terms to make benefits decisions. The Court noted its analysis would proceed as follows:
(1) Because Ellis’s claim for benefits is a federal cause of action, federal law governs the elements of the claim. (2) But when federal law is silent on the specific question at issue (here, whether the Policy’s grant of discretion to Liberty is enforceable), the federal court may incorporate state law instead of constructing a uniform federal rule. In our view, the enforceability question should be answered by state law; that is, federal law should incorporate a state rule of decision to resolve the question. (3) When federal law incorporates a state rule of decision, the choice of which state’s law to incorporate is a matter of federal law. (4) As a matter of federal law, to effectuate ERISA’s goals of uniformity and ease of administration, the law of the State selected by a choice-of-law provision in the plan documents should ordinarily provide the rule of decision for claims brought under the plan.
The Tenth Circuit considered whether there was a federal interest requiring the creation of a uniform federal rule to allow (or prohibit) discretion-granting provisions in ERISA plans. The Court recognized that allowing discretion-granting provisions federally would result in decisions by administrators always being subjected to abuse-of-discretion review by the courts; conversely, prohibiting discretion-granting provisions would always subject ERISA administrators to de novo review. Ultimately, based on Supreme Court precedent, the Court determined that requiring or prohibiting discretion grants are both consistent with ERISA, and thus there was no need for a uniform federal rule on that matter, so state law could be applied.
The Court then considered the question of whether the choice-of-law provision should be enforced, noting the choice-of-law doctrine must take into account the centrality of the plan in ERISA matters. Emphasizing the “aims of uniformity and reduced administrative costs that are essential to ERISA’s purposes,” the panel held that if there were a legitimate connection to the state whose law was chosen by a plan, then that state’s law should govern the enforceability of any discretion-granting clauses. Critically, this holding clarified whether Ellis’ policy was governed by Pennsylvania law — as it declared in a choice-of-law provision — or subject to a Colorado statute that forbids insurance policies from giving insurers, plan administrators or claim administrators discretion to interpret the plan’s terms to make benefits decisions. In short, the Tenth Circuit’s holding allowed the plan administrator here, Comcast, to avoid a less favorable standard of review via its choice-of-law provision.
Finally, the Court considered whether Liberty had abused its discretion in denying Ellis benefits, ultimately finding for Liberty and holding that it had “sound reasons” for making its decision. “Because the record shows Liberty and the experts it retained considered all the pertinent evidence submitted by Ellis and that Liberty reasonably gave less weight to much of Ellis’s evidence, we cannot say that Liberty abused its discretion in denying Ellis’s claim for benefits,” the Court noted. Thus, the Court reversed the lower court’s order and remanded it to have judgment entered in favor of Liberty.
The case is significant for its holding that courts should follow choice-of-law provisions in ERISA plans across the board. As exemplified here, such a ruling allows plan administrators to more strategically select their forum-of-choice to avoid states with less deferential standards of review (among other non-administrator friendly regulations).