Second Circuit Holds California Insurance Code’s Ban on Discretionary Authority in Disability Policies Applies Only to California Residents

Mayer v. Ringler Assocs. Inc., No. 20-1281, __F.4th__, 2021 WL 3556473 (2d Cir. Aug. 12, 2021) involves a dispute over the proper calculation of Plaintiff-Appellant Gregory Mayer’s long-term disability benefits under Defendant-Appellee Ringler Associates Inc. and Affiliates Long Term Disability Plan (the “Plan”), which is insured by Defendant-Appellee Hartford Life and Accident Insurance Company (“Hartford Life”). In affirming the judgment in favor of Hartford Life, the Second Circuit decided issues concerning the proper standard of review and the ERISA claims regulations.

With respect to the standard of review, the Second Circuit determined that the Plan expressly grants broad discretionary authority to Hartford Life with the following language: “[t]he Plan has granted the Insurance Company full discretion and authority to determine eligibility for benefits and to construe and interpret all terms and provisions of the Policy.” Mayer argued that since the Plan was delivered in California, and California law governs, that California Insurance Code § 10110.6(a) voids the Plan’s grant of discretion to Hartford Life. California Insurance Code § 10110.6(a) states in pertinent part:

If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds … 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.

The court disagreed with Mayer. Mayer was a resident of New York at all relevant times: he worked in NY, became disabled in NY, and applied for benefits in NY. The court held that § 10110.6(a) applies only to the claims of California residents. Though no other circuit court has addressed this issue, the district courts that have considered it concluded that § 10110.6(a) applies when the claimant is a California resident, not when the policy potentially insures a beneficiary who resides in California.

The court also determined that de novo review is not applicable based on alleged violations of 29 C.F.R. § 2560.503-1(h)(4). Mayer claimed he was denied a full and fair review because Hartford Life did not turn over documents to Mayer that it considered after it received his appeal. The court found that the version of this regulation which applies to claims filed on or before April 1, 2018 does not require that a claims administrator provide the claimant with documents developed or considered during the appeal phase before there is a final determination. Because Hartford Life did not violate the regulations in reviewing Mayer’s appeal, the arbitrary and capricious standard applies.

On the merits of Mayer’s claim, the court determined that the district court did not err in concluding that Hartford Life’s determination of Mayer’s pre-disability earnings was reasonable and supported by substantial evidence. Hartford relied on all documents related to his compensation in the policyholder’s possession. It was not clear error for the district court to conclude that SEP-IRA contributions are not part of pre-disability earnings given the definition of pre-disability earnings in the policy. It was also not clear error for the district court to determine that the employer paid Mayer’s insurance premiums directly such that the benefits are taxable to Mayer.