ERISA is a federal law which preempts most state laws. However, where ERISA does not directly address an issue or where certain insurance issues are involved, the court make look to state law for guidance. If more than one state’s law appears to be relevant, “choice-of-law” issues may arise. Having a plan that is in compliance with ERISA and has a clear choice-of-law provision will help an employer avoid lawsuits in an unfriendly state court.
There are significant advantages to the employer from being in federal court versus state court. For example, under ERISA, there are no jury trials in federal court, as there are in state courts. This is important because juries often side with the employee/plaintiff and against the employer/defendant. Another advantage is that while punitive damages are often permitted in state court actions, they cannot be awarded in a federal court where ERISA applies.
ERISA also provides the employer with a higher standard of review for overturning decisions of a plan administrator. In a federal court, an administrator’s decision to deny a claim must be determined to be “arbitrary and capricious” before it can be overturned. However, employers should note that in order to have the protection of this so-called “abuse of discretion” standard of review, the Plan/SPD must be so written as to grant the plan administrator full discretion to interpret the plan and make factual determinations. This is referred to as “discretionary review.”
If an employer must defend itself in a state court, a well-chosen choice-of-law provision can make the difference between defeat and victory. Many states have issued insurance regulations and legislation banning discretionary review in ERISA-governed claims decisions. In these states, the court ignores the weight of the plan administrator’s decision and starts a full “de novo” review in which most every aspect of the case is examined “anew,” including those that were not previously in dispute.
South Dakota is a state with such a ban. Following the enaction this ban, one of its citizens challenged the plan administrator’s decision to deny his claim relating to his long-term disability policy despite the policy’s language permitting discretionary review by the plan administrator. Fortunately for the employer in this case, (1) the policy was issued in Minnesota, where the employer had its headquarters, (2) Minnesota was a state with no such regulatory or statutory limitation on the standard of review, (3) the policy contained language permitting the plan administrator’s discretionary review, and (4) the plan specifically provided that Minnesota law apply where the choice-of-law issue arose. Therefore, the case was subject to the abuse of discretion/ discretionary review standard instead of de novo review-a positive outcome for the employer/defendant (whose decision was upheld). Without the plan’s choice-of-law provision, this case could have easily gone the other way.
In choice-of-law cases, the state law selected by the Plan normally governs so long as there is a rational connection with the state. Typically, a rational connection with a state would include: (1) an employer’s state of incorporation, (2) the state where its corporate headquarters is located, or (3) a state where a significant number of the employer’s employees live or work. See the ERISA Wonk for more information. For a list of states banning discretionary review as of 2013, see Section VI on page 200 of “Confronting Bans on Discretionary Clauses in ERISA Plans” by Standish, Reilly and Gingold.