Effective August 5, 2008, the Colorado General Assembly enacted C.R.S. §10-3-1116, creating a statutory cause of action for unreasonable delay or denial of insurance claims, which is in addition to Colorado’s previously-existing bad faith tort. Included in the statute are the following provisions, mandating de novo review and a jury trial in cases involving claims for health, life, and disability benefits:
(2) An insurance policy, insurance contract, or plan that is issued in this state that offers health or disability benefits shall not contain a provision purporting to reserve discretion to the insurer, plan administrator, or claim administrator to interpret the terms of the policy, contract, or plan or to determine eligibility for benefits.
(3) An insurance policy, insurance contract, or plan that is issued in this state shall provide that a person who claims health, life, or disability benefits, whose claim has been denied in whole or in part, and who has exhausted his or her administrative remedies shall be entitled to have his or her claim reviewed de novo in any court with jurisdiction and to a trial by jury.
Under the federal Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §1001 et seq., applicable to employee welfare benefit plans, a legal challenge to a denial of benefits is reviewed de novo unless the plan grants the claims administrator discretion to interpret the plan and decide claims, in which case the standard of review is arbitrary and capricious. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). The Colorado courts have come to different conclusions in determining whether Colorado’s unreasonable delay/denial statute is pre-empted by ERISA when applied to employee welfare benefit plans.
ERISA contains an express preemption provision, stating “[e]xcept as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. §1144(a). However, ERISA also contains a “savings clause,” saving from ERISA preemption state statutes regulating insurance: “[E]xcept as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. §1144(b)(2)(A). To be deemed a law regulating insurance, the statute at issue must (1) be “specifically directed toward entities engaged in insurance,” and (2) “substantially affect the risk pooling arrangement between the insurer and the insured.” Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003). The Colorado unreasonable delay/denial statute states that it is a law regulating insurance, in an apparent effort to avoid express pre-emption under ERISA. C.R.S. §10-3-1116(7).
In addition to express pre-emption, “any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy conflicts with the clear congressional intent to make the ERISA remedy exclusive and is therefore pre-empted.” Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004). This theory is commonly referred to as “conflict preemption,” which applies even if the state law can arguably be characterized as regulating insurance under the savings clause. Id. at 217-18.
Shortly after the enactment of the Colorado unreasonable delay/denial statute, two federal district court cases in Colorado considered whether the statute’s prohibition on arbitrary and capricious review pre-empted ERISA. See McClenahan v. Metro. Life Ins. Co., 416 Fed. Appx. 693, 2011 U.S. App. LEXIS 5826 (10th Cir. 2011). (unpublished order and judgment); Kohut v. Hartford Life & Accident Insurance Co., 710 F. Supp. 2d 1139 (D. Colo. 2008). Each case arose in the context of a claim for long-term disability benefits, and the parties briefed the applicable standard of review. In each case, the court held the Colorado statute was a law regulating insurance under the two-part test describe in Miller, and therefore saved from express pre-emption under ERISA’s savings clause. Although not addressed in Kohut, the court in McClenahan also considered whether the Colorado statute is pre-empted under a theory of conflict pre-emption. The court rejected the insurer’s argument that the Colorado statute conflicts with the federal statute’s remedial scheme by eliminating the arbitrary and capricious standard of review, on the basis that ERISA does not actually contain any standard of review requirement.
Several years later, the Colorado Court of Appeals held that a statutory unreasonable delay/denial claim, also arising from the denial of long-term disability benefits, was pre-empted under a theory of conflict pre-emption. Timm v. Prudential Ins. Co., 259 P.3d 521, 526-527 (Colo. App. 2011). In Timm, the court noted that ERISA provided a remedy for the unreasonable withholding of benefits, which did not include consequential or punitive damages, and held that Colorado’s bad faith statute conflicted with that comprehensive remedial scheme by providing for double recovery of benefits. The court distinguished McClenahan, which found that conflict preemption did not apply, as dealing only with the standard of review for benefits denial, as opposed to the provision of a remedy greater than that permitted under ERISA.
On February 19, 2015, another division of Colorado’s federal district court weighed in on the issue of pre-emption under C.R.S. §10-3-1116, this time in the context of a claim for life insurance benefits. See Shafer v. Metropolitan Life Ins. Co., 2015 U.S. Dist. LEXIS 19822 (D. Colo. Feb. 19, 2015). The court in Shafer agreed with Kohut and McClenahan that the Colorado statute is a law regulating insurance and therefore saved from express pre-emption. The court also agreed with McClenahan that the requirement of de novo review does not conflict with ERISA’s remedial scheme, given that de novo is the default standard of review in an ERISA case. However, the court found that the right to a jury trial in C.R.S. §10-3-1116(3) conflicts with ERISA’s remedial structure, which provides only equitable relief and does not include the right to a jury trial. Although the statute contains a severance provision in C.R.S. §10-3-1116(6), the court read that section as permitted severance only of an entire subsection, and not of a portion of a sentence within a subsection. The court therefore held that ERISA pre-empts C.R.S. §10-3-1116(3) in its entirety, and stated it would review the claim under an arbitrary and capricious standard of review pursuant to the plan language.
Of note, C.R.S. §10-3-1116(2), which Shafer seems to indicate would not be pre-empted by ERISA, also bars arbitrary and capricious review, but is on its face applicable only to health and disability benefits. By contrast, C.R.S. §10-3-1116(3) applies to health, life, and disability benefits. Because Shafer involved a life insurance claim, the former section did not apply.