Colorado Legislature bones ERISA insurers

This is the first in what I hope will be a series of entries describing the fine work done by the Colorado Legislature regarding insurance during its recently concluded session.

The topic of this entry is House Bill 1407 (pdf, 8 pages), the brainchild of Rep. Andrew Romanoff (D-Denver) and Sen. Ken Gordon (D-Denver). The bill passed by big margins in both the House (42-22) and the Senate (24-11), and now needs only the governor’s signature.

H.B. 1407 increases the fines that the Insurance Commissioner can levy against an insurance company for violating statutes and regulations, but the meat of the bill is newly-added C.R.S. §§ 10-3-1115 and 10-3-1116. Those sections prohibit insurers from unreasonably denying or delaying payment of first-party claims. Generally speaking, a first-party claim is a claim for insurance benefits made under your own policy. The bill doesn’t apply to third-party claims, i.e., claims made against the liability insurance policy of somebody else.

If a first-party insurer denies a claim or delays payment “without a reasonable basis,” the insured can file suit in district court and recover double benefits, costs and attorney fees. Before H.B. 1407, the insurance code expressly disclaimed any private right of action. Perhaps now insurance companies will think twice before being such insufferably adversarial cocks when handling first-party claims.

But that ain’t the half of it! Both of the new C.R.S. sections cited above contain a legislative declaration that “this section is a law regulating insurance.” Yeah, well, no shit. Why did the state legislature go out of its way to declare the painfully obvious?

The answer lies in an abomination known as the federal Employee Retirement Income Security Act (“ERISA”), previously discussed here. ERISA governs employee benefit plans, which includes employer-provided health, life and disability insurance. As interpreted by the federal courts, ERISA is a veritable cornucopia of treasures for insurance companies that underwrite employee benefit plans.

For instance, imagine a world in which: (1) an insurance company can insert in its policies a provision stating that the insurer itself has sole and absolute discretion to interpret the policy’s terms and determine eligibility for benefits; and (2) courts will enforce such a provision. Incredibly enough, that’s not just some insurance company CEO’s clown-punching fantasy; as to ERISA-governed benefit plans, it’s the law. If the plan contains the magic language, the insurer’s decision to deny coverage is subject only to “arbitrary and capricious” review in court. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). As you might imagine, that standard pretty much amounts to de facto immunity from judicial review.

Where it applies, ERISA preempts (i.e., renders unenforceable) state law. However, an exception to the general rule of preemption exists for “any law of any State which regulates insurance . . . .” 29 U.S.C. § 1144(b)(2)(A). And that, my friends, is why the Colorado Legislature included that peculiar statement in §§ 10-3-1115 and 10-3-1116. They wanted to avoid the preemptive effects of ERISA.

That’s a big deal for two reasons. First, in the appalling small percentage of ERISA-controlled cases that the insured actually manages to win, recovery is limited to the benefits due under the plan. 29 U.S.C. § 1132(a)(1)(B). Under H.B. 1407, a successful claimant gets double damages and attorney fees.

Second, H.B. 1407 prohibits insurers from inserting Firestone-style “sole discretion” provisions into health and disability plans and policies issued in this here state. Such plans and policies must provide for de novo judicial review of benefits denials and a trial by jury, something else you can’t get in an ERISA-governed case.

Presumably, ERISA’s tender mercies still inure to the benefit of self-funded plans and to insurance policies issued in other states, but H.B. 1407 is a massive step in the right direction. Mad, mad props to Rep. Romanoff, Sen. Gordon and every state legislator who had the stones to vote for this bill.

Update (05/20/08): Got an email from the Colorado Trial Lawyers Association today saying that the insurance industry is lobbying the hell out of Governor Ritter in the hope of getting H.B. 1407 vetoed.  Stay tuned.

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  • ohwilleke  On May 19, 2008 at 12:53 pm

    Not quite right. The notion that states can punish and regulate bad faith in the administration of insurance policies purchaed by an employer is uncontroversial.

    The tricky distinction in not between first party claims and third party claims, but between companies that purchase insurance (in which bad faith claims are not significantly impacted by ERISA) and self-insured companies (generally Fortune 500 class) whose claims are merely administered by insurance companies. Claims against self-insured companies administered by insurance companies are not insurance in the traditional definition and hence receive ERISA pre-emption of state law bad faith lawsuits.

    H.B. 1407 does not, so far as I can tell, extend to self-insurance companies such as Wal-Mart.

  • ohwilleke  On May 19, 2008 at 12:54 pm

    Oops. See that you made this clear in your last paragraph.

  • genghishitler  On May 19, 2008 at 1:15 pm

    Yep. Self-fund plans have been driving the Bad Law Bus through the federal courts for a long time. Wal*Mart’s plan has had some especially disturbing successes in recent years. There’s little a state legislature can do about that.

  • LittlebyLittle  On October 4, 2009 at 5:22 pm

    HELP!!! I’m a victim of what you’re talking about but I live in Canada. What I don’t understand is how the your ERISA is going to saving the American employees who are receiving long-term disability benefits under the piece of crap called ASO and its evil cohort of a misnomer called self-insurance, while the 409 Canadian employees on LTD are being left to fend for themselves in a bankruptcy proceeding…

    Can you provide me with any of the relevant info regarding Nortel’s American employees on LTD that are going to be bailed-out by Erisa? It’s my understanding the the US plan was self-funded, and I also understood that your ERISA provides the exemption in the same way that our crappy provincial legislation exempts benefits not covered by insurance contracts. I need to understand how ERISA is being used to save the NORTEL LTD people in the U.S. so I can shove it into the faces of our apathetic politicians!

    Could you help please? Thanks so much.

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