How far did Colorado's 2008 insurance bad-faith law (HB 08-1407) reach: did it apply to ERISA-preempted self-funded plans, to out-of-state master policies covering Coloradans, to pre-effective-date policies, and did it strip insurers of authority to make ordinary coverage decisions?

Opinion 10-02: HB 08-1407's bad-faith penalties did not extend to self-funded ERISA plans, out-of-state master policies, or pre-2008 contracts, and did not strip insurers of authority to make coverage decisions

Plain-English summary

HB 08-1407 (effective August 5, 2008) did two big things: it raised the Insurance Commissioner's penalty caps for violations of Colorado insurance law (§§ 10-1-205(3)(b) and 10-3-1108) and it created a new private cause of action under § 10-3-1116 for first-party insureds to sue carriers for unreasonable delay or denial of claims, with a damages multiplier of two times the covered benefit plus attorney's fees and costs. It also banned discretionary clauses in health and disability policies under § 10-3-1116(2).

The governor's office sent five questions about the law's reach. The AG worked through them.

ERISA preemption: a fully employer-funded ERISA welfare benefit plan is not an "insurance company" and is not "engaged in the business of insurance" under 29 U.S.C. § 1144(b)(2)(B), so the Insurance Commissioner had no jurisdiction to fine such plans. But where the employer purchased insurance from a licensed Colorado carrier, the carrier itself remained subject to Colorado regulation under ERISA's savings clause, and the Commissioner could fine the carrier. Out-of-state master policies covering Colorado employees were generally outside the Commissioner's penalty jurisdiction under the § 10-3-903(2)(h) carve-out, with one narrow exception: the policy still had to provide mammography benefits at least at the level of § 10-16-104(4), and the Commissioner had limited authority to enforce that.

Retroactivity: HB 08-1407 did not apply to policies issued before August 5, 2008. Section 2-4-202 presumes prospective application, the statute's present-tense "is" pointed forward, the legislative history did not show retroactive intent, and Colo. Const. art. II, § 11 forbids retrospective legislation that impairs vested rights or imposes new obligations.

Insurer authority: HB 08-1407 did not strip insurers of authority to make initial coverage determinations, interpret policy provisions, or apply Colorado's review processes (Prompt Pay Act, internal/external review). The bill's effect was on the standard of judicial review: courts would review carrier decisions de novo under a "reasonable basis" standard, rather than under the deferential arbitrary-and-capricious standard that a discretionary clause would have imposed under Firestone Tire and Rubber Co. v. Bruch.

Currency note

This opinion was issued in 2010. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The mammography mandate has since been relocated and the federal ACA framework has reshaped the regulatory landscape.

Background and statutory framework

The Insurance Commissioner's penalty authority before HB 08-1407 was governed by §§ 10-1-205(3)(b) and 10-3-1108. The bill raised those caps. It also enacted § 10-3-1115 (defining "first-party claimant") and § 10-3-1116 (creating a cause of action for unreasonable delay or denial of an insurance claim, with double-damages and fee-shifting), and prohibited discretionary clauses in health and disability policies under § 10-3-1116(2).

Several federal and state law layers were already in place. ERISA (29 U.S.C. § 1144(a)) preempts state laws that "relate to" employee benefit plans, but its savings clause (§ 1144(b)(2)(A)) preserves state laws regulating insurance, banking, and securities, and its deemer clause (§ 1144(b)(2)(B)) prevents states from deeming a plan to be an insurance company. Section 10-3-903(2)(h) exempted out-of-state master policies from being treated as Colorado-licensed transactions, subject to a mammography-benefits floor.

Colorado's standard for retrospective legislation comes from Shell Western E&P v. Dolores County (presumption of prospective application) and City of Colorado Springs v. Powell (clear-statement requirement for retroactive intent). Colo. Const. art. II, § 11 bars retrospective laws that impair vested rights or create new obligations (City of Golden v. Parker).

The discretionary-clause issue was set against Firestone Tire and Rubber Co. v. Bruch, which held that ERISA welfare-benefit denial decisions are reviewed de novo unless the plan grants the administrator discretion, in which case arbitrary-and-capricious review applies. Metropolitan Life Ins. Co. v. Glenn reaffirmed Firestone but held that nothing required ERISA plans to grant such discretion.

What the AG concluded at the time

Self-funded ERISA plans were beyond the Commissioner's reach; insurers were not

The AG started with ERISA's deemer clause. A fully employer-funded ERISA welfare benefit plan is not an "insurance company" within § 10-1-102(6)(a) and is not "engaged in the business of insurance" within state regulatory law. Therefore the Commissioner could not impose HB 08-1407 fines on such plans or their employers. But where the employer purchased insurance, the AG drew on Metropolitan Life Ins. Co. v. Massachusetts and ERISA's savings clause: the carrier writing the policy remained subject to Colorado insurance regulation. The Commissioner could fine that carrier for any violations of Colorado insurance law.

Out-of-state master policies were generally outside the penalty regime

Section 10-3-903(2)(h) exempted from the unauthorized-transaction definition any benefit plan "purchased, issued or delivered to an employer outside the state of Colorado but covers residents of Colorado." That carve-out kept the Commissioner from fining such carriers under HB 08-1407. The exception: the policy had to provide mammography benefits at the level of § 10-16-104(4) (later relocated to § 10-16-104(18)(b)(III) by HB 09-1204), and the Commissioner had limited authority to enforce that floor and to order compliance.

No retroactive application

Three signals pointed the same direction. First, § 2-4-202 presumes prospective application. Second, the statute's plain language used the present-tense "is" ("an insurance policy, insurance contract, or plan that is issued in this state"), which under § 2-4-104 and Brody v. Banking Bd. refers to current and future drafting, not past contracts. Third, the legislative history of HB 08-1407 (House Business and Labor Committee and Senate State Affairs Committee hearings) focused on prospective insurer behavior. Federal district courts that had already considered the question (McClenahan v. MetLife, James River Ins. Co. v. Rapid Funding, Kohut v. Hartford Life) had reached the same prospective conclusion, with one outlier (Morrissey v. Allstate) allowing a claim based on post-effective-date conduct under a pre-effective-date policy.

The AG flagged the constitutional backstop: under Colo. Const. art. II, § 11 and City of Golden v. Parker, a retroactive reading would have raised serious "retrospective legislation" questions, but the issue was avoided because retroactivity was not present.

Insurers retained ordinary decision-making authority

HB 08-1407 did not displace insurers' authority to make initial coverage determinations, interpret contractual terms (medical necessity, pre-authorization, eligibility), or apply Colorado's statutory review procedures (the Prompt Pay Act § 10-16-106.5; internal review § 10-16-113; external review § 10-16-113.5; preauthorization frameworks § 10-16-704(4) and § 10-16-705(14)(a)). What changed was the standard of judicial review: § 10-3-1116(2)'s ban on discretionary clauses meant courts would review insurer decisions de novo, not under the arbitrary-and-capricious standard that Firestone Tire and Rubber Co. v. Bruch and Metropolitan Life v. Glenn would otherwise allow when a plan reserved discretion. Liability under §§ 10-3-1115 and -1116 turned on whether the insurer's actions were "unreasonable" or "without a reasonable basis," a question for the trial court on the facts.

Common questions

Could a self-funded ERISA plan still be sued under § 10-3-1116?

The opinion addressed Commissioner jurisdiction, not the private cause of action. ERISA preemption analysis for the § 10-3-1116 cause of action would proceed under the same Pilot Life / Aetna Health framework that governs other state-law claims against ERISA-regulated benefits decisions, but the AG did not opine on that issue.

What about a plan administered out-of-state by a third-party administrator but actually insured by a Colorado carrier?

The opinion noted that the Commissioner's regulatory authority over "the insurance company underwriting the health benefits" did not depend on the location of the plan administrator. If the carrier was licensed in Colorado, the Commissioner could enforce HB 08-1407 against it for Colorado insurance law violations.

Could an insurer reserve any kind of decision-making authority in a Colorado policy after HB 08-1407?

The bar on discretionary clauses applied only to health and disability contracts. Section 10-3-1116(2) said a covered policy "shall not contain a provision purporting to reserve discretion to the insurer, plan administrator, or claim administrator." The AG read that as a flat ban on discretionary clauses, not a ban on contractual rules of decision (medical necessity, pre-authorization, exclusions). Insurers could still draft those substantive provisions; they just could not write a clause shifting the standard of judicial review.

Did HB 08-1407 require courts to assume an insurer was wrong?

No. Under §§ 10-3-1115 and -1116, the first-party claimant still had to prove that the insurer's delay or denial was "unreasonable" or "without a reasonable basis." The standard of review was de novo, but the substantive burden remained on the claimant.

Citations

• C.R.S. § 10-3-1115 — definition of first-party claimant.
• C.R.S. § 10-3-1116 — cause of action for unreasonable delay or denial; bar on discretionary clauses.
• C.R.S. § 10-3-1116(2) — discretionary-clause prohibition.
• C.R.S. § 10-3-903(2)(h) — out-of-state master policy carve-out, conditioned on Colorado mammography benefit floor.
• C.R.S. § 10-16-104(4); § 10-16-104(18)(b)(III) — mandatory mammography benefit (relocated by HB 09-1204).
• C.R.S. § 2-4-202; § 2-4-104 — presumption of prospective application; present-tense words include the future.
• 29 U.S.C. § 1144(a) — ERISA broad preemption.
• 29 U.S.C. § 1144(b)(2)(A) — savings clause for state insurance, banking, and securities laws.
• 29 U.S.C. § 1144(b)(2)(B) — deemer clause precluding states from deeming an ERISA plan to be an insurance company.
• Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989) — U.S. Supreme Court ruling on de novo vs. arbitrary-and-capricious review of ERISA benefit denials.
• Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008) — U.S. Supreme Court reaffirming Firestone and confirming nothing requires a discretionary clause.
• Metropolitan Life Ins. Co. v. Massachusetts Travelers Ins. Co., 471 U.S. 724 (1985) — U.S. Supreme Court holding that state insurance laws do not affect ERISA's substantive provisions but indirectly affect plans.
• Shell Western E&P v. Dolores County Bd. of Com'rs, 948 P.2d 1002 (Colo. 1997) — Colorado Supreme Court rule against retroactive legislation absent clear intent.
• City of Colorado Springs v. Powell, 156 P.3d 461 (Colo. 2007) — Colorado Supreme Court clear-statement requirement for retroactive legislation.
• City of Golden v. Parker, 138 P.3d 285 (Colo. 2006) — Colorado Supreme Court retrospective-legislation framework.

Source

• Landing page: https://coag.gov/attorney-general-opinions/
• Original PDF: https://coag.gov/app/uploads/2019/08/No.-10-2-The-Scope-of-HB08-1407-which-became-Effective-August-5-2008-and-Increased-the-Penalties-the-Colorado-Commissioner-of-Insurance-may-Impose-Against-Insurance-Companies-Providing-Benefit-Pl.pdf

Original opinion text

STATE OF COLORADO

John W. Suthers
Attorney General

DEPARTMENT OF LAW

Cynthia H. Coffman
Chief Deputy Attorney General

Office of the Attorney General
State Services Building
1525 Sherman Street - 7th Floor
Denver, Colorado 80203
Phone (303) 866-4500

Daniel D. Domenico
Solicitor General

FORMAL OPINION OF JOHN W. SUTHERS Attorney General

No. 10-02
AG Alpha No. EX AD AGBCY
February 1, 2010

On June 4, 2008, Governor Bill Ritter signed into law HB 08-1407, which increased the penalties that the Colorado Commissioner of Insurance ("Commissioner") may impose against insurance companies for violations of Colorado insurance laws pursuant to sections 10-1-205(3)(b) and 10-3-1108, C.R.S. HB 08-1407 also created a statutory cause of action for first-party claimant insureds to sue insurance companies for the unreasonable delay or denial of insurance claims pursuant to section 10-3-1116, C.R.S. The provisions of HB 08-1407 became effective August 5, 2008.

On May 22, 2009, Thomas M. Rogers, III, Chief Legal Counsel for the Office of the Governor, submitted a request for an opinion from this office raising several questions involving the application and scope of HB 08-1407.

Because this analysis applies equally to both, the terms "insurance company" and "insurer" are used interchangeably herein. The term "insurance company" is defined in section 10-1-102(6)(a) to mean a corporation, association, partnership or individual who is engaged as an insurer in the business of insurance. The term "insurer" is defined in section 10-1-102(13), as every person engaged as principal, indemnitor, surety, or contractor in the business of making insurance contracts. While the term "insurance company" does not include a health maintenance organization ("HMO") as defined in section 10-1-102(6)(b), if the term insurance company or insurer are intended to encompass an HMO, then the term "carrier" will be used. A "carrier" is defined in section 10-16-102(8) to include any entity that provides health coverage in the state of Colorado, including an HMO.

QUESTIONS PRESENTED AND CONCLUSIONS

Q. #1: Would it be a proper exercise of jurisdiction by the Colorado Commissioner of Insurance to apply the bill to the following types of insurance contracts or benefit plans:
a. An employee welfare benefit plan funded by the employer under the Employee Retirement Security Act of 1974. See 29 U.S.C. § 1144(b)(2)(B); see also Rush Prudential HMO, Inc. v. Moran, 536 U.S. 335 at 374, n. 6 (2002); FMC Corp v. Holliday, 498 U.S. 52, 61 (1990).
b. A benefit plan purchased, issued, and delivered to an employer outside the state of Colorado though covering employees in the state of Colorado. See C.R.S. § 10-3-903(2)(h).

A. #1a: No, provided the employee welfare benefit plan is fully funded by the employer. Self-insured ERISA plans are not deemed to be insurance companies for which state insurance laws or regulations apply. However, the Commissioner has jurisdiction to impose penalties against insurance companies who issue master policies in this state that fund employee welfare benefit plans for any violations of Colorado insurance law.

A. #1b: No. The Commissioner generally does not have jurisdiction over benefit plans that are delivered to an employer outside the state of Colorado that cover employees in this state. However, the Commissioner has limited jurisdiction, to the extent it is exercised, to ensure that such master policies include mammography benefits commensurate with current Colorado law.

Q. #2: May the prohibitions set forth in C.R.S. § 10-3-1116(2) be applied to insurance policies issued prior to the effective date of the provision?

A. #2: No. The prohibitions set forth in section 10-3-1116(2) are not retroactive and therefore cannot be applied to insurance policies or the acts of an insurance company prior to August 5, 2008, the effective date of HB 08-1407.

Q: #3: Does C.R.S. § 10-3-1116 prohibit an insurance company from making an initial determination as to an insured's eligibility for benefits and/or from interpreting contractual limitations on benefits (e.g., whether services are medically necessary or whether services are subject to contractual pre-authorization requirements)?

Q. #4: Does C.R.S. § 10-3-1116 preclude an insurance carrier's interpretation or application of a policy's contractual provisions, including determination of medical necessity, eligibility of benefits, processing of claims for benefits, determinations of conditions and exclusions and application of the statutory review processes (i.e., C.R.S. § 10-16-113 and C.R.S. § 113.5)?

Q: #5: Does the prohibition of a discretionary clause in an insurance policy under C.R.S. § 10-3-1116 preempt or preclude other statutorily required processes and determinations, so as to prevent an insurance carrier from being able to decide (or disagree with another's opinion on) matters such as:
a. Whether services are medically necessary or experimental (see C.R.S. 10-16-113 and 113.5);
b. What services may be subject to a pre-authorization requirement (see C.R.S. §§ 10-16-704(14)(a) and 10-16-704(4));
c. Reconsideration of a prior denial of a claim based on a request or submission of additional information (see C.R.S. 10-16-113 and 113.5);
d. Information required for determination of liability for a claim (see C.R.S. 10-16-106.5)?

A. #3/4/5: No. Section 10-3-1116 does not prohibit an insurance carrier from making initial determinations of eligibility or interpreting contractual limitations, or any act for which an insurance company generally engages in to determine liability of a claim or the processing, denial or approval of claims or benefits of its insureds. Section 10-3-1116 establishes a statutory cause of action for first-party claimant insureds to sue their insurance carriers when an insurer has unreasonably denied or delayed payment of a claim or benefit. The district courts review the insurance carrier's actions under a de novo standard of review. Whether an insurance carrier's actions in the first instance for delay or denial of a claim were "unreasonable" or "without a reasonable basis" for which liability will attach under section 10-3-1116 will be for the courts to decide based upon the specific facts and circumstances presented.

DISCUSSION

Q. #1a: Would it be a proper exercise of jurisdiction by the Colorado Commissioner of Insurance to apply the bill to an employee welfare benefit plan funded by the employer under the Employer Retirement Security Act of 1974?

No, provided the employee welfare benefit plan is fully funded by the employer. Most private industry employers who establish voluntary health plans for their employees are subject to the provisions of the federal Employer Retirement Income Security Act of 1974 ("ERISA"). ERISA sets forth minimum standards for employee pension and health benefit plans, and establishes certain fiduciary duties and required notices and information to be provided by employers to employees.

Generally, state laws directed toward the regulation of fully-funded ERISA plans are preempted by ERISA. 29 U.S.C. § 1144(a) ("[ERISA] shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title."). Therefore, health benefits plans that are fully funded by the employer are not deemed to be insurance companies or engaged in the business of insurance for which state regulatory laws apply. 29 U.S.C. § 1144(b)(2)(B). Because a fully-funded employee benefit plan is not considered an insurance company or engaged in the business of insurance, the Commissioner does not have regulatory authority over fully-funded ERISA plans, and it would not be a proper exercise of the Commissioner's jurisdiction to apply the fining provisions of HB 08-1407 to such plans or employers.

In cases where the employer has established an employee welfare benefit plan under ERISA, but chooses to provide benefits through the purchase of insurance, the Commissioner has jurisdiction over the insurance company from whom the insurance was purchased. To the extent an employer purchases the insurance that underwrites the health benefits from a validly licensed insurance company authorized to conduct business in this state, and such master policy was issued for delivery in this state, even if it affects employees of other states, the Commissioner has jurisdiction to apply the fining provisions of HB 08-1407 to those insurance companies for any violations of the Colorado insurance laws.

The regulatory authority exercised by the Commissioner in this instance is over the insurance company underwriting the health benefits of the employee welfare benefit plan and not targeted at the employer or at the administrator of the employee welfare benefit plan itself. Metropolitan Life Ins. Co. v. Massachusetts Travelers Ins. Co., 471 U.S. 724, 736 (1985). This is because state laws that regulate insurance, banking or securities are not preempted by ERISA when insurance is purchased and not self-funded pursuant to the "savings clause" in ERISA. 29 U.S.C. § 1144(b)(2)(A). As such, insurance companies may be subject to the fining provisions of HB 08-1407 should the Commissioner determine there have been violations of Colorado insurance law, even if the insurance companies underwrite health benefits for an ERISA plan.

Q. #1b: Would it be a proper exercise of jurisdiction by the Colorado Commissioner of Insurance to apply the bill to a benefit plan purchased, issued, and delivered to an employer outside the state of Colorado though covering employees in the state of Colorado?

No, but with one caveat. Section 10-3-903(1) defines the unauthorized transaction of insurance business in Colorado, setting forth the types of activities for which a person must be licensed by the Division of Insurance. Certain exempted acts and activities that are not considered the transaction of insurance business in this state are set forth in the following section. One such exemption is a benefit plan that is purchased, issued or delivered to an employer outside the state of Colorado but covers residents of Colorado. § 10-3-903(2)(h), C.R.S. However, in order to qualify for such exemption the policy must provide mammography benefits at a level at least as comprehensive as required by 10-16-104(4). [HB 09-1204, signed into law by Governor Ritter on June 1, 2009, amends the mandated provision for mammography benefits by repealing section 10-16-104(4), C.R.S., and sets forth new mandated mammography benefits at section 10-16-104(18)(b)(III). HB 08-1204 also amends section 10-3-903(2)(h) by removing the reference to section 10-16-104(4) and replacing it with the new provision in section 10-16-104(18)(b)(III). The mandated mammography benefits found in section 10-16-104(18)(b)(III) are effective for insurance policies delivered, issued, renewed, or reinstated on or after July 1, 2010.]

The Commissioner has limited regulatory authority to the extent it is exercised for review of such master policies to ensure that they include the requisite mammography benefits, and to order compliance if such master policies are deficient. The Commissioner does not have any other jurisdiction over the insurance companies who issue such master policies in another state for purposes of imposition of the fining penalties in HB 08-1407.

Q. #2: May the prohibitions set forth in C.R.S. § 10-3-1116(2) be applied to insurance policies issued prior to the effective date of the provision?

No. The prohibitions in section 10-3-1116(2) cannot be applied retroactively to insurance policies issued prior to August 5, 2008, the effective date of HB 08-1407.

Colorado statutes are presumed to apply prospectively. § 2-4-202, C.R.S. Although disfavored, legislation can apply retroactively, meaning it applies to "transactions that have already occurred or rights and obligations that existed before its effective date." Shell Western E&P v. Dolores County Bd. of Com'rs, 948 P.2d 1002, 1011 (Colo. 1997). To overcome the presumption of prospective application, the legislature's intent that a law applies retroactively must be clearly manifested on the face of the statute or in its legislative history. City of Colorado Springs v. Powell, 156 P.3d 461, 465 (Colo. 2007).

In this case, the plain language of section 10-3-1116(2) and legislative history both support the conclusion that the provision was intended to only apply prospectively. The statute states in relevant part that "an insurance policy, insurance contract, or plan that is issued in this state ... shall not contain a provision purporting to reserve discretion to the insurer, plan administrator, or claim administrator ..." Section 10-3-1116(2) (emphasis added). The present verb tense "is" contemplates the current or future drafting of a substantive term in an insurance contract, rather than any retroactive application of such prohibition in insurance contracts already issued or in effect prior to the date of August 5, 2008. § 2-4-104, C.R.S. (words in the present tense include the future tense); see also Brody v. Banking Bd., 528 P.2d 952, 952 (Colo. App. 1974) (present tense "is" refers to the present and future). At least three federal district court rulings have ruled similarly. See McClenahan v. Metropolitan Life Ins. Co., 2009 WL 1320919 (D. Colo.); James River Ins. Co. v. Rapid Funding, LLC, 2009 WL 524994 (D. Colo.); Kohut v. Hartford Life Ins. Co., 2008 WL 5246163 (D. Colo.); but see Morrissey v. Allstate Ins. Co., 2009 WL 1384099 (D. Colo.) (holding that plaintiff's case could go forward on conduct of insurance company that occurred after August 5, 2008 even though insurance contract was issued prior to that date).

A review of the legislative history does not reveal any evidence that the General Assembly intended to retroactively apply the provisions of section 10-3-1116(2). Rather the comments focused on the prospective behavior of insurance companies based upon prospective insurance contracts. Since the plain language of section 10-3-1116(2) and the legislative history for HB 08-1407 do not express an intent that the legislation applies retroactively, there is no need to proceed to the second part of the test. The provisions of section 10-3-1116(2) may not be applied to insurance policies issued prior to August 5, 2008. [If HB 08-1407 applied retroactively, it would raise a constitutional question. Article II of Section 11 of the Colorado Constitution forbids "retrospective" legislation. Legislation that applies to past actions is unconstitutionally retrospective (as opposed to simply retroactive) if it (1) takes away or impairs a vested right or (2) creates a new obligation, imposes a new duty, or attaches a new disability. City of Golden v. Parker, 138 P.3d 285, 290 (Colo. 2006). Because this legislation does not apply to past actions, we need not reach this question.]

Q: #3: Does C.R.S. § 10-3-1116 prohibit an insurance company from making an initial determination as to an insured's eligibility for benefits and/or from interpreting contractual limitations on benefits (e.g., whether services are medically necessary or whether services are subject to contractual pre-authorization requirements)?

Q. #4: Does C.R.S. § 10-3-1116 preclude an insurance carrier's interpretation or application of a policy's contractual provision, including determination of medical necessity, eligibility of benefits, processing of claims for benefits, determinations of conditions and exclusions and application of the statutory review processes (i.e., C.R.S. § 10-16-113 and C.R.S. § 113.5)?

Q: #5a-5d: Does the prohibition of a discretionary clause in an insurance policy under C.R.S. § 10-3-1116 preempt or preclude other statutorily required processes and determinations, so as to prevent an insurance carrier from being able to decide (or disagree with another's opinion on) matters such as:
a. Whether services are medically necessary or experimental (see C.R.S. 10-16-113 and 113.5);
b. What services may be subject to a pre-authorization requirement (see C.R.S. §§ 10-16-704(14)(a) and 10-16-704(4));
c. Reconsideration of a prior denial of a claim based on a request or submission of additional information (see C.R.S. 10-16-113 and 113.5);
d. Information required for determination of liability for a claim (see C.R.S. 10-16-106.5)?

The answers to Questions 3-5 are collectively 'no'. In order to understand why the answers are 'no', one must first understand the cause of action authorized in HB 08-1407 and the legal effect of a prohibition against the use of discretionary clauses in certain insurance contracts. HB 08-1407 enacted sections 10-3-1115 and 1116, which authorizes a first-party claimant to bring a lawsuit against an insurer in district court for the unreasonable delay or denial of a health, life, or disability claim. The cause of action authorizes the recovery of attorney's fees, costs and two times the covered benefit amount if the first-party claimant prevails in the lawsuit. Courts are required to provide de novo review of the actions or decisions made by an insurer in order to determine if the insurer is liable under section 10-3-1116 for the "unreasonable" delay or denial of a claim.

HB 08-1407 also prohibits the use of discretionary clauses or any other type of provision for health and disability insurance policies. Section 10-3-1116(2), C.R.S. A discretionary clause is generally a provision in an employee welfare plan that reserves discretion to the plan administrator to make determinations of coverage for employees under said plan. The insurance carrier who underwrites the plan then covers and pays benefits according to the determinations made by the plan administrator. It is typical for an employer to hire the same insurance carrier to act as the plan administrator and to underwrite and pay valid claims of the employee welfare plan.

The use of discretionary clauses or other types of provisions reserving discretion to the insurer or plan administrator provides a more deferential standard of review of the insurer's actions. In Firestone Tire and Rubber Co. v. Bruch, the U.S. Supreme Court held that when an employee brings an action under ERISA for review of the denial of a claim or benefit by a plan administrator, the standard of review by the court is de novo unless the plan administrator specifically reserves discretion; in which case an arbitrary and capricious standard applies. The holding in Firestone applies to both self-funded and insured ERISA plans. The U.S. Supreme Court recently decided Metropolitan Life Ins. Co. v. Glenn, which re-affirmed the central holding from Firestone, but also held that nothing from Firestone mandates that ERISA welfare plans include a discretionary clause reserving discretion to a plan administrator for determinations of employee coverage under the insurance contract.

In understanding what a discretionary clause does and the cause of action authorized in HB 08-1407, it becomes evident that a discretionary clause does not alter the ability or discretion of an insurance carrier to make initial determinations of coverage and continue to process claims, which are the essential functions and responsibilities of an insurance carrier. Rather, the decisions and determinations made by an insurance carrier pursuant to or as a result of the statutorily required procedures and requirements will be subject to a different standard of review should the first-party claimant institute a lawsuit under the new cause of action authorized in sections 10-3-1115 and 1116.

Other than the requirement that the insurer not act unreasonably or without a reasonable basis, nothing in the plain language of sections 10-3-1115 and 10-3-1116 prohibits an insurer making determinations regarding coverage or otherwise complying with sections 10-16-106.5 (Prompt Pay Act), 10-16-113 and 10-16-113.5 (internal and external review procedures), or 10-16-704(4) and 10-16-705(14)(a) (preauthorization within managed care plans). Whether the insurance carrier's actions were "unreasonable" or "without a reasonable basis" for purposes of liability under sections 10-3-1115 and 10-3-1116 will be based upon the facts and circumstances presented to the court, who will review such actions de novo.

Issued this 1st day February, 2010.

JOHN W. SUTHERS
Colorado Attorney General