Chicago Daily Law Bulletin
October 20, 2004
by MARK D. DEBOFSKY
For the last year, there has been an ongoing debate in the federal court in Philadelphia as to whether the Employee Retirement Income Security Act, 29 U.S.C. sec1001, et seq., preempts claims involving insured benefits such as disability or health insurance disputes brought under Pennsylvania's bad-faith statute, 42 Pa.C.S. sec8371.
On the one side are two thoughtful but provocative decisions authored by U.S. District Judge Clarence Newcomer holding that the provision of the ERISA statute that saves laws regulating insurance from preemption (29 U.S.C. sec1144(b)(2)(A)) trumps an implied reading of the ERISA law that would nonetheless preempt an extra-contractual remedy: Rosenbaum v. UNUM, 2002 U.S. Dist. LEXIS 14155 (E.D. Pa., July 29, 2002); Rosenbaum v. Unum Life Insurance Company of America, 2003 U.S. Dist. LEXIS 15652 (E.D. Pa. 2003).
Newcomer's reading of the law was concurred in by a federal judge in Pittsburgh in Stone v. Disability Management Services Inc., 2003 U.S. Dist. LEXIS 18413 (M.D. Pa., Oct. 15, 2003). However, virtually every other judge in Pennsylvania has followed the opposite course, ruling that bad faith insurance causes of action are preempted by the ERISA law despite the provision saving from preemption laws that regulate insurance: Sprecher v. Aetna, 2002 U.S. Dist. LEXIS 15571 (E.D. Pa. 2002); Bell v. UnumProvident Corp., 2002 U.S. Dist. LEXIS 17693 (E.D. Pa., Sept. 19, 2002); Smith v. Continental Casualty, 2002 U.S. Dist. LEXIS 18312 (E.D. Pa., Sept. 16, 2002); McGuigan v. Reliance Standard Life Insurance Co., 2003 U.S. Dist. LEXIS 5718, 30 Empl.Ben.Cases (BNA) 1524 (E.D. Pa., April 9, 2003); Rieser v. Standard Life Insurance Co., 2004 U.S. Dist. LEXIS 9378 (E.D. Pa., May 25, 2004); Morales-Ceballos v. First Unum Life Insurance Company of America, 2003 U.S. Dist. LEXIS 9801 (E.D. Pa., May 28, 2003); Dolce v. Hercules Inc., 2003 U.S. Dist. LEXIS 23890 (E.D. Pa., Dec. 15, 2003); Tannenbaum v. Unum Life Insurance Company of America, 2004 U.S. Dist. LEXIS 5664 (E.D. Pa., Feb. 27, 2004); and Hunter v. Federal Express Corp., 2004 U.S. Dist. LEXIS 13271 (E.D. Pa., July 15, 2004).
In the recent case of Barber v. Unum Life Insurance Company of America, 2004 U.S. App. LEXIS 18827 (Sept. 7), 3d U.S. Circuit Court of Appeals settles the question by finding that the Pennsylvania bad faith law is both conflict preempted by ERISA section 514 (29 U.S.C. sec1144) as well as completely preempted by ERISA section 502 (29 U.S.C. sec1132).
In its analysis, the court focused on the ERISA savings clause, which saves from preemption a state law regulating insurance even though such laws would otherwise "relate to" employee benefit plans and be preempted by ERISA section 514.
Rejecting both Rosenbaum decisions, the court explained that it was guided by Aetna Health Inc. v. Davila, 124 S.Ct. 2488 (2004), the Supreme Court's most recent ruling on ERISA preemption, which reinforced the exclusivity of ERISA's remedies and the breadth of ERISA preemption. Calad holds that "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 preempted." Id. at 2495 (citing Pilot Life v. Dedeaux, 481 U.S. at 54-56 1987).
Calad further unequivocally ruled that ERISA's exclusive civil enforcement mechanism would be "undermined" if state court causes of action provide an alternative or additional remedy. Because the Pennsylvania insurance bad-faith law allows recovery of punitive damages for insurers' conduct in violation of the law, thus "supplementing the scope of relief granted by ERISA," Barber held the law was preempted in relation to claims brought under the ERISA statute.
The court explicitly rejected the plaintiff's argument that the Pennsylvania bad-faith law falls within the ambit of laws that are "saved" from preemption as laws that "regulate insurance," See, ERISA section 514(b)(2)(A). Once again, the court turned to Calad in holding that the savings clause does not affect the preemption analysis:
"ERISA section 514(b)(2)(A) must be interpreted in light of the congressional intent to create an exclusive federal remedy in ERISA section 502(a). Under ordinary principles of conflict preemption, then, even a state law that can arguably be characterized as 'regulating insurance' will be preempted if it provides a separate vehicle to assert a claim for benefits outside of, or in addition to, ERISA's remedial scheme." Id. at 2500.
In footnote 9 of the Barber opinion, the court also rejected the argument that the Pennsylvania law does not provide a separate vehicle to assert a claim for benefits, finding that contention "too narrow a reading," given the Supreme Court's determination of a Congressional intent to create an exclusive federal remedy under ERISA section 502(a).
Moreover, the court determined the savings clause would not even be applicable based on the Supreme Court's most recent pronouncement in Kentucky Association of Health Plans v. Miller, 538 U.S. 329, 155 L.Ed.2d 468 (2003), which sets forth a test to analyze whether a law is saved from preemption: a statute "regulates insurance" and satisfies the saving clause only if it (1) is "specifically directed toward entities engaged in insurance" and (2) "substantially affects the risk pooling arrangement between the insurer and the insured." Id. at 341-42.
Applying that test, the court found the first prong was met since the Pennsylvania law is directed toward insurers. The court rejected the defendant's argument that the law regulates an insurer's conduct rather than insurance, holding that Miller found Kentucky's "any willing provider" law was saved from preemption since it regulates insurance and insurers' conduct "by imposing industry-wide conditions on the insurance business." However, the court ruled that the Pennsylvania bad-faith law does not substantially affect the risk pooling arrangement between insurer and insured. The court described the bad-faith statute as remedial rather than substantive in affecting the terms of the insurance contract. The court further noted that "claims for bad-faith insurance breaches bear no relation to the risk pooled -- the risk of loss the insurer agrees to bear on behalf of the insured." The court added, "Here, the risk pooled, in this case the risk of disability, is reflected in the policy itself. The tort of bad-faith breach of an insurance contract is not ordinarily a risk identified in the insurance policy as a risk of loss the insurer agrees to bear for its insured."
Finally, the court pointed out that "the threat that punitive awards may result in increased costs that could be passed on to the insured is too attenuated to be deemed to 'substantially affect' the risk-pooling arrangement." Thus, the court concluded that the Pennsylvania bad-faith statute did not "regulate insurance" within the meaning of the ERISA savings clause.
Barber is probably the last, best chance the plaintiffs had to convince an appeals court to allow for an extra-contractual remedy in an ERISA case. By rejecting such a remedy based on the Supreme Court's divination as to congressional intent that ERISA provide an exclusive remedy for benefit denials, Barber takes away the protections of a law enacted to protect Massachusetts insureds. Nowhere in the statute or in its history is there any support for the Supreme Court's Pilot Life or Miller analysis of the savings clause or for the court's establishment of the principle that the ERISA law imposes an exclusive remedy.
Further, the implication of Barber is that insurers do not have to comply with well-recognized standards of conduct when they administer claims governed by the ERISA law. Although Barber is nothing more than a garden-variety insurance dispute, because the benefit was provided by a private-sector employer, the plaintiff was stripped of the same protection he would enjoyed if he had worked for an entity whose benefit plans are excluded from ERISA such as a school district or the Archdiocese of Philadelphia.
The bad-faith standard has been taken away, and cases such as Wallace v. Reliance Standard Life Insurance Co., 318 F.3d 723 (7th Cir. 2003), have further determined that insurers owe no fiduciary duty to their insureds under plans governed by ERISA despite Calad's recognition that insurers administering ERISA plans are indeed fiduciaries under the law, and notwithstanding 29 U.S.C. sec1104(a)(1), which imposes on fiduciaries a duty of loyalty as well as an obligation to act exclusively in the interest of plan participants and their beneficiaries.
Moreover, although the Illinois and California departments of insurance have recently begun taking action to bar insurers from drafting policy language granting themselves discretion to determine benefit eligibility, it has become common to see such clauses in group insurance policies, which have the legal effect of triggering a standard of court review that precludes a court from overturning a benefit decision if it is merely wrong; and only allows a claim determination to be overruled if it is found to be arbitrary and capricious. Concurrently, through decisions such as Perlman v. Swiss Bank Corp., 195 F.3d 975 (7th Cir. 1999), which was criticized by implication in Herzberger v. Standard Insurance Co., 205 F.3d 327 (7th Cir. 2000), as based on a misapplication of administrative law concepts to the ERISA law, plaintiffs are barred from taking discovery necessary to establish the arbitrariness of claims decisions by deposing the decision-makers to learn of bias, lack of expertise or whether crucial evidence was simply overlooked.
Justice Sandra Day O'Connor ruled in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 114 (1989), that ERISA should not leave claimants with less protection than before the law's enactment based on a congressional intent found in the statute's preamble that the ERISA law was aimed at protecting employee benefits. However, by eliminating standards of conduct, Barber leaves plaintiffs with much less protection than if the claim were not governed by ERISA and directly challenges the promise made by Congress in the ERISA preamble declaring the intent of the law to "protect ... the interests of participants in employee benefit plans and their beneficiaries ... by establishing standards of conduct, responsibility and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions and ready access to the federal courts." 29 U.S.C. sec1001(b).