Home | Business News | Browse by Publication | T | Trial

Saving state law bad-faith claims from preemption: most lower courts continue to void state law remedies for ERISA plan participants. But a few federal district court judges are reevaluating the act's preemptive effect on state law insurance bad-faith claims in light of recent U.S. Supreme Court analyses.

Article Excerpt
Extracting congressional intent from the Employee Retirement Income Security Act's (ERISA) (1) "antiphonal" preemption clauses continues to frustrate the U.S. Supreme Court. In a recent case, Justice David Souter, writing for the majority, noted that ERISA's express language "seems simultaneously to preempt everything and hardly anything." (2)

Applying early Supreme Court precedent, most courts have held that ERISA preempts state law bad-faith claims arising from ERISA-governed health care and disability benefit plans, even though the act itself does not substitute comparable federal remedies. The righteousness and strength of the crusade for consumer protections, however, offer hope that courts may yet reinvigorate the bad-faith remedy in cases where plan participants struggle to receive fair treatment from ERISA-plan insurers and HMOs. (3)

ERISA expressly supersedes any and all state laws [that] ... relate to any employee benefit plan" (the preemption dame), except "any law of any state which regulates insurance" (the savings clause). However, self-insured plans are not "deemed" to be insurance companies or insurance contracts for purposes of any state laws that purport to regulate insurance (the deemer clause). (4)

In 1987, during the era of expansive ERISA preemption, the Supreme Court delighted the insurance industry by ruling that the statute preempted a state common law bad-faith claim filed against an ERISA-plan insurer. In Pilot Life Insurance Co. v. Dedeaux, the Court held that Mississippi's common law bad-faith remedy "relate[d] to" an ERISA plan, and, therefore, fell within the scope of the preemption clause. (5) The Court also found that the bad-faith law was not saved from preemption as a law that regulates insurance because, in Mississippi, the bad-faith remedy is available for any aggravated breach of contract, not just the breach of an insurance contract. (6)

The Pilot Life Court applied a three-factor test--developed under cases interpreting the phrase "business of insurance" in the McCarran-Ferguson Act (7)--to define which state laws regulate insurance. The Court explained that a state law "regulates the business of insurance" when the law affects the spreading of policyholder risk, affects an integral part of the insurer/ insured policy relationship, and specifically targets the insurance industry. (8)

The Court found that Mississippi's law affected the insurance industry but did not specifically target it; did not affect an integral part of the insurer/insured policy relationship any more than other applications of a state's general contract law; and did not spread policyholder risk. (9) Following this narrow, anticonsumer interpretation of ERISA's express savings clause, the Court further increased the burden on working families by recognizing a new inference of preemption arising from the statute's civil enforcement provision--[section] 502.

That section details who can sue under the statute and what relief is available. (10) The Court concluded that the "comprehensive" remedies in [section] 502 provided evidence that Congress intended ERISA to broadly preempt state law, suggesting that the remedies listed were the only ones available in actions arising from an ERISA-governed employee benefit plan. (11)

After that decision, until 1999, each federal circuit court that addressed ERISA's preemptive effect on state common law bad-faith or statutory unfair-settlement-practices claims filed against an ERISA-plan insurer held that the statute superseded the state law remedies, either because the state law was not expressly saved from preemption or because the remedy conflicted with [section] 502. (12)

Changing tide

As the Supreme Court began to retreat from its expansive view of ERISA preemption--beginning in 1995 with New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co. (13)--some federal judges began to limit the statute's preemption powers. (14) Several district courts have now ruled that ERISA does not preempt the bad-faith or unfair-settlement-practices laws of various states. (15)

Each of these decisions noted that the savings-clause analysis in Pilot Life was unique to that case because of the Mississippi law involved. The courts issuing these decisions have found that bad-faith laws affect an integral part of the insurer/insured policy relationship and that when the remedy can be pursued only against the insurance industry, the laws are saved from preemption because they do...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!