Attached for your reference is my analysis of the "business of insurance" issue with regard to ERISA preemption and the potential that state law could "draft around" that preemption in the health care or other context.
DISCLAIMER: THIS ANALYSIS IS PROVIDED ON AN INFORMATIONAL ONLY BASIS AND IS NOT INTENDED TO BE CONSTRUED AS OFFERING OR PROVIDING LEGAL ADVICE AND IS NOT TO BE CONSTRUED AS A "LEGAL OPINION" ON THE ISSUES PRESENTED.
"BUSINESS OF INSURANCE" ERISA PREEMPTION ANALYSIS
Would a state law statute imposing civil liability on an insurer for violation of specified claims practice prohibitions survive ERISA preemption, despite the Pilot Life court's discussion to the effect that ERISA's civil enforcement provisions are to "be the exclusive vehicle for actions asserting improper processing of a claim for benefits?"
There are two aspects to the analysis of this question. First, what is the straightforward analytical structure that should be applied looking only to the face of the applicable statutes? Second, what is the meaning and effect of the Supreme Court's discussion in Pilot Life to the effect that ERISA's civil enforcement provisions were meant by Congress to be exclusive?
1. Statutory analysis:
Putting aside the Pilot Life court's discussion for the moment, it is clear from the structure of ERISA itself that a state statute providing civil damages against an insurer for the insurer's misconduct in the investigation, handling or determination of claims cannot be preempted by ERISA's civil enforcement statutes.
A. ERISA's civil enforcement provision is subject to state law preemption under the savings clause.
First, ERISA's civil enforcement provision, 29 U.S.C. section 1132, is a co-equal statute with its preemption provision, 29 U.S.C. section 1144. Nothing in the express provisions of the civil enforcement section provides that the terms and provisions of that section do, or are intended to, establish or provide a preemption power distinct from the preemption provision itself. Indeed, section 1132 is utterly silent as to the preemptive effect of its civil enforcement scheme.
The only preemption language in ERISA, in fact, is contained in section 1144. The actual structure of ERISA's provisions is unambiguous: None of the definitional, substantive, procedural or other provisions contain any preemption provisions at all except section 1144. Thus, it was obviously the drafter's intent that section 1144 establish and set forth the preemptive power of the act itself as a whole, as well as the preemptive effect of each individual provision of the act. Thus, the determination of whether the civil enforcement provision of the act (section 1132) preempts a state law remedy or enforcement scheme is controlled by the preemption analysis applicable under section 1144.
Under section 1144(a), the provisions of the act, including the civil enforcement section, "supersede any and all State laws insofar as they . . . relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title." This is commonly referred to as the "preemption provision."
Section 1144(b) is entitled "Construction and application" and delineates how section 1144 is to be applied. Section 1144(b)(2)(A) is commonly referred to as the "savings clause" and that provides:
"Except 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." (Emphasis added.)
Following the "savings clause" is the "deemer clause" which, in turn, forbids
application of state regulatory law to self-funded ERISA plans (i.e., a plan shall not be "deemed" to be an insurer, bank, etc.)
Further support for the conclusion that section 1132 (the civil remedy provisions) and section 1144 (the preemption provision) are co-equal provisions and that the civil enforcement scheme established under 1132 is subject to the preemption rules set forth in section 1144 is the fact that the savings clause expressly states that it applies to all the provisions of the subchapter. Sections 1132 and 1144 are both contained in the same subchapter. (Title 29, Chapter 18, Subchapter I.) Thus, Congress expressly provided that the civil enforcement provisions set forth in ERISA are not to be construed to exempt or relieve any person from any law which regulates insurance.
B. The McCarran-Ferguson Act mandates state control of claims handling issues and precludes application of section 1132 as an exclusive remedies provision.
Moreover, to construe either section 1132 or section 1144 any other way would conflict with - and be overridden by - the McCarran-Ferguson Act, 15 U.S.C. section 1011, et seq. The McCarran-Ferguson Act expressly provides that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . . unless such Act specifically relates to the business of insurance." (15 U.S.C. section 1012(b).)
As expressed by the U.S. Supreme Court in Securities and Exchange Commission v. National Securities, Inc. (1969) 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668, the purpose of the McCarran-Ferguson Act was to assure that activities of insurance companies in dealing with their policyholders would remain subject to state regulation.
And, as noted by the Ninth Circuit in Merchants Home Delivery Service, Inc. v. Frank B. Hall & Co., Inc. (9th Cir. 1995) 50 F.3d 1486, cert. den., 516 U.S. 964, 116 S.Ct. 418, the McCarran-Ferguson Act was specifically designed to prevent "inadvertent" preemption of state insurance laws by federal statutes of general application and Congress thus established its "inverse preemption" approach - meaning that a federal law that would otherwise preempt the state insurance law is itself preempted by McCarran-Ferguson, thus leaving the state law intact and enforceable, despite the otherwise expansive preemptive effect of the federal law.
The McCarran-Ferguson Act thus precludes any federal legislation from preempting state laws regulating the business of insurance unless the federal legislation is, itself, directly related to the business of insurance. (Merchants Home Delivery Service, Inc. v. Frank B. Hall & Co., Inc. (9th Cir. 1995) 50 F.3d 1486, cert. den., 516 U.S. 964, 116 S.Ct. 418.)
Thus, as delineated by the Ninth Circuit in Merchants Home Delivery, a federal statute cannot be enforced so long as the four following prongs are met:
(1) The federal statute does not "specifically relate" to the business of insurance;
(2) The acts challenged under the federal statute constitute the business of insurance;
(3) The state has enacted laws regulating the challenged acts; and,
(4) The state law would be superseded, impaired or invalidated by application of the federal statute.
Assuming the state law at issue is one prohibiting specified acts or practices in the investigation, handling or determination of a claim submitted under an insurance policy, and providing for imposition of civil liability for all damages resulting from the violation of the statute, the question, then, is whether applying 29 U.S.C. section 1132 (ERISA's civil enforcement section) would violate the McCarran-Ferguson Act's prohibitions and would thus be unenforceable. Addressing the McCarran-Ferguson Act's elements seriatim:
(1) Does ERISA specifically relate to the business of insurance?
As noted by the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson (1996) 517 U.S. 25, 116 S.Ct. 1103, in which the court uses the bankruptcy laws as an example, many federal statutes with potentially preemptive effect on state insurance laws use general language that does not appear to specifically relate to insurance. Where those statutes conflict with state law enacted for the purpose of regulating insurance, the McCarran- Ferguson Act's "antipreemption rule" will apply to prohibit federal preemption of those state laws and the state laws apply.
Obviously, ERISA does not relate, either generally or specifically, to the business of insurance. It relates to the business of pension plans and employee benefits. While employee benefits may be provided through the purchase of insurance, and ERISA would thus arguably have a potentially preemptive effect on state insurance laws, the effect would be collateral at best, much like bankruptcy laws might affect the business of insurance, and could not rationally be construed as a law specifically related to the business of insurance.
In fact, an older Ninth Circuit case specifically held that ERISA fell within the preemption provisions of the McCarran-Ferguson Act, thus necessarily determining that it was not a law specifically related to the business of insurance. (Hewlett-Packard Co. v. Barnes (9th Cir. 1978) 571 F.2d 502, cert. den., 439 U.S. 831, 99 S.Ct. 108.)
(2) Do the acts challenged under the federal law relate to the business of insurance?
The question here is whether the manner in which an insurer investigates, handles and determines a claim constitutes part of the business of insurance. As noted by one Supreme Court case interpreting the "business of insurance" component of the McCarran-Ferguson Act, a state statute aimed at protecting or regulating the relationship between the insurance company and policyholder, directly or indirectly are laws regulating the business of insurance. (Securities and Exchange Commission v. National Securities, Inc. (1969) 393 U.S. 453, 89 S.Ct. 564.)
And where the state itself determines that an activity constitutes the "business of insurance," the federal courts will give great weight to that determination. (Royal Drug Co., Inc. v. Group Life & Health Ins. Co. (5th Cir. 1977) 556 F.2d 1375, affd., 435 U.S. 903, 98 S.Ct. 2017.) Thus, if the legislation itself provides that the intent of the statute is to regulate the business of insurance, that will require the federal courts to give great weight to that conclusion.
In Stuart Circle Hospital Corp. v. Aetna (1993) 995 F.2d 500,503, the court
quoted the Supreme Court's decision in Metropolitan Life Ins. Co. v.
Massachusetts (1985) 471 U.S. 724, 743-744 to the effect that the concerns
addressed under the McCarran-Ferguson Act center around "the type of
policy which could be issued, its reliability, its interpretation, and
enforcement" as being among the core issues in the business of insurance
determination. (Emphasis added.)
Obviously, a state regulatory statute that expressly deals with the enforcement of the insured's policy rights falls squarely within the McCarran-Ferguson Act's provisions.
Other cases also support that conclusion. The court in Lowe v. Aarco-Am., Inc. (7th Cir. 1976) 536 F.2d 1160, in concluding that the business of insurance includes setting insurance rates and terms for financing premiums as well as disclosure of such terms, stated that the "business of insurance" includes more than `just' questions of validity and enforceability of insurance policies. Obviously, a statute regulating the appropriate handling of claims, and imposing civil liability for improperly handling claims, specifically relates to the enforceability of policies.
Also, in Klamath-Lake Pharmaceutical Ass'n v. Klamath Medical Service Bureau (9th Cir. 1983) 701 F.2d 1276, cert. den., 464 U.S. 822, 104 S.Ct. 88, the court held that Oregon's regulations banning unfair or deceptive acts or practices constituted regulation of the business of insurance under the Act.
And in Freier v. New York Life Ins. Co. (9th Cir. 1982) 679 F.2d 780, the court held that the relationship between an insurer making payments to a disabled employee under a group term policy issued to the employer was an activity that fell within the definition of business of insurance.
Even under the standard mantra that, in order to be considered part of the business of insurance, the targeted activity must have the effect of transferring or spreading policyholder's risk, the practice must be an integral party of a policy relationship and the practice must be limited to entities within the insurance industry, regulating the investigation and determination of claims obviously qualifies as part of the business of insurance. (Ticor Title Ins. Co. v. F.T.C. (3rd Cir. 1993) 998 F.2d 1129, cert. den., 510 U.S. 1190, 114 S.Ct. 1292.)
First, of course, if an insurer acts unreasonably or unfairly in the manner in which it handles claims, it is directly impacting the spreading of policyholder risk. Because the insurer is not paying on claims that it had assumed the risk for, it is leaving the policyholder bearing a risk that the insurer had accepted a premium to assume. And, obviously, the payment - or nonpayment - of claims is the very thing contracted for by the insured and is thus integral to the policy relationship. Lastly, of course, only insurers pay claims under insurance policies and the since payment of the claims represent the ultimate outcome of promising indemnification for contingent risks, is relevant only to the insurance industry.
Thus, legislation regulating the manner for payment of claims falls within the parameters of the business of insurance.
(3) Has the state enacted laws regulating the challenged acts?
That is the starting premise.
(4) Would the state law be superseded, impaired or invalidated by application of the federal statute.
This prong, too, is well met. Obviously, if ERISA's civil enforcement scheme were applied to limit the damages recoverable under the state law provisions prohibiting the mishandling of claims, it would do all three: supersede, impair and invalidate the state law.
Thus, the straightforward application of the McCarran-Ferguson Act precludes ERISA's preemption of a state law regulating claims handling, even where that state law imposes civil liability against an insurer (as opposed to a plan) in the course of that regulation.
And that, obviously, was the very reason Congress included the "savings clause" in ERISA's preemption provision. The "savings clause" is nothing more than an express acknowledgment that ERISA cannot usurp the states' regulation of insurance. In fact, the 8th Circuit specifically cited ERISA's savings clause as support for the principle that there is a strong federal policy of deferring to state regulation of insurance under the McCarran- Ferguson Act. (Wolfson v. Mutual Benefit Life Ins. Co. (8th Cir. 1995) 51 F.3d 141.)
2. Pilot Life analysis
The second half of the Supreme Court's decision Pilot Life is touted and feared as constituting an absolute bar to any state private right of action for damages resulting from improper claims handling. Federal circuit court cases, and various state appellate cases, issued after the Pilot Life decision have construed that case as expressly holding that state statutory regulation of claims handling practices are preempted by ERISA's enforcement provision irrespective of the construction and application of the preemption provision. (See, for example, Kanne v. Connecticut General Life Ins. Co. (9th Cir. 1988) 867 F.2d 489; Commercial Life Ins. Co. v. Superior Court (Juliano) (1988) 47 Cal.3d 473, 253 Cal.Rptr. 682; Greany v. Western Farm Bureau Life Ins. Co. (9th Cir. 1992) 973 f.2d 812.)
These cases, however, in their slavish desire to fulfill Pilot Life's mandate to protect ERISA plans at all costs, read far too much into the second half of the Pilot Life decision and extrapolated out of it conclusions that were never expressly stated in it.
First, the Supreme Court's discussion relied on for the proposition that ERISA's civil enforcement scheme is exclusive and immune from the savings clause is, in fact, dicta. All the court ultimately held was that the Alabama common law causes of action derived from general contract principles upon which the action was brought were not state laws "regulating insurance" and thus did not fall within the parameters of the savings clause in the first instance. In fact, in footnote 4 of the opinion, the court expressly declined to determine the issue raised by the insurer as to whether an insurance company should be protected from direct state regulation under the deemer clause if it is acting in the place of the plan's trustees while engaged in the processing and review of claims for benefits under the employee benefit plan. In framing that footnote, the court specifically stated that it would not decide that issue "[b]ecause we conclude that Dedeaux's state common law claims fall under the ERISA preemption clause and are not rescued by the savings clause."
Second, another distinct gap in the analysis applied to the Pilot Life decision by later courts, and which arises from the court's own inexact language, is the distinction between a civil enforcement scheme for processing of claims which is to be applied to the plan and a civil enforcement scheme for processing of claims which is to be applied to an insurer. There is no question that the Pilot Life decision contemplates the application of ERISA's civil enforcement scheme as the exclusive means of regulating the manner in which a plan processes claims, even if it does so through the auspices of the purchase of an insurance policy. But - and this is a very important but - the Supreme Court nowhere states that a state regulatory scheme that does fall within the McCarran-Ferguson Act is ineffective with respect to regulating the insurer, even as to the manner in which the insurer processes claims.
Indeed, subjecting insurers to state remedies for improper claims processing of claims under policies issued to ERISA plans does not imperil Congress's intent to protect ERISA plans from liability beyond the scope of section 1132. As the court expressed in Pilot Life, Congress's intent in establishing its exclusive civil enforcement scheme was to protect plans from differing standards among the states which would subject the plan to varying administrative requirements and would disrupt and delay the claims process. Congress also wanted to protect the financial integrity of the plan's assets by assuring that the plan's funds would not be depleted by awards of extra- contractual damages under varying state laws.
And if the state laws regulating claims processing applied to the plan, that analysis would be valid. But where the state law applies to the practices and procedures employed by insurance companies, even when they are processing claims under policies issued to ERISA plan beneficiaries, those rationales break down:
First, the insurer, with respect to claims under its non-ERISA policies (including policies issued to government plans and church plans which are exempted from ERISA preemption), is already subjected to varying state law administrative requirements and must conform its claims processing to different laws among the states in which it conducts business. Requiring the insurer to do the same with respect to the processing of claims under ERISA policies adds nothing to the burden the insurer already bears.
Second, state laws imposing damages beyond those permitted under ERISA against the insurance company do nothing to deplete the assets of the ERISA plan. Since state laws regulating insurance can be applied only to an insurer engaging in the business of insurance, and since insurers pay claims submitted under policies issued by them out of their own general accounts and do not pay claims out of the plan's ERISA account, any damages affect only the insurer's general account. As such, the plan's account is not impacted and cannot be depleted or affected by the state law in abrogation of section 1132.
Thus, Pilot Life can be narrowly construed to preclude imposition of state law remedies in the limited circumstances where the action for remedies beyond those permitted by section 1132 are sought from the plan as opposed to remedies permitted under state laws regulating insurance which are sought solely from the insurer. Conversely, a narrow construction of Pilot Life results in the conclusion that where the state law remedies impact only the insurer, and not the plan, section 1132 has no application.
But even assuming the Supreme Court actually meant what the later courts thought it meant, i.e., that ERISA's civil enforcement scheme is the exclusive means of attacking improper processing of a claim for benefits and that application of the savings clause to insurance company conduct is also barred, that does not preclude the possibility that the Supreme Court, in reexamining the issue, would not come to a different conclusion, for any number of reasons and on any number of analytical foundations:
First, as noted above, the language of the decision is sufficiently inexact to allow the court to reinterpret its analysis. Indeed, the decision never expressly states that its conclusion applies with respect to actions brought solely against insurance companies under state regulatory statutes falling within the McCarran-Ferguson Act where the damages sought would affect only the insurer's general account and would not impact the plan's funds. (Obviously, the plan's fund may be impacted in the same way every other purchaser would be impacted, i.e., the specter of higher premiums resulting from the judgments rendered against the insurer for its misconduct. But even that would be, at most, a peripheral impact because the plan could always choose to purchase its policy from an insurer who does not engage in the misconduct and who does not, therefore, suffer adverse judgments that impact its premium or rate structure.)
Second, the court, of late, has consistently and expansively reapproached its analysis with regard to its "relate to" holding in Pilot Life. (See, e.g., California Div. Of Labor Standards Enforcement v. Dillingham Const. Co. (1997) 519 U.S. 316, 117 S.Ct. 832, 842; DeBuono v. NYSA-ILA Med. and Clinical Serv. Fund (1997) 117 S.Ct. 1747; New York State Conf. Of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. (1995) 514 U.S. 645, 115 S.Ct. 1671.) There is no reason to think that it would be any more reluctant to reexamine the "savings clause" analysis as well.
Third, the court's later decision in FMC Corp. v. Holliday (1990) 498 U.S. 52, 111 S.Ct. 403 would additionally support the court's effort to distinguish its discussion in Pilot Life from a situation in which a state regulatory law, applicable only to insurers and not to plans, allows remedies over and above those specified in section 1132. In FMC, the court strongly distinguished between regulatory provisions applicable to a self-insured plan and a plan which fulfilled its fiduciary obligation to provide benefits through the purchase of insurance:
"An insurance company that insures a plan remains an insurer for purposes of state laws `purporting to regulate insurance' after application of the deemer clause. The insurance company is therefore not relieved from state insurance regulation.  Our decision, we acknowledge[d], `results in a distinction between insured and uninsured plans, leaving the former open to indirect regulation while the later are not.' . . . `By doing so, we merely give life to a distinction created by Congress in the "deemer clause," a distinction Congress is aware of and one it has chosen not to alter.'  By recognizing a distinction between insurers of plans and the contracts of those insurers, which are subject to direct state regulation, and self-insured employee benefit plans governed by ERISA, which are not, we observe Congress's presumed desire to reserve to the States the regulation of the `business of insurance.'" (Emphasis added.)
The court also went on to note:
"As we have pointed out . . ., the savings clause retains the independent effect of protecting state insurance regulation of insurance contracts purchased by employee benefit plans. . . . Our interpretation of the deemer clause makes clear that if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer's insurance contracts; if the plan is uninsured, the State may not regulate it. As a result, employers will not face `"conflicting or inconsistent State and local regulation of employee benefit plans."'" (Emphasis added.)
Thus, under FMC, the court, for the first time, did expressly and specifically distinguish between state regulation of ERISA plans and state regulation of insurance companies issuing policies to ERISA plans - a distinction it did not reach in Pilot Life.
Other appellate courts have begun to expound on this same distinction, upholding state insurance statutes against ERISA preemption arguments. (See, e.g., Seymour v. Blue Cross/Blue Shield (10th Cir. 1993) 988 F.2d 1020, 1024 ["while ERISA preempts state insurance laws as applied to self-funded ERISA plans, it does not preempt state insurance laws insofar as they regulate purchased insurance policies."]; Winchester v. Prudential Life Ins. Co. (10th Cir. 1992) 975 F.2d 1479, 1484-1485 [same]; Stuart Circle Hospital Corp. v. Aetna (1993) 995 F.2d 500,503-505; Blue Cross and Blue Shield v. St. Mary's Hospital (1993) 426 S.E.2d 117.)
And, lastly, there are two fundamental flaws in the Supreme Court's analysis in Pilot Life with respect to the "exclusive civil enforcement" portion of the opinion:
First, the court either ignored or overlooked the very specific statement made by Congress on the face of the savings clause that it applies to all the provisions of the subchapter and that sections 1132 and 1144 are both contained in the same subchapter. (Title 29, Chapter 18, Subchapter I.) Thus, the court did not acknowledge or address the fact that Congress expressly provided that the civil enforcement provisions set forth in ERISA are not to be construed so as to exempt or relieve any person from any law which regulates insurance.
Second, the court's conclusion is predicated on its analogy between the civil enforcement provisions of ERISA with the civil enforcement provisions of the LMRA and the rulings that the civil enforcement provisions of the LMRA were intended to be exclusive. The flaw in that analysis, however, is the fact that the LMRA has no savings clause provision like ERISA's. Obviously, ERISA's remedy provisions are intended to be exclusive with respect to claims against the plan, just like the LMRA's provisions are intended to be exclusive with respect to employee claims under collective bargaining agreements. But because the LMRA deals with employee contracts, it does not implicate insurance regulation and ERISA, of course, does.
Thus, it is reasonable to expect, given the progress of the Supreme Court's analyses of ERISA issues during the last few years, that it would "distinguish" or "limit" its Pilot Life decision if faced with a state regulatory remedies provision which expressly applied to entities in the business of insurance and which impose damages only with respect to that entity's general account.