Appendix — Kanne v. Connecticut General Life Insurance

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IN THE |

SUPREME COURT ~~

OF THE UNITED STATES

October Term, 1988

THEODORE KANNE and

BEATRIZ KANNE,

Petitioners,

vs.

CONNECTICUT GENERAL

“-LIFE INS. CO.,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

LEONARD SACKS

15915 Ventura Boulevard

Suite 304

Encino, California 91436

(818) 906-7200

Attorney for Petitioners

THEODORE KANNE and

Vol. li of II BEATRIZ KANNE,

APPENDIX A

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

THEODORE KANNE, and NO. CV

BEATRIZ KANNE, 83-2261-ER

Plaintiffs,

CONNECTICUT GENERAL LIFE

INSURANCE COMPANY, a AMENDED

Connecticut corporation; MEMORANDUM

THE LINCOLN NATIONAL LIFE DECISION

Indiana corporation;

METROPOLITAN LIFE INSURANCE

COMPANY, a New York cor-

poration; HARLOW CARPETS INC.

a California corporation;

HART, SHAFFNER & MARX, a

General Partnership; DOES

1 through 50, Inclusive,

)

INSURANCE COMPANY, an )

)

Defendants.

This matter came on regularly for trial

on March 6, 1984, before the Honorable

Edward Rafeedie, United States District

Judge. Plaintiffs Theodore Kanne and

Beatriz Kanne appeared with their attorneys

of record, Carol A. Hay and Ernest

A-1l

Franceschi, Jr. Defendant Connecticut

General Life Insurance Company appeared

through its attorneys of record, Adams,

Duque & Hazeltine, by James Cline and

Suzette Clover. The Court, heard the

testimony of witnesses, having received

oral and documentary evidence in the mat-

ter and having considered the pleadings

and all of the records and files herein,

renders its decision as follows:

I. BACKGROUND

| Procedural

On December 17, 1982 plaintiffs Theodore

Kanne ("Theodore") and Beatriz Kanne

("Beatriz") filed this civil action in the

Superior Court of the State of California

for the County of Los Angeles. The defen-

dants at that time were Connecticut General

Life Insurance Company ("Connecticut

General"), Lincoln National Life, Metropoli-

tan Life Insurance Company ("Metropolitan"),

A-2

Harlow Carpets, Inc. ("Harlow Carpets")

and Hart, Shaffner & Marx. The complaint

sought compensatory and punitive damages

under state law for (1) breach of contract

by failing to pay claims for medical bene-

fits within a reasonable period of time,

(2) breach of the implied covenant of good

faith and fair dealing, (3) breach of fidu-

Clary duties, (4) common law fraud, and

(5) breach of statutory duties under

California Insurance Code § 790.03.

Connecticut General and Metropolitan

answered the complaint on March 18, 1983.

In their answer, they denied plaintiffs'

allegations and raised affirmative defenses,

including failure to state a claim for

relief as to all causes of action, full

payment of benefits due, privilege to

assert one's rights in good faitn, the bars

of California Insurance Code § 10111 and

Civil Code § 3302, failure to mitigate

A-3

damages, preemption by the Employee Retire-

ment Income Security Act of 1974, 29 U.S.C.

§ 1001-1381, ("ERISA"), failure to exhaust

administrative remedies under ERISA, and

the unconstitutionality of allowing punitive

damages against the defendant for breach of

the covenant of good faith and fair dealing.

On February 4, 1983, plaintiffs filed a

Motion to Remand. The Court granted the

motion on March 24, 1983. After the par-

ties stipulated to the dismissal of Lincoln

National Life Insurance Company and Harlow

Carpets on March 3, 1983, the action again

was removed to federal court on April 8,

1983 on the basis of diversity jurisdiction.

On April 19, 1983, Hart, Shaffner & Marx

filed a Motion to Dismiss Extra-Contractual

Claims, which the Court granted on May 23,

1983. On April 13, 1983, Metropolitan

filed a Motion for Summary Judgment, which

the Court granted on June 17, 1983. Although

A-4

plaintiffs appealed these determinations,

they subsequently dismissed their appeals.

Finally, upon reaching a settlement with

Hart, Shaffner & Marx on November 1, 1983,

plaintiffs requested that Hart, Shaffner &

Marx be dismissed with prejudice. The

Court granted this request.

fs Factual

On May 23, 1981, Theodore was an em-

ployee of Harlow Carpets. Since Connecticut

General had issued a group medical insur-

ance policy (the "policy") to the ABC Trust,

of which Harlow Carpets was a member,

Theodore was covered as an eligible em-

ployee under the policy. The ABC Trust is

administered by the Associated Builders and

Contractors in Washington, D.C. Similarly,

on the same date, Beatriz was covered as

an eligible employee under as

mAh

self-funded

administered by Metropolitan Life Insurance

Company .2/

Jonathan Kanne ("Jonathan") was born on

May 23, 1981 to Theodore and Beatriz while

they were vacationing in Holland. Although

the policy provided primary coverage for

Jonathan only from the date of application

by his parents, ABC Trust later authorized

coverage retroactive to May 23, 1981. The

Hart, Shaffner & Marx policy provided

Jonathan with secondary coverage from May

23, 1981 through January 31, 1982.

Jonathan was born two months early with

congestive heart failure. Within two weeks

he was diagnosed as being cyanotic (a "blue

baby") as a result of the heart failure.

Shortly thereafter, Theodore provided this

information to Connecticut General.

Doctors in Holland subsequently recom-

mended that Jonathan be treated at Moffitt

Hospital in San Francisco. Theodore advised

A-6

Metropolitan of this recommendation and

requested an advance payment for air

transportation fees on KLM, Royal Dutch

Airlines, in the sum of $3,000.00 This

amount was to cover first class airfare

for Beatriz and Jonathan, oxygen for

Jonathan while in first class, and modifi-

cation of the plane's electrical system

necessitated by Jonathan's need for oxygen.

Because Connecticut General and Metro-

politan refused to advance any portion of

the requested sums, Theodore drove to Mexico

to borrow the necessary money from his

father. Jonathan thereafter was transported

from Amsterdam to Los Angeles by KLM Air-

lines and from Los Angeles to San Francisco

by Schaffer Air Ambulance.

After Jonathan arrived in San Francisco,

Theodore obtained reimbursement in the sum

of $698.40 from Metropolitan. Theodore

then sought to recover the balance from

r= /

Connecticut General under a coordination of

benefits arrangement between the two insur-

ance companies.

The Kannes dealt with Rosa Monostroi

("Rosa"), the Connecticut General Senior

Benefits Analyst with primary responsibility

for handling claims of the ABC Trust in-

volving employees and dependents of Harlow

Carpets. Rosa initially rejected the KLM

claim on the ground that San Francisco was

not the nearest hospital to Amsterdam.

Thereafter, she changed her reasoning,

determining instead that the treatment

Jonathan was to receive in San Francisco

was neither essential nor medically

necessary .2/ She based these decisions on

the wording of the policy which covers:

"Charges for professional ambulance services

to or from the nearest hospital where neces-

Sary care and treatment can be given

)

Rosa, however, determined that the

A-8

Air Ambulance bill was covered by the policy

and, therefore, paid this claim promptly.

On October 22, 1982, Los Angeles Chil-

dren's Hospital mailed to Connecticut

General medical bills incurred by Jonathan

for emergency surgery on September 15, 1981.

Similarly, other medical providers involved

in this hospital stay presented their medi-

cal bills to Connecticut General within a

reasonable time after they were incurred.

Notwithstanding provisions in the policy

booklet calling for immediate payment upon

receipt of proof of loss, Connecticut

General delayed payment of a majority of

these medical bills for three to eleven

hs after presentation. Similarly,

mon

Connecticut General delayed payment for

over eight months of the claims sustained

by Jonathan's hospitalization at Los Angeles

Children's Hospital beginning on October 16,

1981. Theodore repeatedly telephoned Rosa

he claims file docu-

40)

1.)

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ments Kept by Connecticut General, however,

show that an itemized bill from Children's

TA en 3 -~ 7 hd hk = - 7 m~ —— ~ 20 Q ) 1 £

Hospital in the total amount of $89,840.16

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waS received by Connecticut General on

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itemized bill for the $69,141.44, Connecticut

General, as stated above, admits receiving

the Children's Hospital bill in the sum of

$89,840.16 on December 29, 1981. The bal-

ance forward on that bill was $69,141.44.

Rosa explained that she thought this figure

read $9,144.00, and that it already had

been paid.

II. DISCUSSION

A. Federal Preemption

Connecticut General argues that the

Employee Retirement Income Security Act of

1974, 29 U.S.C. §§ 1001-1381, ("ERISA"),

preempts all of plaintiffs' claims for re-

lief. While under the facts of the case at

hand plaintiffs initially could have sued

in federal court under ERISA for benefits

due and breach of fiduciary duty, they chose

instead to rely solely upon state law. As

explained below, plaintiffs as masters of

their complaint, were free to make this

choice since their state law claims are not

preempted by ERISA.

he fact that ERISA may apply to a par-

icular dispute because the plan under

scrutiny is an ERISA plan -- as is the case

here -- does not by itself answer the diffi-

cult question of ERISA's effect on state law

claims against an insurance company. Rather,

in order to resolve this issue, it is neces-

ary to distinguish between state laws which

regulate an employee benefit plan and those

which regulate an insurance company from

which a plan purchases insurance. Any law

directly regulating an employee benefit

plan is preempted, 29 U.S.C. 1144(a), but

laws regulating an insurance company or

policy from an insurance company are saved

from preemption. Eversole v. Metropolitan

Life Insurance Co., Inc., 500 F. Supp. 1162

C.D. CA 1980); Accord McLaughlin v

ecticu seneral Life Insurance Co., 565

F. Supp. 434 (N.D. CA 1983).

Section 1144(b)(2)(A) saves from pre-

emption state laws which "regulate insur-

ance." The phrase "regulating the business

of insurance" has been defined as "statutes

aimed at protecting or regulating this rela-

tionship, directly or indirectly." See

Eversole, 500 F. Supp at 1168, relying on

SEC v. National Securities, Inc., 393 U.S.

453, 460 (1969); McLaughlin, 565 F. Supp.

at 443. Under the facts of the case at

hand, the purpose of the state laws under-

lying plaintiffs' claims is to secure the

insured's rights as policyholders. As a

consequence, these claims should be treated

as insurance regulations which are saved

from preemption as was the case in Eversole

and McLaughlin. This conclusion is further

Strengthened by § 1144(b)(2)(B), the "deemer

clause." That subsection prohibits a state

from deeming an employee benefit plan to be

A135

an insurance company for the purpose of any

state law regulating insurance. The effect

of this clause is to prohibit a state from

regulating a self-insured employee benefit

plan as if it were an insurance company.

Eversole, 500 F. Supp at 1169; McLaughlin,

565 F. Supp. at 443.

Russell v. Massachusetts Mutual Life

Insurance Co., 722 F.2d 482 (9th Cir. 1983)

does not compel a different result. In

Russell the plans in question were self-

funded employee benefit plans. Neither in-

volved insurance policies. As a consequence,

the savings clause of ERISA did not serve

to protect the plaintiff's state law claims

which were directed to the plans. In con-

trast, here, as in Eversole and McLaughlin,

Connecticut General issued a group insur-

ance policy to a plan. Since plaintiffs'

Claims are directed to this policy, the

Savings clause is triggered. Russell,

A-14

a T_T ATT NS SS Se eee Ce

therefore, does not alter the rule that any

law directly regulating an employee benefit

plan is preempted, but laws regulating an

insurance company or policy purchased from

an insurance company are saved from preemp-

tion. See Eversole, 500 F. Supp. at 1170.

B. Substantive Claims

1. Coverage Under the Policy

(a) KLM Airline Ticket

Rules governing the interpretation of

insurance contracts in California are well

settled. First, ambiguities are construed

against the insurance company. Therefore,

coverage clauses are interpreted broadly in

favor of coverage, while exclusions are

interpreted narrowly. McLaughlin, 565 F.

Supp. 434, 440 (N.D. Cal. 1983); see also

State Farm Mutual Automobile Ins. Co. v.

Partridge, 10 Cal.3d 94, 101-02, 109 Cal.

Rptr. 811, 816 (1973). Second, if two or

more interpretations are reasonable, the

court must adopt the interpretation which

favors coverage. "If semantically per-

missible, an insurance contract will be

given such interpretation as will fairly

achieve its object of securing indemnity

to the insured for the losses to which the

insurance relates." State Farm Mutual Auto-

mobile Ins. Co. v. Jacober, 10 Cal. 3d 193,

203, 110 Cal. Rptr. 1, 7 (1973). In other

words the insurer must establish that its

interpretation supporting denial is the

only reasonable construction of the contract.

McLaughlin, 565 F. Supp. at 441. Third,

the insurance contract must be considered

in light of the insured's reasonable expec-

tation of coverage. If coverage reasonably

may be expected but is not to be provided,

notice of noncoverage must be conspicuous,

plain, and clear. Id.

Even if the ABC Trust, on behalf of

1ts employer members, bargained for this

A-16

2 ae ee

contract, the California rules outlined

above apply to the facts of this case.

See McLaughlin, 565 F. Supp. 434; Jones v.

Crown Life Ins. Co., 86 Cal. App.3d 630,

150 Cal. Rptr. 375 (1978). Therefore, in

order to prevail on the issue of the KLM

bill, Connecticut General must show either

that the clause unambiguously excludes

coverage or that the clause cannot be inter-

preted reasonably to provide coverage. As

Stated above, the clause in question covers

“charges for professional ambulance service

to or from the nearest hospital where neces-

Sary care and treatment can be given." At

various times Connecticut General contended

that the claim for the KLM flight was not

subject to coverage because: (1) it was a

pleasure flight; (2) the services were not

performed at the nearest hospital where

treatment could have been provided; and

(3) the treatment was not essential and

A-17

medically necessary.

The clause, however, does not specific-

ally exclude from coverage the use of a

passenger airline, does not state criteria

to determine what is the nearest hospital

where treatment could be received, and does

not provide any guidance as to when and

under what circumstances care and treatment

is necessary. Furthermore, it is reasonable

to interpret the clause as providing cover-

age for transportation upon a passenger

airline to a hospital recommended by doctors

for treatment which the doctors believe is

essential and medically necessary. Although

the doctors in San Francisco determined

that Jonathan was too small and had to grow

before the operation could be performed,

the doctors in Holland thought that an

immediate operation was necessary.

Even if the clause cannot be interpreted

reasonably to provide coverage, Connecticut

A-18

General is liable for the KLM bill because

it breached its contractual duty to make an

adequate investigation of plaintiffs'

claims. The duty to investigate possible

bases for an insured's claim includes the

duty to investigate grounds for denying the

claim. Prior to rejecting the claim for

the KLM bill, Connecticut General neither

investigated whether Moffitt Hospital was

the nearest hospital nor whether the treat-

ment Jonathan was to receive there was

medically necessary. For example,

Connecticut General never discussed with

the physicians at Moffitt Hospital or with

the referring physicians in Holland the ne-

cessity of Jonathan's receiving treatment at

Moffitt Hospital as opposed to a hospital in

Europe. Failure to substantiate the grounds

for rejection through proper investigation

renders Connecticut General liable for the

claim.

A- l 9

For either reason set forth above,

Connecticut General is liable for the KLM

bill. Because Hart, Snaffner & Marx has

paid $698.40, its share of the KLM bill

under the coordination of benefits agree-

ment, Connecticut General is liable for

80% of the remaining sum of $2,793.60 or

2,234.88.

(b) Failure to Pay Other

Claims Immediately

Page 34 of the plan booklet states:

"All benefits other than disability income

benefits will be paid by Connecticut General

immediately upon receipt of due proof."

Connecticut General breached its contract

with plaintiffs by failing to comply with

this term.

The evidence at trial revealed that

payment on many of the other claims was

delayed for over nine months. For example,

the $69,141.44 issued to Children's Hospital

A-20

Zs Breach of the Covenant

of Good Faith and Fair

Dealing

In addition to the duties imposed by

the express terms of an agreement, the law

in California implies in every contract a

covenant of good faith and fair dealing.

Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d

809, 157 Cal. Rptr. 482 (1979), cert. denied,

445 U.S. 912 (1980). This implied promise

requires each contracting party to refrain

from acting in any way that would impede

the right of the other to receive the bene-

fits of the agreement. Egan, 24 Cal.3d at

Sis, 169 Cal. Rptr. at 695.

Denial of a claim for insurance bene-

fits where benefits were in fact due under

an insurance contract is not, in and of

itself, a breach of the implied covenant;

an insurer is not required to pay every

claim presented to it. Austero v. National

Cas. Co., 84 Cal.App.3d 1, 30, 148 Cal.Rptr.

A-22

653, 672.

Instead, in order to be liable for

breach of the implied covenant of good

faith and fair dealing, Connecticut General

must have acted unreasonably and in bad

faith. Silberg v. California Life Ins. Co.,

li Cal.3@ 452, 461, 113 Cal. Rptr. fii

(1974); Austero, 84 Cal. App.3d at 27, 148

Cal. Rptr. at 670. Bad faith, in this con-

text, is an imprecise label for what essenti-

ally is some kind of unreasonable insurer

conduct. Austero, 84 Cal.App.3d at 27 n.22,

148 Cal.Rptr. at 670 n.22. Thus, generally,

the substance or gravamen of the wrong in

first party insurance cases (as distinguished

from third party insurance cases where the

insurance company is being sued for refusing

to accept the third party's offer to settle

his claim) is an unreasonable refusal to pay

benefits due under the terms of the policy.

The benefit contracted for by an insured

A-23

under the terms of a policy is the avail-

ability of money promptly upon the occur-

rence of a particular event. When an

insurer refuses unreasonably to make a

payment of the benefit due, or when the

insurer does not pay promptly, it deprives

the insured of the essence of the bargain.

The insured bargained for prompt payment,

not a right of action against the insurer.

Austero, 84 Cal. App.3d at 30, 148 Cal.

Rptr. at 6/70.

The facts of this case go beyond the

typical first party insurance case in cua

all but one of the claims presented (the

KLM airline ticket) have been paid. None-

theless, the test of liability in this case

1s the same -- whether Connecticut General's

failure to investigate possible bases that

may have supported plaintiffs' claims as

well as its failure to pay these claims

promptly was unreasonable.

A-24

From the evidence presented at trial,

this Court has concluded that Connecticut

General acted unreasonabl'

- 4

> 9

()

As stated previously, payment on several of

the claims was delayed for over nine months.

In addition, Connecticut General failed to

investigate several of the ciaims, specific-

ally, the KLM airline ticket, as well as

the status of the $69,141.40 bill. Because

Connecticut General acted in an unreasonable

manner in handling plaintiffs' claims,

Connecticut General breached the implied

covenant of good faith and fair dealing.

This lawsuit could have been avoided

had there been better communication between

the parties. While both sides share respon-

Sibility for this breakdown in communication,

most of the blame rests with Connecticut

General, a sophisticated insurance company

whose obligation is to process claims in a

timely, efficient, and cordial manner.

AMW~Zs

People insure themselves for peace of mind

and security. To protect these interests,

it 1s essential that an insurer fully in-

quire into the possible bases that might

Support the insured's claim and act promptly.

In this case, Connecticut General became

overly pedantic and insensitive to plain-

tiffs during their time of great stress.

The Court does not find that the plain-

tiffs were negligent in the submission of

their claims. While they may not have

acted in strict conformity with the defen-

dants' requirements, their failure to do so

was reasonable under all of the circumstances.

Early on, defendants were placed on notice

that plaintiff's child was seriously ill,

and would require extensive hospitalization

and treatment. Repeated requests for pay-

ment of the bills were made to the claims

representative, and copies of the bills

were in defendants' possession. Under these

A-26

circumstances, it is not proper for the

insurer to sit back and delay payment of

the claims, under the pretextual theory

that the plaintiffs have not dotted all the

"I's" and crossed all the "T's". On the

contrary, the insurer has the duty to take

the initiative to see to it that the

promised protection is delivered when

needed. It must act to facilitate the

claims instead of searching for reasons not

to do so.

3. Breach of Fiduciary Duty

Plaintiffs argue that Connecticut

General breached its fiduciary duties in

its dealings with them. California law,

however, does not recognize an action for

breach of fiduciary duty between an insurer

and an insured.

An insurance policy is a contract. As

such, there is implied within every insur-

ance policy a duty of good faith and fair

dealing. While this duty is fiduciary in

nature, it does not create a fiduciary

relationship. See, Spindle v. Chubb/Pacific

Indemnity Group, 89 Cal. App.3d 706, 712,

152 Cal.Rptr. 776, 780 (1979).

In the insurance context, the implied

covenant of good faith and fair dealing re-

guires no more than "that each party is

prevented from interfering with the other's

right to benefit from the contract."

Miller v. Elite Ins. Co., 100 Cal. App.3d

739, 756, 161 Cai. Rotr. 322; 331 (1980). 4

It does not further require that the insurer

place the insured's interests above its own

as would be the case were the insured a

fiduciary. The Miller court also noted

that "where a conflict of interest emerges,

the carrier has the obligation of protecting

the interests of the insured [only] equally

with his own." Miller, 100 Cal. App.3d at

756; 161 Cal. Rptr. at 331; see also, Egan

A-28

v. Mutual of Omaha Ins. Co., 24 Cal.3d at

818; 169 Cal. Rptr. at 695 (1979); Silberg,

aa Gee eoe @t 460, 113 Cal. Rptr. at 71/7.

An insurance company, moreover, is

privileged, in pursuing its own economic

interests, to assert its legal rights.

Fletcher v. Western National Life Insurance

Co., 10 Cal. App.3d 376; 89 Cal. Rptr. 78

(1970).

[A]n insurer is not required to

pay every claim presented to it.

Besides the duty to deal fairly

with the insured, the insurer

also has a duty to its other

policyholders and to the stock-

holders (if it is such a company)

not to dissipate its reserves

through payment of meritless

claims. Such a practice inevit-

ably would prejudice the insurance

seeking public because of the

necessity to increase rates, and

would finally drive the insurer

out of business.

Austero, 84 Cal. App.3d at 30, 148

eis MOCr. at 672.

Finally, as stated in McLaughlin:

it strains credulity to suggest,

as defendant does here, that when

A-29

an insurance company is the fidu-

ciary [under ERISA] making claims

decisions under a group policy,

that it is due the same deference

accorded to trustees who have no

financial interest in their deci-

sions. There is an inherent

conflict of interest between an

insurance company's duties to

plan participants and to its

policyholders. To remedy this

conflict, California insurance

law holds insurers to fiduciary

standards by inter alia applying

Strict rules of construction

against the insurer. McLaughlin,

565 F.Supp at 447 n.9.

In this case this Court has applied

strict rules of construction against

Connecticut General in order to remedy the

inherent conflict of interest between its

duties to its plan participants and its

duties to its policyholders. Even were

Connecticut General a fiduciary under ERISA,

it would not be a fiduciary under California

law. Under that law, while Connecticut

General is obliged to act in good faith and

deal fairly, this is not a fiduciary duty.

4. Fraud

Plaintiffs' complaint alleges a cause

of action for fraud based upon Connecticut

General's alleged promises to them which

plaintiffs claim were made without intent

to perform. pecifically, plaintiffs con-

tend that the policy contained promises

that any expenses incurred by reason of

Jonathan's medical problems, including his

air fare from Holland to Los Angeles, would

be covered in full by coordination of bene-

fits between the various insurance companies

insuring plaintiffs. Plaintiffs further

contend that they were induced by these

promises to purchase a policy, and also

relied upon the representation to refrain

from procuring other insurance.

In order to prevail on their fraud

claim, plaintiffs needed to show misrepre-

sentation, Knowledge of falsity, intent to

defraud -- that is, intent to induce

A-31

reliance -- justifiable reliance, and re-

sulting damage. 4 Witkin, Summary of

California Law Torts § 466 at 2711 (8th ed.

1974). The evidence at trial fails to

Support each of these elements. Connecticut

General did not make any false representa- -

tions that any medical expenses resulting

from illness to Jonathan would be covered

by the policy and paid promptly. The

liability in this case stems from Connecticut

General's failure to comply with their own

internal regulations rather than from

Connecticut General's intent tc defraud.

5. Breach of the Statutory

Duties Imposed by Insur-

ance Code Section

790.83th)

Plaintiffs assert that Connecticut

General violated §§ 790.03(h)(2) and

790.03 (h)(3) of the Claifornia Insurance

Code. These sections prohibit respectively,

the failure "to acknowledge and act

A-32

reasonably promptly upon communications with

respect to claims arising under insurance

policies [,]" and the failure "to adopt and

implement reasonable standards for the prompt

investigation and processing of claims

arising under insurance policies.”

Connecticut General violated § 790.03(h)

(2) by failing to acknowledge and act reason-

ably promptly upon the Kanne's claims, not-

withstanding Theodore's repeated efforts to

obtain payment. Theodore'’s many telephone

calls to Connecticut General were unproduc-

tive. Eventually, he became so frustrated

that following Jonatnan's release from the

hospital in February 1982, Theodore went to

see Rosa. Although he presented to her, on

that occasion, a number of the unpaid bills,

which did not include the Children's

Hospital bill in the sum of $69,141.40,

several of these bills remained unpaid for

many months thereafter.

A-33

Connecticut General, however, did not

violate § 790.03(h)(3). Mr. Hanna, the

Complex Manager at Connecticut General

testified that Connecticut General has

adopted and implemented standards for the

prompt, accurate, and courteous investiga-

tion and processing of claims of policy-

holders. These standards are reasonable.

Thus, although Rosa did not comply with

these standards in handling the Kanne's

claims, Connecticut General did not violate

§ 790.03(h) (3).

C. Exemplary And Other Damages

Were plaintiffs to have prevailed on

their breach of contract claim alone, they

would be entitled only to the award of com-

pensatory damages set forth above for the

KLM ticket. Civil Code § 3294 provides:

In an action for the breach of an

obligation not arising from con-

tract, where the defendant has

been guilty of oppression, fraud,

or malice, express or implied, the

A-34

plaintiff, in addition to the

actual damages, may recover damages

for the sake of example and by way

of punishing the defendant.

Punitive damages thus are not available in

an action based solely upon breach of a con-

tractual obligation, even where the breach

is intentional, willful, or in bad faith.

However, where an action also sounds in

tort, exemplary damages may be recovered

upon proper showing of malice, fraud or

oppression, even though the tort incident-

ally involves a breach of contract. Miller

v. National American Life Insurance Co. of

California, 54 Cal.App.3d 331, 336, 126 Cal.

Bptr. 34, 4323 (39763.

Plaintiffs, therefore, may be entitled

to punitive damages on the tort theory on

which they have prevailed, breach of the

implied covenant of good faith and fair

dealing. The mere fact that an insurer has

breached its duty of good faith and fair

dealing by acting unreasonably in handling

a claim, however, does not mean that the

insurance company automatically is liable

for exemplary damages. Austero, 84 Cal.

App.3d at 36, 148 Cal. Rptr. at 676;

Sanpenra, £1 Cal.3d at 462, 113 Cal. Rptr.

at 718. Exemplary damages may be awarded

only where there is oppression, fraud,

malice to vex, annoy or injure, or where

there is a conscious disregard of a plain-

tiff's rights. Miller v. Elite Insurance

Co., 100 Cal. App.3d 759, 161 Cal. Rptr.

322 (1980). Thus, to be liable for puni-

tive damages on a breach of good faith and

fair dealing claim an insurer must have

acted with actual malice which may be in-

ferred from the circumstances of the case.

Miller, 100 Cal. App.3d at 758, 161 Cal.

Rptr. at 333, (citing Richardson v. Em-

ployer's Liability Assurance Corp., 25 Cal.

Mepsea 232, 245; 102 Cal. Rptr. 547, 556

A-36

= |

(1972)); See also BAJI 6.94 and 14.71.

The evidence presented at trial estab-

lished that Connecticut General acted with

actual malice towards the Kannes. Connecticut

General consciously disregarded the Kannes'

rights by failing to process their claims

in a prompt manner, by failing to investi-

gate their claims, and by interpreting some

of their claims in an unreasonable manner.

Connecticut General's breach of the

implied covenant of good faith and fair

dealing, and violation of Insurance Code

§790.03(h)(2) were the proximate and direct

cause of all loss, damage, emotional dis-

tress, embarrassment and fear of denial of

medical treatment suffered by plaintiffs.

Plaintiffs have suffered emotional distress,

humiliation and embarrassment to their

damage in the sum of $ 250,000.00 . In

addition, plaintiffs are entitled to exemplary

damages in the sum of $500,000.00, an amount

A-37/

which the Court believes is sufficient to

deter Connecticut General and other such

insurance companies from treating their

policyholders and insureds in the manner

in which the Kanne's have been treated.

D. ATTORNEY'S FEES

In the prayer of the complaint, plain-

tiffs seek to recover attorney's fees as an

element of damages. In California, in the

absence of an attorney's fee clause in the

applicable insurance policy, attorney's fees

are not recoverable ina bad faith action

against an insurance company. Moore v.

American United Life Insurance Co., 150

Cal. App.3d 610, 644; 197 Cal. Rptr. 878,

900 (1984). The question, therefore, be-

comes whether or not there is an attorney's

fee provision in the insurance contract

between the Kannes and Connecticut General.

The policy provides in pertinent part:

—

A= 3Io

SUMMARY PLAN DESCRIPTION

(Continued)

Under ERISA there are steps

you can take to enforce the above

rights. For instance, if you

request materials from the plan

and do not receive them within 30

days, you may file suit ina fed-

eral court. In such a case, the

court may require the Plan Ad-

ministrator to provide the mater-

ials and pay you up to $100 a

day until you receive the materials,

unless the materials were not sent

because of reasons beyond the

control of the Administrator.

If you have a claim for bene-

fits which is denied or ignored,

in whole or in part, you may

file suit in a state or federal

court. If it should happen that

plan fiduciaries misuse the plan's

money or if you are discriminated

against for asserting your rights,

you may seek assistance from the

U.S. Department of Labor, or you

may file suit in a federal court.

The court will decide who should

pay court costs and legal fees.

If you are successful the court

may order the person you have sued

to pay these costs and fees. If

you lose, the court may order you

to pay these costs and fees, for

example, if it finds your claim

is frivolous.

ean

If you have any questions

about your plan, you should con-

tact the Plan Administrator. If

you have any questions about this

Statement or about your rights

under ERISA, you should contact

the nearest Area office of the

U.S. Labor - Management Services

Administration, Department of Labor.

This summary plan description is meant

to provide policyholders with an under-

Standing of their rights under ERISA such

as those set forth in 29 U.S.C.§1132(g).

That section states that: "In any action

under this subchapter by a participant,

beneficiary, or fiduciary, the court on

its discretion may allow a reasonable

attorney's fee and costs of action to

Gither party."

Thus, although the summary plan descrip-

tion does not expressly restrict the Court's

discretion to award attorney's fees to ac-

tions brought under ERISA, the description

Should be interpreted in this fashion. As

See: Poca ICT NSE E

a consequence, since the Kannes chose to

proceed only under state law, the Court has

no power to award them attorney's fees in

this action. They are, however, entitled

to their costs.

LET JUDGMENT BE ENTERED ACCORDINGLY.

DATED: January 23 1985.

/s/

EDWARD RAFEEDIE

United States District

Judge

FOOTNOTES

1. Although Beatriz was not covered as

an eligible employee under the policy,

Beatriz as Theodore's spouse is a party to

the insurance contract and, therefore, has

standing to sue for the claims asserted.

The policy booklet states at page 4 that

"you and your family members are eligible

to participate in this plan .. ." and

further defines family members as one's

spouse. Under the policy, therefore,

Beatriz is able to recover expenses in-

curred on behalf of a dependent to the same

extent as Theodore. Moreover, it is reason-

ably foreseeable that Beatriz, in addition

to Theodore, could suffer emotional dis-

tress from Connecticut General's improper

handling of the Kanne family's claims.

2. In addition, she, at one time, told

Theodore that the flight was not covered

A-42

because it was a "pleasure trip."

cf. McLaughlin v. Connecticut General,

965 F. Supp. 434, 453 (N.D. CA 1983) hold-

ing that both Mr. and Mrs. McLaughlin were

parties to the insurance contract, he as

the "employee" and she as his "dependent"

and thus both had standing to seek damages

for emotional distress and other injuries

for breech of the implied covenant.

— - : tap

or = ees r= = a ~

rE ee oe a aaa

RES pe array FT RE

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THEODORE KANNE and BEATRIZ

KANNE, No. 85-5641

, Plaintiffs-Appellees, SC. to.

: CV 83-2261i-

CONNECTICUT GENERAL LIFE ER

INSURANCE COMPANY,

Defendant/Appellant,

LINCOLN NATIONAL LIFE INSURANCE

COMPANY and HARLOW CARPETS,

INC.,

Defendants.

THEODORE KANNE and BEATRIZ

cai No. 85-5642

Plaintiffs-Appellants,

V o

CONNECTICUT GENERAL LIFE OPINION

INSURANCE COMPANY,

Defendant-Appellee.

Argued and Submitted

April 7, 1986-Pasadena, California

Withdrawn from Submission July 2, 1986

Resubmitted and Filed June 4, 1987

Before: Betty B. Fletcher and Harry Pregerson,

Circuit Judges, and Philip C. Wilkins,*

District Judge.

Per Curiam

Appeal from the United States District Court

for the Central District of California

Edward Rafeedie, District Judge, Presiding

SUMMARY

Insurance

Appeal from judgment. Reversed.

This action arises from appellant

Connecticut General's obligation to pay the

costs for appellees' (the Kannes) son. The

Kannes prevailed on two state common-law

causes of action: breach of contract and

breach of duty of good faith and fair deal-

ing, and one statutory cause of action under

the California Insurance Code for failure

to pay claims reasonably promptly.

*Honorable Philip C. Wilkins, Senior United

States District Judge, Eastern District of

California, sitting by designation.

B-45

Connecticut General contends that these

state-law claims are preempted by the

Employee Retirement Income Security Act

(ERISA).

[1] The Supreme Court has held that

state common law causes of action asserting

improper processing of a claim are pre-

empted by federal law. [2] Reading two

recent Supreme Court decisions together

compels this court to conclude that the

Kannes' claim that transportation costs are

1eimbursable under the insurance policy is

also preempted.

COUNSEL

Leonard Sacks, Encino, California, Carol A.

Hay, and Andrew O. Feringa, Lakewood,

California, for the plaintiffs-appellees-

appellants.

James S. Cline, Suzette Clover, David L.

Bacon, and Bruce A. Beckman, Los Angeles,

California, for the defendants-appellants-

appellees.

OPINION

PER CURIAM:

Appellant Connecticut General Life In-

Surance Co. (Connecticut General) appeals

from a judgment awarding the Kannes

$252,234 in compensatory damages and

$500,000 in punitive damages. The Kannes

cross-appeal the denial of attorneys fees.

The Kannes brought this action, which

arises out of Connecticut General's obliga-

tion to pay the costs of medical treatment

for their son, Jonathan, for reimbursement

for an airline fare to transport Jonathan

from the Netherlands to the United States

for surgery, and for compensation for the

emotional distress caused them by the delay

in payments for the airline, physician, and

hospital bills. The Kannes based their

claims on a number of theories. They pre-

vailed on three that are at issue on appeal:

two state common-law causes of action, one

for breach of contract and the other for

breach of duty of good faith and fair deal-

ing, and one statutory cause of action under

the California Insurance Code for failure

to pay claims reasonably promptly.

DISCUSSION

We withdrew the case from submission

pending the Supreme Court's decision in

Pilot Life Insurance Co. v. Dedaux, No.

85-1043 (U.S. Apr. 6, 1987), in light of

ithe Kannes also claimed breach of fiduciary

duty, fraud, and failure to adopt reasonable

standards for the processing of claims, see

Cal.Ins.Code § 790.03(h)(3). They do not —

appeal the denial of those claims.

B-48

Connecticut General's contention at trial

and before this court that the Kannes's

state-law claims are preempted by the

Employee Retirement Income Security Act of

1974 (ERISA), 29 U.S.C. §§ 1001 et seq.*

Pilot Life and a companion case, Metropoli-

tan Life Insurance Co. v. Taylor, No. 85-686

(U.S. April 6, 1987), which also bears on

the issues presented here, have now been

-ERISA'S relationship to state laws is

governed by § 1144 of the Act. The per-

tinent subsections of § 1144 provide:

(a) Except as provided in subsec-

tion (b) of this section, the pro-

visions of [these subchapters ]

shall supersede any and all State

laws insofar as they...relate to

any employee benefit plan....

(b) (2) (A) 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.

(d) Nothing in this subchapter

shall be construed to alter, amend,

modify, invalidate, impair, or

Supersede any law of the United

Sstates....

decided. We now resubmit the case and re-

view de novo as a matter of law the district

court's conclusion that the claims were not

preempted. United States v. McConney, 728

F.2d 1195 (9th Cir.) (en banc), cert. denied,

469 U.S. 824 (1984). We reverse.

[1] In Pilot Life, the Supreme Court

held that state common law causes of action

asserting improper processing of a claim

are preempted by federal law. The Kannes'

claims arising out of delay in payment are

claims for improper processing and therefore

are preempted. Accordingly, the judgment

insofar as it awards compensatory and puni-

tive damages arising out of the claims of

delay in payment must be vacated.

[2] Reading of Pilot Life, together

with Metropolitan Life, compels us to con-

clude that the Kannes' claim that transpor-

tation costs are reimbursable under the

B-50

insurance policy is also preempted. Because

the claim "relate[s] to an employee benefit

plan," see Metropolitan Life, slip op. at 4

(citing section 514(a), 29 U.S.C. § 1144(a)),

it 1s preempted unless it is based on a law

that “regulates insurance." Section 514(b)

(2)(A), 29 U.S.C. § 1144(b)(2) (A). Cali-

fornia's common law of contract interpreta-

tion is not “specifically directed toward

{the insurance] industry." See Pilot Life,

slip op. at 8; see also Metropolitan Life,

slip op. at 4. Nor generally does it effect

risk spreading or concern the policy rela-

tionship between the insurer and the insured

beyond that to which the parties have agreed

in the insurance contract. Id. at 9. Accord-

ingly, we conclude that California's common

law of contract interpretation is not a law

that “regulates insurance," and therefore

is not saved from preemption.> The district

See p.B-52.

court's judgment based on the Kannes' claim for

transportation costs must also be vacated.

CONCLUSION

We resubmit this case for decision. We

reverse the district court's compensatory

and punitive damage awards in favor of the

Kannes. We affirm the denial of attorneys

fees to the Kannes.

3 Because we find that the law on which this

claim is based does not regulate insurance,

we need not consider whether the claim is

in any event preempted because of the deemer

clause or because it is based on a law that

conflicts with federal law.

4Finding these claims to be preempted, we

do not consider the other issues that

Connecticut General has raised on appeal.

The Kannes have appealed the district

court's denial of their request for attor-

ney's fees. The California Code of Civil

Procedure, section 1021, states as a general

rule that parties shall bear their own costs

of legal representation. See Brandt v. Supe-

rior Court, 37 Cal.3d 813, 820, 210 Cal.Rptr.

211, 214 (1985). The general rule may be

altered by agreement of the parties. Id.

Because the contract does not provide for

the payment of attorneys fees for claims

brought under state law, whether meritorious

or not, we affirm this part of the district

court's decision.

APPENDIX C

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THEODORE KANNE and BEATRIZ

KANNE, No.85-5641

Plaintiffs-Appellees, D.C.No.

ihe CV 83-2261-ER

CONNECTICUT GENERAL LIFE

INSURANCE COMPANY,

Defendant-Appellant,

LINCOLN NATIONAL LIFE INSURANCE

COMPANY and HARLOW CARPETS,

i oar

Defendants.

THEODORE KANNE and BEATRIZ

KANNE,

Plaintiffs-Appellants,

sy No.85-5642

CONNECTICUT GENERAL LIFE

INSURANCE COMPANY, OPINION

Defendant-Appellee.

Appeal from the United States District Court

for the Central District of California

Edward Rafeedie, District Judge, Presiding

Argued and Submitted April 7, 1986

Pasadena, California

Withdrawn from Submission July 2, 1986

Resubmitted and Filed June 4, 1987

Sage

Petition for Rehearing granted and opinion

withdrawn from submission July 23, 1987

Argued and Resubmitted November 23, 1987

Filed October 4, 1988

Before: Betty B. Fletcher and Harry Pregerson,

Circuit Judges, and Philip C. Wilkins,*

District Judge.

Per Curiam

SUMMARY

Insurance

Vacating a judgment, the court found an

insurance policy governed and preempted by

ERISA.

Appellant Connecticut General Life Insur-

ance Co. appeals from a judgment awarding

appellees Theodore and Beatriz Kanne compensa-

tory and punitive damages. The Kannes cross-

appeal the denial of attorney's fees. The

*Hon. Philip C. Wilkins, Senior United.

States District Judge for the Eastern

District of California, sitting by designation.

C=-54

action arises out of Connecticut General's

medical coverage of the Kannes' son Jonathan.

The Kannes seek reimbursement for an airline

fare to transport Jonathan from the Nether-

lands to the U.S. for surgery, and compensa-

tion for the emotional distress caused them

by the delay in payments for the airline,

physician, and hospital bills. The court

considers two specific issues: (1) whether

the insurance policy in question is a plan

governed by ERISA; and (2) whether Cal. Ins.

Code § 790.03(h)(2) is preempted by ERISA.

This court now concludes both that the

Kannes' insurance policy is an ERISA plan

and that their claims against Connecticut

General are preempted.

[1] Recently, it was found that ERISA

preempts state law causes of action pertain-

ing to improper handling of insurance claims

under an employee benefit plan. [2] The

plan brochure submitted by Connecticut

C-39

General as an exhibit at trial describes

the plan as an ERISA plan, evidencing the

intent of ABC to create an ERISA plan. The

ABC plan is not one of the group insurance

programs excluded by ERISA under the regula-

tions. Because ABC is more than a mere ad-

vertiser of group insurance, there need not

be employer contributions or automatic em-

ployee coverage to bring the plan within

ERISA. [3] The Kannes and numerous amici

argue that section 790.03(h) is not pre-

empted by ERISA because the section is a

law regulating insurance within the meaning

of the so-called "savings clause" of ERISA.

[4] To accept the Kannes' argument asking

this court to limit Pilot Life's preemption

holding to only those state laws which do

not fall within the savings clause, would

have this court ignoring the second half of

Pilot Life. The Supreme Court made clear

that its preemption holding was equally

C=36

based on its acceptance of the Solicitor

General's view that Congress clearly ex-

pressed an intent that the civil enforce-

ment provisions of ERISA section 502(a) be

the exclusive vehicle for actions by ERISA-

plan participants and beneficiaries assert-

ing improper processing of a claim for

benefits. Accordingly, the Kannes' state

statutory cause of action for mishandling

of their insurance claim is also preempted.

COUNSEL

Leonard Sacks, Encino, California, Carol A.

Hay, and Andrew O. Feringa, Lakewood,

California, for the plaintiffs-appellees-

appellants.

James S. Cline, Suzette Clover, David L.

Bacon, and Bruce A. Beckman, Los Angeles,

California, for the defendants-appellants-

appellees.

= 37

OPINION

PER CURIAM:

Connecticut General Life Insurance Co.

(Connecticut General) appeals from a judg-

ment awarding Theodore and Beatriz Kanne

$252,234 in compensatory damages and

$500,000 in punitive damages. The Kannes

cross-appeal the denial of attorneys fees.

This action arises out of Connecticut

General's medical coverage of the Kannes'

son Jonathan. The Kannes seek reimburse-

ment for an airline fare to transport

Jonathan from the Netherlands to the United

States for surgery, and compensation for

the emotional distress caused them by the

delay in payments for the airline, physician,

and hospital bills. The Kannes based their

Claims on a number of theories and prevailed

on three causes that are at issue on appeal:

two state common-law causes of action (breach

of contract, and breach of the duty of good

faith and fair dealing) and one statutory

cause of action under the California Insur-

ance Code for failure to pay claims reason-

ably promptly.?

We withdrew the case from submission

pending the Supreme Court's decision in

Pilot Life Insurance Co. v. Dedaux, 107 S.

Ct. 1549 (1987), in the expectation that

Pilot Life would resolve the threshold

issue of whether the Kannes' state-law

claims are preempted by the Employee Re-

tirement Income Security Act of 1974)

(ERISA), 29 U.S.C. §§1001 et seq.* after

Ithe Kannes also claimed breach of fiduci-

ary duty, fraud, and failure to adopt reason-

able standards for the processing of claims.

see Cal. Ins. Code § 790.03(h)(3). They do

not appeal the denial of those claims.

-ERISA'S relationship to state laws is

governed bv § 514 of the Act, 29 U.S.C.

§ 1144. The pertinent subsections of §514

provide:

(a) Except as provided in subsec-

tion (b) of this section, the

(con't p. C-60)

C=-59

Pilot Life and a companion case, Metropolitan

Life Insurance Co. v. Taylor, 107 S.Ct. 1542

(1987), were decided, we resubmitted the case

and reversed the district court's conclusion

that the claims were not preempted. Kanne

v. Connecticut General Life Ins. Co., Nos.

85-5641, 85-5642 (9th Cir., June 4, 1987).

We subsequently withdrew the opinion,

granting the Kanne's request for rehearing,

to consider two specific issues: (1) whether

the insurance policy in question is a plan

2. teon*t)

provisions of [these subchapters]

shall supersede any and all State

laws insofar as they...relate to

any employee benefit plan....

(b)(2)(A) 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.

(ad) Nothing in this subchapter

shall be construed to alter, amend,

modify, invalidate, impair, or

Supersede any law of the United

states....

governed by ERISA; and (2) whether Cal. Ins.

Code § 790.03(h)(2) is preempted by ERISA.

We now conclude both that the Kannes' insur-

ance policy is an ERISA plan and that their

claims against Connecticut General are

preempted.

DISCUSSION

I. Whether the Insurance Policy is part of

an ERISA Plan

The parties at trial apparently assumed

that the insurance policy was covered by

ERISA. Little or no attention was paid to

the issue. The plan brochure, introduced

by Connecticut General as an exhibit at

trial, describes the plan as an ERISA plan.

The Associated Builders and Contractors

(ABC), an employer group to which Harlow

Carpets belongs, is described as the Admini-

strator of the plan. Harlow Carpets sub-

scribed to the group health insurance plan

administered by ABC. Pursuant to the re-

quirements of ERISA, the plan was estab-

lished as a trust entity, called the ABC

Trust. It purchased a policy of group

health insurance from Connecticut Senerai.°

Thecdore Kanne was an employee of Harlow

Carpets and was covered by the policy.

Under ERISA § 3(1), 29 U.S.C. § 1002(1),

an "employee welfare benefit plan" or "Wel-

fare plan" is:

(1) a “plan, fund or program"

(2) established or maintained

(3) by an employer or by an em-

ployee organization, or by both,

(4) for the purpose of providing

medical, surgical, hospital care,

Sickness, accident, disability,

death, unemployment or vacation

benefits, apprenticeship or other

training programs, day care cen-

ters, scholarship funds, prepaid

legal services or severance bene-

fits (5) to the participants or

their beneficiaries.

Donovan v. Dillingham, 688 F.2d 1367, 1371

(llth Cir. 1982)(en banc).

prior to 1981, Harlow Carpets had sub-

scribed to an insurance plan directiy with

Connecticut General, but then changed to

the ABC plan.

C-62

[1] The existence of an ERISA plan is a

guestion of fact, to be answered in light

of all the surrounding facts and circum-

stances from the point of view of a reason-

able person. Credit Managers Ass'n v.

Kernesan Life & Accident Ins. Co., 809

F.2d 617, 625 (9th Cir. 1987). At trial,

the parties did not contest the issue of

whether the ABC Trust was an ERISA plan.

However, in the wake of the broad holding

of Pilot Life, that ERISA preempts state

law causes of action pertaining to improper

handling of insurance claims under an em-

ployee benefit plan, the question of whether

the policy here is governed by ERISA takes

on vital importance to the Kannes, who now

contest that an ERISA plan existed.

The Department of Labor has issued regu-

lations excluding certain group insurance

programs from ERISA's definition of

"Employee welfare benefit plan":

C-63

(j) Certain group or group-type

insurance programs.

For purposes of Title I of the Act

and this chapter, the terms "em-

ployee welfare benefit plan" and

"welfare plan" shall not include

a group or group-type insurance

program offered by an insurer to

employees or members of an em-

ployee organization, under which

(1) No contributions are made by

an employer or employee organization;

(2) Participation in the program

is completely voluntary for employees

Or members;

(3) The sole functions of the em-

ployer or employee organization

with respect to the program are,

without endorsing the program, to

permit the insurer to publicize

the program to employees or mem-

bers, to collect premiums through

payroll deductions or dues check-

offs and to remit them to the

insurer; and

(4) The employer or employee

Organization receives no con-

Sideration in the form of cash or

otherwise in connection with the

program, other than reasonable

compensation, excluding any

profit, or administrative services

actually rendered in connection

with payroll deductions or dues

checkoffs.

29 C.F.R. § 2510.3-1(j)(1987). A bare pur-

chase of insurance, without any of the above

C-64

elements present, does not by itself con-

stitute an ERISA plan (although it may be

evidence of the existence of an ERISA plan).

See Donovan v. Dillingham, 688 F.2d at 1375.

An employer has not established an ERISA

plan if it merely advertises a group insur-

ance plan that has none of the attributes

described in 29 C.F.R. § 2510.3-1(j). See

Credit Managers Ass'n., 809 F.2d at 625.

The Kannes argue that, in respect to

the group insurance at issue here, there is

no evidence of the existence of the four

criteria under 29 C.F.R. § 2510.3-1(j),

any one of which would prevent the exclusion

of the insurance plan from ERISA coverage.

It is true that the record is ambiguous as

to whether Harlow Carpets ever contributed

4 Because Connecticut General's claim of

ERISA preemption is a federal defense in

this lawsuit, Metropolitan Life Ins. Co. v.

Taylor, 107 S.Ct. at 1546, the burden is on

the defendant to prove the facts necessary

to establish it.

C65

any payments towards Theodore Kanne's insur-

ance coverage or whether Kanne's participa-

tion was voluntary or automatic. Harlow

Carpets’ function with respect to the

program waS minor and ministerial, and no

evidence indicates whether the plan was

administered by a profit-making concern.

However, the problem with the Kannes'

argument is their apparent assumption that

Harlow Carpets' functions with respect to

the plan determine ERISA coverage. Accord-

ing to ERISA § 3(5):

The term “employer" means any

person acting directly as am em-

ployer, or indirectly in the inter-

est of an employer, in relation to

an employee benefit plan and in-

cludes a group or association of

employers acting for an employer

in such capacity.

29 U.S.C. § 1002(5) (emphasis added). Under

this definition, ABC can be an ERISA employer

for purposes of our analysis.

[2] The plan brochure submitted by

Connecticut General as an exhibit at trial

describes the plan as an ERISA plan, evi-

dencing the intent of ABC to create an ERISA

plan. It is clear that, ata minimum, ABC

does not merely advertise the group insur-

ance, but rather, as the administrator of

the plan, “endorses" it within the meaning

of 29 C.F.R. § 2510.3-1(j)(3). Thus the ABC

plan is not one of the group insurance pro-

grams excluded by ERISA under the regulations.

Because ABC is more than a mere advertiser

of group insurance, there need not be em-

ployer contributions or automatic employee

coverage to bring the plan within ERISA.

See Credit Managers Ass'n, 809 F.2d at 625.

II. Whether ERISA Preempts the Kannes'

State Law Claims

In Pilot Life, the Supreme Court held

that state common law causes of action aris-

ing from the improper processing of a claim

C-6/

are preempted by federal law. The Kannes'

claims arising out of delay in payment are

claims for improper processing and therefore

are preempted. Accordingly, the judgment

insofar as it awards compensatory and puni-

tive damages arising out of the common law

claims for delay in payment must be vacated.

We must also decide whether ERISA pre-

empts the Kannes' state statutory claims

for compensatory and punitive damages

arising from delay in payment. California

Insurance Code § 790.03(h) prohibits vari-

ous “unfair insurance practices" having to

do with the processing of claims. Among

these unfair practices is an insurer's

failure "to acknowledge and act reasonably

promptly upon communications with respect to

claims arising under insurance policies."

§790.03(h)(2). At the time relevant to

this appeal § 790.03(h) created a private

right of action. Royal Globe Ins. Co. v.

C-68

Superior Court, 23 Cal.3d 880, 886, 153 Cal.

Rptr. 842, 846 (1979), overruled by Moradi-

Shalal v. Fireman's Fund Ins. Co., Cal.

34 (Cal. Aug. 18, 1988).” The district

court found that Connecticut General had

violated subsection (h)(2), giving rise to

a cause of action in the Kannes.

[3] The Kannes and numerous amici argue

virorously that § 790.03(h) is not pre-

empted by ERISA because § 790.03(n) is a

law regulating insurance within the meaning

of the so-called "savings clause," § 514(b)

(2)(A) of ERISA, 29 U.S.C. § 1144(b) (2) (A),

which provides:

Except as provided in subpara-

graph (B), nothing in this sub-

chapter shall be construed to

exempt or relieve any person from

any law of any State which regu-

lates insurance, banking, or

securities.

>The Moradi-Shalal court held that the

Royal Globe rule would continue to apply

to all cases filed prior to the Moradi-

Shalal decision. Cal.3d at

C=69

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ver, we would have to ignore the second

f Pilot Life, 107 S.Ct. 1555-58, in

h the Court made abundantly clear that

reemption holding was equally based on

the Solicitor General's

eT)

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40)

49)

)

that Congress clearly expressed an

nt that the civil enforcement provisions

502(a) be the exclusive vehicle

actions by ERISA-plan participants and

eficiaries asserting improper processing

laim for benefits." Id. at 1555: The

tated:

the detailed provisions

2(a) set forth a compre-

ive civil enforcement scheme

represents a careful balancing

of the need for prompt and fair

claims settlement procedures

against the public interest in

encouraging the formation of em-

loyee benefit plans. The policy

choices reflected in the inclusion

of certain remedies and the ex-

clusion of others under the federal

scheme would be completely under-

mined if ERISA-plan participants

and beneficiaries were free to

obtain remedies under state law

that Congress had rejected in ERISA.

}

—

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» wo

ct - wr W

C-7)

Id. at 1556. We do not find it pussible to

read this language in a way that permits a

state statute like § 790.03(h) to supplement

the ERISA civil enforcement provisions avail-

able to remedy improper claims processing.

Accordingly, the Kannes state statutory

cause of action for mishandling of their

insurance claim is also preempted.

Finally,we must consider whether the

Kannes' claim for reimbursement of trans-

portation costs is preempted. Because the

claim "relate[s] to an employee benefit

plan," see Metropolitan Life, 107 S.Ct. at

1546 (citing section 514(a), 29 U.S.C. §

1144(a)), it 1S preempted unless it is based

on a law that "regulates insurance." Sec-

tion 514(b)(2)(A), 29 U.S.C. § 1144(b) (2) (A).

The Kannes' claim for reimbursement is pre-

mised on the interpretation of their insur-

ance contract. However, California's common

law of contract interpretation is not

C-i2

"specifically directed toward [the insur-

ance] industry." See Pilot Life, 107 S.Ct. at

1555; see also Metropolitan Life, 107 S.Ct.

at 1546. Nor generally does it effect risk

spreading or concern the policy relationship

between the insurer and the insured beyond

that to which the parties have agreed in

the insurance contract. Pilot Life, 107

S.Ct. at 1554-55. Accordingly, we conclude

that Califcrnaia's common law of contract

interpretation is not a law that "regulates

insurance," and therefore is not saved from

preemption. ’ The district court's judgment

based on the Kannes' claim for transportation

costs must also be vacated.”

‘Because we find that the law on which this

claim is based does not regulate insurance,

we need not consider whether the claim is in

any event preempted because of the deemer

clause or because it is based on a law that

conflicts with federal law.

8 pinding these claims to be preempted, we

do not consider the other issues that

Connecticut General has raised on appeal.

(cont. ps. C-74)

C272

CONCLUSION

We find that the Kannes' group health

insurance policy with Connecticut General

is part of an ERISA plan. We hold that

each of their state common-law and statu-

tory causes of action is preempted by ERISA.

Accordingly, we VACATE the judgment of the

district court insofar as it awards damages

in favor of the plaintiffs.

8 cont.)

The Kannes have appealed the district

court's denial of their request for attor-

ney's fees. The California Code of Civil

Procedure, section 1021, states as a gen-

eral rule that parties shali bear their own

costs of legal representation. See Brandt

v. Superior Court, 37 Cal.3d 813, 820, 210

Cal. Rptr. 211, 214 (1985). The general

rule may be altered by agreement of the

parties. Id. Because the contract does not

provide for the payment of attorneys fees

for claims brought under state law, whether

meritorious or not, we affirm this part of

the district court's decision.

C-74

~ TT AIT\ TV T

AvPPRH ) .

Lk » aan wS 1 ‘ Ly

APPENDIX D

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THEODORE KANNE and BEATRIZ

KANNE , No.85-5641

Plaintiffs-Appellees,

Vv. D.C.No.

CONNECTICUT GENERAL LIFE CV83-2261-ER

INSURANCE COMPANY,

Defendant-Appellant,

LINCOLN NATIONAL LIFE INSURANCE

COMPANY and HARLOW CARPETS,

INC.,

Defendants.

THEODORE KANNE and BEATRIZ

KANNE,

Plaintiffs-Appellants, Pecnecrnee

¥.

CONNECTICUT GENERAL LIFE ORDER AND

INSURANCE COMPANY, AMENDED

OPINION

Defendant-Appellee.

Appeal from the United States District Court

for the Central District of California

Edward Rafeedie, District Judge, Presiding

Argued and Submitted

April 7, 1986--Pasadena, California

D-75

Withdrawn from Submission July 2, 1986

Resubmitted and Filed June 4, 1987

Petition for Rehearing granted and opinion

withdrawn from submission July 23, 1987

Argued and Resubmitted November 23, 1987

Filed October 4, 1988

Amended February 2, 1989

Before: Betty B. Fletcher and Harry Pregerson,

Circuit Judges, and Philip C. Wilkins,*

District Judge.

Per Curiam

SUMMARY

Insurance

Vacating a judgment, the court found an

insurance policy governed and preempted by

ERISA.

Appellant Connecticut General Life Insur-

ance Co. appeals from a judgment awarding

appellees Theodore and Beatriz Kanne com-

pensatory and punitive damages. The Kannes

*Hon. Philip C. Wilkins, Senior United States

District Judge for the Eastern District of

California, sitting by designation.

D-76

cross-appeal the denial of attorney's fees.

The action arises out of Connecticut Gen-

eral's medical coverage of the Kannes' son

Jonathan. The Kannes seek reimbursement

for an airline fare to transport Jonathan

from the Netherlands to the U.S. for surgery,

and compensation for the emotional distress

caused them by the delay in payments for

the airline, physician, and hospital bills.

The court considers two specific issues:

(1) whether the insurance policy in question

is a plan governed by ERISA; and (2) whether

Cal. Ins. Code § 790.03(h)(2) is preempted

by ERISA. This court now concludes both

that the Kannes' insurance policy is an

ERISA plan and that their claims against

Connecticut General are preempted.

[1] Recently, it was found that ERISA

preempts state law causes of action pertain-

ing to improper handling of insurance claims

under an employee benefit plan. [2] The

D-77

plan brochure submitted by Connecticut

General as an exhibit at trial describes

the plan as an ERISA plan, evidencing the

intent of ABC to create an ERISA plan. The

ABC plan is not one of the group insurance

programs excluded by ERISA under the regula-

tions. Because ABC is more than a mere ad-

vertiser of group insurance, there need not

be employer contributions or automatic em-

ployee coverage to bring the plan within

ERISA. [3] The Kannes and numerous amici

argue that section 790.03(h) is not pre-

empted by ERISA because the section is a

law regulating insurance within the meaning

of the so-called "savings clause" of ERISA.

[4] To accept the Kannes' argument asking

this court to limit Pilot Life's preemption

holding to only those state laws which do

not fall within the savings clause, would

have this court ignoring the second half of

Pilot Life. The Supreme Court made clear

5-75

that its preemption holding was equally

based on its acceptance of the Solicitor

General's view that Congress clearly ex-

pressed an intent that the civil enforce-

ment provisions of ERISA section 502(a) be

the exclusive vehicle for actions by ERISA-

plan participants and beneficiaries assert-

ing improper processing of a claim for

benefits. Accordingly, the Kannes' state

statutory cause of action for mishandling

of their insurance claim is also preempted.

COUNSEL

Leonard Sacks, Encino, California, Carol A.

Hay, and Andrew O. Feringa, Lakewood,

California, for the plaintiffs-appellees-

appellants.

James S. Cline, Suzette Clover, David L.

Bacon, and Bruce A. Beckman, Los Angeles,

California, for the defendants-appellants-

appellees.

D-79

ORDER

We hereby amend the opinion Filed

October 4, 1988.

In the middle paragraph of slip opinion

at page 12500, the final sentence is changed

to read:

Nevertheless, under Pilot Life we

find the conclusion inescapable

that the private right of action

for violation of §790.03(h) is

preempted by ERISA.

Footnote 6 is amended by adding the sentence:

We express no opinion as to

whether the substantive provisions

of § 790.03(h) are themselves pre-

empted so as to bar administrative

enforcement by California's Insur-

ance Commissioner.

With this amendment, the panel has voted

to deny the petition for rehearing. The

full court has been advised of the amend-

ment to the opinion and the suggestion for

rehearing en banc and no active judge has

requested a vote on whether to rehear the

D-80

matter en banc. (Fed. R. App. P. 35.)

The petition for rehearing is denied

and the suggestion for rehearing en banc

is rejected.

OPINION

PER CURIAM:

Connecticut General Life Insurance Co.

(Connecticut General) appeals from a judg-

ment awarding Theodore and Beatriz Kanne

$252,234 in compensatory damages and

$500,000 in punitive damages. The Kannes

cross-appeal the denial of attorney's fees.

This action arises out of Connecticut

General's medical coverage of the Kannes'

son Jonathan. The Kannes seek reimbursement

for an airline fare to transport Jonathan

from the Netherlands to the United States

for surgery, and compensation for the emo-

tional distress caused them by the delay in

D-81

payments for the airline, physician, and

hospital bills. The Kannes based their

claims on a number of theories and prevailed

on three causes that are at issue on appeal:

two state common-law causes of action

(breach of contract, and breach of the duty

of good faith and fair dealing) and one

statutory cause of action under the Cali-

fornia Insurance Code for failure to pay

claims reasonably promptly.

We withdrew the case from submission

pending the Supreme Court's decision in

Pilot Life Insurance Co. v. Dedeaux, 107

S.Ct. 1549 (1987), in the expectation that

Pilot Life would resolve the threshold

issue of whether the Kannes' state-law

claims are preempted by the Employee

the Kannes also claimed breach of fiduci-

ary duty, fraud, and failure to adopt

reasonable standards for the processing of

Claims. See Cal.Ins.Code § 790.03(h) (3).

The do not appeal the denial of those claims.

D-82

Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. § 1001 et seq.” After

Pilot Life and a companion case, Metropoli-

tan Life Insurance co. v. Taylor, 107 S.Ct.

1542 (1987), were decided, we resubmitted

the case and reversed the district court's

conclusion that the claims were not pre-

empted. Kanne v. Connecticut General Life

2ERISA'S relationship to state laws is

governed by § 514 of the Act, 29 U.S.C.

§ 1144. The pertinent subsections of

§ 514 provide:

(a) Except as provided in subsec-

tion (b) of this section, the pro-

visions of [these subchapters]

shall supersede any and all State

laws insofar as they...relate to

any empioyee benefit plan....

(b)(2)(A) 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 regu-

lates insurance, banking, or

securities.

(d) Nothing in this subchapter

shall be construed to alter, amend,

modify, invalidate, impair, or

supersede any law of the United

States....

D-

Ins. Co., Nos. 85-5641, 85-5642 (9th Cir.

June 4, 1987).

We subsequently withdrew the opinion,

granting the Kannes' request for rehearing,

to consider two specific issues: (1) whether

the insurance policy in question is a plan

governed by ERISA; and (2) whether Cal.Ins.

Code § 790.03(h)(2) is preempted by ERISA.

We now conclude both that the Kannes'

insurance policy is an ERISA plan and that

their claims against Connecticut General

are preempted.

DISCUSSION

I. Whether the Insurance Policy is Part

of an ERISA Plan

The parties at trial apparently assumed

that the insurance policy was covered by

ERISA. Little or no attention was paid to

the issue. The plan brochure, introduced

by Connecticut General as an exhibit at

D-84

trial, describes the plan as an ERISA plan.

The Associated Builders and Contractors

(ABC), an employer group to which Harlow

Carpets belongs, is described as the Admin-

istrator of the plan. Harlow Carpets sub-

scribed to the group health insurance plan

administered by ABC. Pursuant to the re-

quirements of ERISA, the plan was estab-

lished as a trust entity, called the ABC

Trust. It purchased a policy of group

health insurance from Connecticut General.>

Theodore Kanne was an employee of Harlow

Carpets and was covered by the policy.

Under ERISA § 3(1), 29 U.S.C. § 1002(1),

an "employee welfare benefit plan" or

“welfare plan" is:

(1) a “plan, fund or program"

(2) established or maintained

(3) by an employer or by an

prior to 1981, Harlow Carpets had sub-

scribed to an insurance plan directly with

Connecticut General, but then changed to

the ABC plan.

D-85

. a -

es er

employee organization, or by

both, (4) for the purpose of pro-

viding medical, surgical, hospital

care, sickness, accident, dis-

ability, death, unemployment or

vacation benefits, apprenticeship

or other training programs, day

Care centers, scholarship funds,

prepaid legal services or sever-

ance benefits (5) to the partici-

pants or their beneficiaries.

Donovan v. Dillingham, 688 F.2d 1367, 1371

(lith Cir. 1982)(en banc).

[1] The existence of an ERISA plan is

a question of fact, to be answered in light

of all the surrounding facts and circum-

stances from the point of view of a reason-

able person. Credit Managers Ass'n v.

Kernesan Life & Accident Ins. Co., 809 F.2d

6i7v, 625: -(9th Cir. i967)... At trial, the

parties did not contest the issue of whether

the ABC Trust was an ERISA plan. However,

in the wake of the broad holding of Pilot

Life, that ERISA preempts state law causes

of action pertaining to improper handling

of insurance claims under an employee

D-86

benefit plan, the question of whether the

policy here is governed by ERISA takes on

vital importance to the Kannes, who now

contest that an ERISA plan existed.

The Department of Labor has issued regu-

lations excluding certain group insurance

programs from ERISA's definition of

"employee welfare benefit plan":

(j) Certain group or group-type

insurance programs.

For purposes of Title I of the Act

and this chapter, the terms "em-

ployee welfare benefit plan" and

“welfare plan" shall not include

a group or group-type insurance

program offered by an insurer to

employees or members of an employee

organization under which

(1) No contributions are made by

an employer or employee organization;

(2) Participation in the program

is completely voluntary for em-

ployees or members;

(3) The sole functions of the em-

ployer or employee organization

with respect to the program are,

without endorsing the program, to

permit the insurer to publicize

the program to employees or mem-

bers, to collect premiums through

payroll deductions or dues checkoffs

D-87

4p a :

<) orehat dis

and to remit them to the insurer;

and

(4) The employer or employee

Organization receives no con-

Sideration in the form of cash or

otherwise in connection with the

program, other than reasonable

compensation, excluding any

profit, or administrative ser-

vices actually rendered in con-

nection with payroll deductions

or dues checkoffs.

29C.F.R. § 2510.3-1(3)(1987). A bare pur-

chase of insurance, without any of the above

elements present, does not by itself con-

stitute an ERISA plan (although it may be

evidence of the existence of an ERISA plan).

See Donovan v. Dillingham, 688 F.2d at 1375.

An employer has not established and ERISA

plan if it merely advertises a group insur-

ance plan that has none of the attributes

described in 29 C.F.R. § 2510.3-1(j).

See Credit Managers Ass'n, 809 F.2d at 625.

Tne Kannes argue that, in respect to

the group insurance at issue here, there is

no evidence of the existence of the four

D-88

criteria under 29 C.F.R. § 2510.3-1(j), any

one of which would prevent the exclusion of

the insurance plan from ERISA coverage.

It is true that the record is ambiguous as

to whether Harlow Carpets ever contributed

any payments towards Theodore Kanne's

insurance coverage or whether Kanne's

participation was voluntary or automatic.

Harlow Carpets' function with respect to

the program was minor and ministerial, and

no evidence indicates whether the plan was

administered by a profit-making concern.

However, the problem with the Kannes'

argument is their apparent assumption that

Harlow Carpets' functions with respect to

the plan determine ERISA coverage. Accord-

ing to ERISA § 3(5):

4 because Connecticut General's claim of

ERISA preemption is a federal defense in

this lawsuit, Metropolitan Life Ins. Co. v.

Taylor, 107 S.Ct. at 1546, the burden is on

the defendant to prove the facts necessary

to establish it.

D-89

The term "employer" means any

person acting directly as an em-

ployer, or indirectly in the inter-

est of an employer, in relation to

an employee benefit plan and in-

cludes a group or association of

employers acting for an employer

in such capacity.

29 U.S.C. § 1002(5) (emphasis added). Under

this definition, ABC can be an ERISA em-

ployer for purposes of our analysis.

[2] The plan brochure submitted by

Connecticut General as an exhibit at trial

describes the plan as an ERISA plan, evi-

dencing the intent of ABC to create an ERISA

plan. It is clear that, at a minimum, ABC

does not merely advertise the group insur-

ance, but rather, as the administrator of

the plan, "endorses" it within the meaning

of 29 C.F.R. § 2510.3-1(3)(3). Thus the

ABC plan is not one of the group insurance

programs excluded by ERISA under the regula-

tions. Because ABC is more than a mere

advertiser of group insurance, there need

D-90

not be employer contributions or automatic

employee coverage to bring the plan within

ERISA. See Credit Managers Ass'n, 809 F.2d

at 625

II. Whether ERISA Preempts the Kannes'

State Law Claims

In Pilot Life, the Supreme court held

that state common law causes of action aris-

ing from the improper processing of a claim

are preempted py federal law. The Kannes'

claims arising out of delay in payment are

claims for improper processing and there-

fore are preempted. Accordingly, the judg-

ment insofar as it awards compensatory and

punitive damages arising out of the common

law claims for delay in payment must be

vacated.

We must also decide whether ERISA pre-

empts the kannes' state statutory claims

for compensatory and punitive damages arising

from celay in payment. California Insur-

ance Code § 790.03(h) prohibits various

"unfair insurance practices" having to do

with the processing of claims. Among these

unfair practices is an insurer's failure "to

acknowledge and act reasonably promptly upon

communications with respect to claims arising

under insurance policies." §790.03(h)(2).

At the time relevant to this appeal §790.03

(h) created a private right of action.

Royal Globe Ins. Co. v. Superior Court, 23

Cal.3d 880, 886, 153 Cal. Rptr. 842, 846

(1979), overruled by Moradi-Shalal v. Fire-

man's Fund Ins. Co., Cal.3d (Cal.

Aug. 18, 1988).> The district court found

that Connecticut General had violated sub-

section (h)(2), giving rise to a cause of

action in the Kannes.

5The Moradi-Shalal court held that the

Royal Globe rule would continue to apply

to all cases filed prior to the Moradi-

Shalal decision. — Cal.3d at

{3] The Kannes and numerous amici argue

vigorously that § 790.03(h) is not preempted

by ERISA because § 790.03(h) is a law regu-

lating insurance within the meaning of the

so-called "savings clause," § 514(b) (2) (A)

of ERISA, 29 U.S.C. § 1144(b) (2) (A), which

provides

Except as provided in subpara-

graph (b), nothing in this sub-

chapter shall be construed to

exempt or relieve any person from

any law of any State which regu-

lates insurance, banking, or

securities.

The Kannes and the amici point out that the

preempted common law causes of action for

bad faith in Pilot Life were held not to be

laws regulating insurance within the sav-

ings clause. They argue that because

§ 790.03(h) regulates insurance, the savings

clause saves that provision from preemption.

We can assume, without deciding, that

§ 790.03(h) is a law regulating insurance

under the savings clause. Nevertheless,

D-93

under Pilot Life we find the conclusion in-

escapable that the private right of action

for violation of § 790.03(h) is preempted

by ERISA.°

[4] The Kannes' argument asks us to

limit Pilot Life's preemption holding to

only those state laws which do not fall

within the savings clause. To accept this

argument however, we would have to ignore

the second half of Pilot Life, 107 S.Ct.

1555-58, in which the Court made abundantly

clear that its preemption holding was equally

based on its acceptance of the Solicitor

General's view that "Congress clearly

6a handful of cases in federal district

courts in California have by now been de-

cided, reaching different results. We find

ourselves most in agreement with the well-

reasoned opinion in Roberson v. Equitable

Life Assurance Soc., 661 F.Supp. 416, 423-24

(C.D.Cal. 1987). We express no opinion as

to whether the substantive provisions of

§790.03(h) are themselves preempted so as

to bar administrative enforcement by

California's Insurance Commissioner.

D-94

expressed an intent that the civil enforce-

ment provisions of ERISA § 502(a) be the

exclusive vehicle for actions by ERISA-plan

participants and beneficiaries asserting

improper processing of a claim for benefits."

id. at 1555. The Court stated:

In sum, the detailed provisions

of § 502(a) set forth a comprehen-

Sive civil enforcement scheme

that represents a careful balanc-

ing of the need for prompt and

fair claims settlement procedures

against the public interest in

encouraging the formation of em-

ployee benefit plans. The policy

choices reflected in the inclu-

Sion of certain remedies and the

exclusion of others under the

federal scheme would be completely

undermined if ERISA-plan partici-

pants and beneficiaries were free

to obtain remedies under state

law that Congress had rejected

in ERISA.

Id. at 1556. We do not find it possible to

read this language in a way that permits a

state statute iike § 790.03(h) to supplement

the ERISA civil enforcement provisions avail-

able to remedy improper claims processing.

Accordingly, the Kannes' state statutory

cause of action for mishandling of their

insurance claim is also preempted.

Finally, we must consider whether the

Kannes' claim for reimbursement of trans-

portation costs is preempted. Because the

Claim "relate[s] to an employee benefit

plan." see Metropolitan Life, 107 S.Ct. at

1546 (citing section 514(a), 29 U.S.C.

§ 1144(a)), it is preempted unless it is

based on a law that "regulates insurance."

Section 514(b)(2)(A), 29 U.S.C. § 1144(b) (2)

(A). The Kannes' claim for reimbursement

is premised on the interpretation of their

insurance contract. However, California's

common law of contract interpretation is

not "Specifically directed toward [the

insurance] industry." See Pilot Life, 107

S.Ct. at 1555; see also Metropolitan Life,

107 S.Ct. at 1546. Nor generally does it

effect risk spreading or concern the policy

D-96

relationship between the insurer and the

insured beyond that to which the parties

have agreed in the insurance contract.

Pilot Life, 107 S.Ct. at 1554-55. Accord-

ingly, we conclude that California's common

law of contract interpretation is not a law

that "regulates insurance," and therefore

is not saved from preemption. ’ The district

court's judgment based on the Kannes' claim

for transportation costs must also be

vacated.”

‘Because we find that the law on which

this claim is based does not regulate in-

Surance, we need not consider whether the

claim is in any event preempted because of

the deemer clause or because it is based

on a law that conflicts with federal law.

8rinding these claims to be preempted, we

do not consider the other issues that

Connecticut General has raised on appeal.

The Kannes have appealed the district

court's denial of their request for attor-

ney's fees. The California Code of Civil

Procedure, section 1021, states as a general

rule that parties shall bear their own costs

of legal representation. See Brandt v.

Superior Court, 37 Cal.3d 813, 820, 210

Cal.Rptr. 211, 214 (1985). The general

(cont. p. D-98)

D-97

CONCLUSION

We find that the Kannes' group health

insurance policy with Connecticut General

is part of an ERISA plan. We hold that

each of their state common-law and statu-

tory causes of action is preempted by

ERISA. Accordingly, we VACATE the judg-

ment of the district court insofar as it

awards damages in favor of the plaintiffs.

8 (cont.)

rule may be altered by agreement of the par-

ties. Id. Because the contract does not pro-

vide for the payment of attorneys fees for

Claims brought under state law, whether

meritorious or not, we affirm this part of

the district cc irt's decision.

D-98

APPENDIX E

29 U.S.C. Section 1144(b)(2)(A) provides:

"(2) (A) 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."

29 U.S.C. Section 1883(a) provides:

"(a) Except as provided in

subsection (b) of this section and in

sections 195l, 1981, and 11981 of this

title, this subchapter shall apply to any

employee benefit plan if it is

established or maintained--

(1) by any employer engaged in

commerce or in any industry or activity

affecting commerce; or

(2) by any employee organization or

organizations representing employees

”,

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engaged in commerce or in any industry or

activity affecting commerce; or

(3) by both."

29 U.S.C. Section 1982(5) provides,

“For Purposes of this subchapter":

(5) The term "“employer" means any

person acting directly as an employer, or

indirectly in the interest of an

employer, in relation to an employee

benefit plan; and includes a group or

association of employers acting for an

employer in such capacity.

29 U.S.C. Section 1131’ provides:

"Any person who willfully violates

any provision of part 1 of this subtitle,

or any regulation or order issued under

any such provision, shall upon conviction

be fined not more than $5,998 or

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imprisoned not more than one year, or

both; except that in the case of such

violation by a person not an individual,

the fine imposed upon such person shall

be a fine not exceeding $190,800."

Department of Labor Regulation

29 CFR Section 2518.3-1(4j) provides:

"(3) Certain group or _ group-type

insurance programs. For purposes of

Title I of the Act and this chapter, the

terms "employee welfare benefit plan" and

“welfare plan" shall not include a group

Or group-type insurance program offered

by an insurer to employees or members of

an employee organization, under which

(1) No contributions are made by an

employer or employee organization;

(2) The Participation in the

program is competely voluntary for

employees or members;

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(3) The sole functions of the

employer or employee organization with

respect to the program are, without

endorsing the program, to permit the

insurer to publicize the program to

employees or members, to collect premiums

through payroll deductions or dues

checkoffs and to remit them to the

insurer; and

(4) The employer or employee

organization receives no consideration in

the form of cash or otherwise in

connection with the program, other than

reasonable compensation, excluding any

profit, or administrative services

actually rendered in connection with

payroll deductions or dues checkoffs."

California Insurance Code

Section 798.83(h)(2) provides:

"The following are hereby defined as

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unfair methods of competition and unfair

and deceptive acts of practices in the

business of insurance.

(h) Knowingly committing or

performing with such frequeny as to

indicate a general business practice any

of the following unfair claims settlement

practices:

(2) Failing to acknowledge and act

reasonably promptly upon communications

with respect to claims arising under

insurance policies.

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.