# Appendix — Kanne v. Connecticut General Life Insurance > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_1185%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1989 - **Citation:** 492 U.S. 906 ## Text No. 8 ilivn + T 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, V 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 nr 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 J) ) th h 4) ry 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, ct 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- ny O ct *y 40) 1.) oo tr 1) Q 40) =) + + 7 U Hy loam XY 08) | ot ( - oF 'O fy b- Ou iY ea) WO | > -- > +> © @) ‘and ‘a ner & AT € — hd — > i At A + ‘ - IDE A A , » . r p + . m F y 1 - ‘r C 4 ¥ Vv ¢ hc a 1 , i L « Aud 4G rr e i y 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 ct 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 ~ a ct > 9 0) W 1) | o W ge D () ct f 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 4 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 Ae \ 35 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." p 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. 7 43 — - : 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 X 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 ‘. 4 4 c4 a O 4 + c O WY) »} O me eo, ? 4 | 4+/ . | bo Ww oq ) > ry m4 ‘ v + b44 N = qQ @ = 08 * My ” ' ; b44 Y) qd) - ‘ . | 108) G4 4 most + Ourseives Q jr ri iN {) j 104 j cy () . W) jt by @ ire (Q |\O ) WO e4 ° a Of () OO f= YW}O) () Com | ra Yd = OF] ° A fic hth ct | hh tr} D | ct 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 TY the Solicitor General's eT) () () 40) @) ct fu a Q 49) O rh t ) 3 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 Q laim for benefits." Id. at 1555: The . tated: W = 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. } © — > ome 3 WI » wo ct - wr W - L 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.... 83 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 : 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 oa {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 ”, E-99 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 E-100 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; E-101 (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 E-102 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. E-103 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_1185%3A2. Public record. Not legal advice.