Opposition Brief — American Economy Insurance v. Smith

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No. 91-375

=4y

In The

Supreme Court of the United States

October Term, 1991

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AMERICAN ECONOMY INSURANCE

COMPANY, et al.,

Petitioners,

BEVERLY L. SMITH, et al.,

Respondents.

¢

Petition For A Writ Of Certiorari To The

Court Of Appeals For

The Second District Of Texas

¢

RESPONDENTS’ BRIEF IN OPPOSITION

¢

Counse! for Respondents

Beverly L. Smith &

William Smith

FRANK R. JEWEL!

Jewett & Associates

3100 Monticello Avenue

Dallas, Texas 75205

(214) 528-2800 telephone

(214) 528-4907 telefax

COCKLE LAW BRIEF PRINTING CO., (800) 225-4964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED (RESTATED)

An exception to ERISA coverage exists for employee

benefit plans “maintained solely for the purpose of com-

plying with applicable workman’s compensation laws.”

29 U.S.C. § 1003(b)(3).

The questions (restated) presented in this petition

are:

1) Does this ERISA exception apply to a policy of

Workers’ Compensation obtained by an employer in com-

pliance with applicable state law which penalizes non-

conforming employers by withdrawal of common law

defenses in direct negligence actions by injured

employees not covered by such insurance?

2) Does this exception apply to a policy of Workers’

Compensation insurance which complies solely with

applicable state workers’ compensation laws and admin-

istrative procedures under which benefits are adminis-

tered by a separate administrative unit?

ii

LIST OF PARTIES AND RULE 29.1 LIST

The parties to the proceedings below were the peti-

tioner American Economy Insurance Company, the peti-

tioner Lindsey & Newsom Claim Services, Inc. (formerly

known as Lindsey & Newsom Insurance Adjusters, Inc.),

and the respondents Beverly L. Smith and William Smith.

Petitioners have identified the parent company of the

petitioners as follows:

The parent company of American Economy Insur-

ance Company is American States Insurance Company,

whose parent company is Lincoln National Corporation.

American Economy Insurance Company has no non-

wholly-owned subsidiaries.

The parent company of Lindsey & Newsom Claim

Services, Inc., is Morden & Helwig Group, Inc.; Lindsey &

Newsom Claim Services, Inc., has no non-wholly-owned

subsidiaries.

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TABLE OF CONTENTS

Page

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List of Parties and Rule 29.1 List.................. ii

ee ideas waves es vesudvaseeees iii

Table of Authorities ..... fae a apd dane ie, gl aan EAR ee iv

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Statutory Provisions Involved...................... 2

re 3

How the Federal Questions Were Presented........ 5

Reasons for Denying the Writ ..................... 5

I. A SEPARATE POLICY OF INSURANCE WHICH

PROVIDES ONLY WORKERS’ COMPENSATION

BENEFITS REQUIRED BY STATE LAW AND

ADMINISTERED AS A SEPARATE UNIT IS

EXEMPT FROM ERISA PREEMPTION ......... 6

Il. THOSE PLANS LIMITED TO WORKMENS’

COMPENSATION BENEFITS, UNEMPLOY-

MENT COMPENSATION BENEFITS AND DIS-

ABILITY BENEFITS SPECIFIED BY LAW,

WHICH DO NOT IMPINGE UPON THE

ADMINISTRATION OF OTHER CO-EXISTING

EMPLOYEE BENEFIT PLANS PROVIDED BY

AND ADMINISTERED BY THE EMPLOYER,

QUALIFY FOR EXEMPTION FROM ERISA PRE-

et ere ea ose bese asec cei tess s 9

I a 2 Oe er eS a cee uns 11

STATUTES

TABLE OF AUTHORITIES

Page

Cases

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

St SRR Aah iE ese aay aaa Fier ae neg g ed 9

Ft. Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1

ky SORE DARE Seen BIS Bane os renal eee 9

Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473

| SR SEN Serie ee setg weer Heat sy a We 5

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983)....6, 10

Smith v. American Economy Ins. Co., 794 S.W.2d 574

(Tex. App. — Ft. Worth 1990, writ denied)......... l

poe a ee ae ee rr rer ee ee ee

a ee SS ee eee 6, 7

ae! ee ee ee ee

Tex. Rev. Stat. art. 8306 § 3.22..... Peery Tir eer s

Tex. Rev. Stat. art. 8306 § 4........ > .7, 10

Tex. Rev. Stat. art. 8506-6309... .. 1.0... eens cess eer

Tex. Rev. Stat. ast. GSG7 & 1... 62... eee ; 6

ro Sie |) 2

EF UF POE ss cocky cr ce can ees 2, 4, 5, 6, 9, 10

ADMINISTRATIVE RULES

Texas Register, “Rules of the Industrial Accident

Board” 3, 6

No. 91-379

+

In The

Supreme Court of the United States

October Term, 1991

*

AMERICAN ECONOMY INSURANCE

COMPANY, et al.,

Petitioners,

BEVERLY L. SMITH, et al.,

Respondents.

+

Petition For A Writ Of Certiorari To The

Court Of Appeals For

The Second District Of Texas

+

RESPONDENTS’ BRIEF IN OPPOSITION

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The Respondents, Beverly L. Smith and William

Smith, respectfully pray that Petitioners’ petition for a

writ of certiorari to review the judgment and opinion of

the Court of Appeals for the Second District of Texas, be

in all things denied.

—-— —---— 6

OPINIONS BELOW

[he opinion of the Court of Appeals for the Second

District of Texas is reported at 794 S.W.2d 574.

The Supreme Court of Texas denied discretionary

review without opinion.

JURISDICTION

The opinion and judgment of the Court of Appeals

were entered on August 1, 1990. Timely motions for

rehearing of that decision were overruled on September

11, 1990.

Timely applications to the Supreme Court of Texas

for a writ of error were denied on March 27, 1991. A

timely motion for rehearing of that decision was over-

ruled on June 5, 1991.

The jurisdiction of this Court is invoked under 28

U.S.C. § 1257(a).

STATUTORY PROVISIONS INVOLVED

29 U.S.C. § 1003(b) states in pertinent part:

The provisions of this subchapter shall not apply to

any employee benefit plan if -

(3) such plan is maintained solely for the

purpose of complying with applicable work-

men’s compensation laws or unemployment

compensation or disability insurance laws; ... .

¢

STATEMENT OF THE CASE

This is a suit by Respondents Beverly Smith

(“Smith”) and her husband William Smith arising out of a

workers’ compensation claim filed by Smith in 1984. Peti-

tioners are the American Economy Insurance Company

(“American Economy”), which is a workers’ compensa-

tion carrier, and Lindsey & Newsom Insurance Adjusters,

Inc. (“Lindsey & Newsom”), which is American Econ-

omy’s adjuster.

At the time of her injuries, Beverly Smith was

employed by Braum’s Ice Cream Stores, Inc. (“Braum’s”)

in Tarrant County, Texas. Braum’s was then insured

under a workers’ compensation program that was totally

separate and apart from any other insurance coverage

provided by Braum’s to its employees. Moreover,

Braum’s workers’ compensation plan was administered

under totally separate and independent procedures from

any other employee benefits plan provided by Braum’s.

(R. 20, 22, 23).

After sustaining her injury, Smith sought medical

treatment from an orthopedic doctor, but she was refused

medical care because Petitioners refused to accept finan-

cial responsibility for her treatment. Petitioners instead

directed Smith to report to three different doctors, who

rendered opinions on her condition.

In reliance on the medical records and reports of

these three doctors, Smith settled her claim. This settle-

ment was approved by the Texas Industrial Accident

Board in accordance with the Texas Workers’ Compensa-

tion Act and the administrative procedures established by

the Texas Industrial Accident Board. (R. 24, 38).

Subsequently, Smith learned that her injury was more

severe than the mild back strain as diagnosed by Peti-

tioners’ doctors. Smith’s physicians performed further

diagnostic tests and discovered that she suffered from a

herniated, intervertebral disk. She underwent surgery for

the removal of the disk and was left with a permanent

partial disability and future medical expenses.

Smith then filed suit to set aside her prior settlement

and to reopen her claim before the Texas Industrial Acci-

dent Board. In addition, Smith sued Petitioners for dam-

ages on the basis of misrepresentation by Petitioners’

agents, Smith’s detrimental reliance on Petitioners’ doc-

tors’ reports, and Petitioners’ breach of the duty of good

faith and fair dealing. (R. 19-38).

American Economy and Lindsey & Newsom moved

for summary judgment on the ground, inter alia, that the

Smiths’ damage claims were preempted by the Employee

Retirement Income Security Act of 1974 (“ERISA”); (R.

46-121, 308-13). The trial court granted summary judg-

ment to both defendants. (R. 368, 369).

The Texas Court of Appeals reversed the summary

judgment and remanded the case for trial. The Court of

Appeals held that Braum’s workers’ compensation plan

was maintained solely for the purpose of complying with

Texas’ workers’ compensation law. Thus, under 29 U.S.C.

§ 1003(b)(3) of the Employee Retirement Income Security

Act of 1974 (“ERISA”), the Court of Appeals found that

Smith’s claims were not preempted by ERISA federal

laws. The Court of Appeals rejected Petitioners argu-

ments that the plan was intricately embedded with

Braum’s other insurance and employee benefits. Pet.

A-1-8.

The Supreme Court of Texas denied discretionary

review of this decision. (P. A-13, infra).

+

HOW THE FEDERAL QUESTIONS WERE PRESENTED

Respondents acknowledge that Petitioners sought to

raise the federal questions presented herein as stated in

their petition.

REASONS FOR DENYING THE WRIT

This case presents a fact question as to whether the

workers’ compensation policy as written by American

Employers and administered by the Texas Industrial

Accident Board is a plan “maintained solely for the pur-

pose of complying with applicable workmens’ compensa-

tion laws...” and thus exempt from ERISA coverage

pursuant to 29 U.S.C. § 1003(b)(3).

Petitioners concede that “ . . . state courts undoubt

edly have full jurisdiction to adjudicate federal law

issues,” e.g. Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S.

473, 478-79 (1981); Petitioners’ Brief, p. 10. Here the state

court, fully recognizing the ERISA preemptions and regu-

lations applicable to employee benefit plans, made a fac-

tual determination that American Economy’s policy of

insurance in question fell squarely within the ERISA

exemption. 29 U.S.C. § 1003(b)(3).

I. A SEPARATE POLICY OF INSURANCE WHICH

PROVIDES ONLY WORKERS’ COMPENSATION

BENEFITS REQUIRED BY STATE LAW AND

ADMINISTERED AS A SEPARATE UNIT IS

EXEMPT FROM ERISA PREEMPTION.

In Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983), this

Court established a two-fold test to determine whether a

plan is “maintained solely for a purpose of complying

with applicable workmen’s compensation laws” under 29

U.S.C. 1003(b)(3). The test is whether, in practice, the plan

is administered as a separate administrative unit and

whether it provides only those benefits required by state

law. Shaw, 463 U.S. at 107.

Texas created a statutory administrative body, the

Industrial Accident Board, now known as the Texas

Workers’ Compensation Commission. Tex. Rev. Civ. Stat.

Art. 8307 § 1. This administrative body was empowered

to create rules to carry out the provisions of the workers’

compensation benefit program in Texas. Texas Register,

Rules of the Industrial Accident Board Workers Compen-

sation. These administrative rules, together with the stat-

utory provisions of the Texas Workers’ Compensation Act

(Tex. Rev. Civ. Stat. arts. 8306-8309-1), provide a complete

administrative plan for the workers’ compensation pro-

gram in Texas.

Under this statute, employers in Texas are not

required to subscribe to workers’ compensation insurance

(Tex. Rev. Civ. Stat. art. 8306). However, once the

employer elects to provide workers’ compensation cover-

age, the «mployer then is required to accept the rights

and responsibilities imposed by the statute.

Upon subscription, the employer must obtain insur-

ance coverage through a licensed insurance company or

through self-insurance. Texas has provided comprehen-

sive guidelines and requirements that mandate what

medical benefits and disability benefits must be provided

by the employer through its insurance carrier to qualify

as workers’ compensation coverage. Tex. Rev. Civ. Stat.

Art. 8306. The employer is not free to establish his own

plan to compensate employees who suffer from occupa-

tional injuries. Only by providing those benefits required

by the Texas workers’ compensation statute and by sub-

mitting to administration of such benefits by the appro-

priate state agency can the employer avoid penalties set

by the workers’ compensation statute.

The insurer for an employee who subscribes to the

Act becomes absolutely liable to pay workers’ compensa-

tion benefits when an employee is injured in the course

and scope of his employment. Tex. Rev. Civ. Stat. art. 8306

§ 3a. However, the employer’s liability is limited. In

return, the employee of subscribers lose their right to sue

their employer under the common law or under statute,

unless the employee timely notifies the employer that he

declines the workers’ compensation coverage.

If the employer chooses not to subscribe, however,

the injured employee may sue for common law and statu-

tory damages. In addition, the non-subscribing employer

loses all common law defenses in the law suit against it

by an injured employee. In addition, the employer faces

unlimited liability. Tex. Rev. Civ. Stat. art. 8306, § 1, 4.

Thus the benefit and importance of obtaining coverage

under the state workers’ compensation law is obvious.

Moreover, a non-subscribing employer must notify

the Commission that he is declining to subscribe in the

manner and time prescribed by Commission rules. Other-

wise, his failure to notify the Commission subjects the

employer to a monetary penalty for each day of noncom-

pliance. Tex. Rev. Civ. Stat. art. 8306 § 3.22. Thus,

although the employer may opt out of Texas workers’

compensation program, the employer is still bound by the

workers’ compensation law in important respects. The

decision to subscribe or not to subscribe is not wholly

“free,” and “voluntary,” or “strictly elective,” as Peti-

tioners would have this Court believe.

In this case, Braum’s elected to provide workers’

compensation coverage under Texas’ workers’ compensa-

tion statute. Braum’s activities with respect to its

workers’ compensation coverage was governed exclu-

sively by the Industrial Accident Board. The rules of

administration of the workers’ compensation plan was

governed by the Industrial Accident Board with penalties

for non-compliance imposed and determined by the

Industrial Accident Board.

Moreover, Braum’s procured a policy of workers’

compensation insurance from American Economy which

by its very terms complied with those terms required by

the Texas Workers’ Compensation Act. American Econ-

omy, as the employer’s insurer for workers compensation

carrier, is also governed by rules of the Industrial Acci-

dent Board. es

II. THOSE PLANS LIMITED TO WORKMENS’ COM-

PENSATION BENEFITS, UNEMPLOYMENT COM-

PENSATION BENEFITS AND DISABILITY

BENEFITS SPECIFIED BY WORKERS’ COMPEN-

SATION LAW, WHICH DO NOT IMPINGE UPON

THE ADMINISTRATION OF OTHER CO-EXIS-

TING EMPLOYEE BENEFIT PLANS PROVIDED

BY AND ADMINISTERED BY THE EMPLOYER,

QUALIFY FOR EXEMPTION FROM ERISA PRE-

EMPTION.

The presence of exclusionary clause 29 U.S.C. 1003(b)

(3) in the ERISA statute bespeaks the intent of the framers

of the statute to exclude workers’ compensation pro-

grams which do not impact upon other aspects of

‘employer benefit plans’ or their administration. In Alessi

v. Raybestos — Manhattan, Inc., 451 U.S. 504 (1981), this

Court upheld the preemption by federal law in New

Jersey’s workers’ compensation statute only insofar as it

impacted upon pension benefits governed by ERISA.

Allessi, 451 U.S. at 506. However, this Court did not

mandate preemption of the whole New Jersey workers’

compensation statute.

The purpose of ERISA preemption is to provide uni-

form regulation and administration by employers of

employee benefit plans. Ft. Halifax Packing Co., Inc. v.

Coyne, 482 U.S. 1, 11 (1987):

Congress intended preemption to afford

employers advantages of a uniform set of

administrative procedures governed by a single

set of regulations. This concern only arises,

however, with respect to benefits whose provi-

sions by nature require an ongoing administrative

program to meet the employer's obligation. It is for

10

this reason that Congress pre-empted state laws

relating to plans rather than simply to benefits.

Id. at 11 (emphasis added).

Where a state, by law, has established required bene-

fits for workmens’ compensation plans, unemployment

or disability insurance benefits and where such programs

are not administered by the employer as part of his total

employee benefit plan, but as a separate administrative

unit, the ERISA exemption applies. 29 U.S.C. § 1003(b)(3).

Accord Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983):

Only separately administered disability plans

maintained solely to comply with the Disability

Benefit Law are exempt from ERISA coverage

under § 4(b)(3).

Id.

As a Braum’s employee, Smith was eligible to partici-

pate in Braum’s employee benefit plan (R 49-50). That

plan provided a group life and accidental death and

dismembership insurance policy issued by a company

other than American Economy and a group accident, med-

ical and non-occupational disability benefit program that

was self-insured. (R 53-121, 130-98). There was no inter-

connection between the workers’ compensation plan and

other benefits provided through other programs offered

by Braum’s as part of its employee benefit plan.

American Economy’s policy serves no other purpose

than to comply with the Texas Workers’ Compensation

Act. ERISA expressly does not apply to plans that have as

their entire purpose compliance with state law. In this

case, the entire policy at issue was a workers’ compensa-

tion plan that was required to be in place strictly

11

pursuant to Texas’ workers’ compensation law to which

Braum’s elected to subscribe. The entire plan was regu-

lated by the workers’ compensation statute. Braum’s

workers’ compensation policy did not contain a single

benefit not required by Texas’ workers’ compensation

law. Therefore, ERISA does not preempt the legal issues

considered in this case.

CONCLUSION

For the reasons stated herein, the writ of certiorari

should be denied in this case.

Respectfully submitted,

FRANK R. JEWELL

Jewett & AssociaTEs

3100 Monticello, Suite 8J0

Dallas, Texas 75205

(214) 528-2800 telephone

(214) 528-4907 telefax

Counsel for Respondents

Beverly Smith and

William Smith