Amicus Curiae Brief — Pilot Life Ins. Co. v. Dedeaux

09 No. 85-1043

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

PrLoT LIFE INSURANCE Co.,

. Petitioner,

EVFRATE W. DEDEAUX,

Respondent.

On a Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

AND BRIEF AMICI CURIAE FOR

AMERICAN COUNCIL OF LIFE INSURANCE AND

HEALTH INSURANCE ASSOCIATION OF AMERICA

IN SUPPORT OF PETITIONER

Of Counsel: ERWIN N. GRISWOLD

JACK H. BLAINE Counsel of Record

Vice President, PatTriciA A. DUNN

State Relations, and JONES, DAY, REAVIs & POGUE

General Counsel Metropolitan Square

PHILLIP E. STANO 655 Fifteenth Street, N.W.

Senior Counsel Washington, D.C. 20005-5701

AMERICAN COUNCIL OF (202) 879-3939

LIFE INSURANCE Counsel for the Amici

1850 K Street, N.W.

Washington, D.C. 20006-2284

(202) 862-4000

Joe W. PEEL

Vice President and

General! Counsel

JOHN P. DINEEN

Associate General Counsel

HEALTH INSURANCE

ASSOCIATION OF AMERICA

1025 Connecticut Ave., N.W.

Suite 1200

Washington, D.C. 20036

(202) 223-7780

_—————————

WILSON - Epes Printing Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No. 85-1043

PILOT LIFE INSURANCE CoO.,

Petitioner,

Vv.

EVERATE W. DEDEAUX,

Respondent.

On a Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

FOR AMERICAN COUNCIL OF LIFE INSURANCE AND

HEALTH INSURANCE ASSOCIATION OF AMERICA

IN SUPPORT OF PETITIONER

The American Council of Life Insurance (the “Coun-

cil”) and the Health Insurance Association of America

(the “HIAA”) hereby move, pursuant to Rule 36.3 of

the Rules of this Court, for leave to file the attached brief

as amici curiae. Consent to the filing of this brief has

been obtained from counsel for the petitioner. Counsel

for the respondent has refused consent.

The Council is the largest life insurance trade associa-

tion in the United States, representing the interests of

627 member life insurance companies. The Council’s

members, which include most of the country’s major life

insurers, currently hold ninety-five percent of the life

insurance in force in legal reserve life insurance com-

panies in the United States. The HIAA represents the

interests of 327 member companies. These companies pro-

vide over eighty-five percent of the health insurance writ-

ten by insurance companies in the United States. The

combined memberships of the HIAA and the Council rep-

resent over ninety percent of the health insurance written

by insurance companies in this country.

The insurance industry plays a critical role in provid-

ing health and life insurance benefits to members of this

nation’s workforce through employee welfare benefit plans

governed by the Employee Retirement Income Security

Act of 1974 (“ERISA”), 29 U.S.C. 88 1001 et seq.

Through group policies, insurance companies—including

many members of the Council and the HIAA—fund ap-

proximately 99 percent of the benefit plans in the United

States which cover fewer than 100 participants. See

“Employee Welfare Benefit Plans and Plan Sponsors in

the Private Nonfarm Sector in the United States, 1978-

79,” Health and Population Study Center, Battelle Human

Affairs Research Centers, Vol. IV (1980), at 43-45. Ap-

proximately 92 percent of the plans in this country cov-

ering greater than 100 participants are funded through

insurance. Jd. In many instances, insurers assume ad-

ministrative responsibilities for such plans as well. Jd.

Thus, members of the Council and the HIAA make wel-

fare benefit plans possible for countless employers—large

and small—thereby ensuring that the great mass of work-

ers in this country receive some form of life and health

insurance protection. For example, through group policies

issued by insurers, more than 17 million individuals in

1982 were protected by long-term disability insurance

programs like the program involved here. See HIAA

Source Book of Health Insurance Data, 1984 Update, at 9.

Because of their nationwide constituencies, the Council

and the HIAA are peculiarly able to present to this Court

the views of the life and health insurance industries con-

cerning the issue presented in this case: whether an em-

ployee’s state common law claims against an insurer for

an alleged mishandling of a benefit claim under an in-

sured plan are laws “which regulate insurance” and are

thus saved from preemption by Section 514(b) of ERISA,

29 U.S.C. § 1144(b). Those views are particularly im-

portant where, as here, resolution of this case requires

interpretation of ERISA’s “insurance saving clause” and

turns in part on the meaning of “regulating the business

of insurance” under the McCarran-Ferguson Act, 15

U.S.C. §§ 1101-12. They are also important because, if

the decision below stands, insurers who undertake claims

review responsibilities, but not their non-insurer coun-

terparts, will be exposed to suit under widely-varying

state common laws—in addition to or in lieu of ERISA—

whenever a disgruntled participant challenges the han-

dling of a benefit claim. Because the decision below dras-

tically enlarges the risk of insurers to varying standards

of conduct imposed by state common law rules and to

substantial, yet unpredictable, compensatory and puni-

tive damages awards, the Council and the HIAA have a

direct and substantial interest in this case.

For these reasons, the motion for leave to file the at-

tached brief amici curiae in support of the petitioner

should be granted.

Respectfully submitted,

Of Counsel: ERWIN N. GRISWOLD

JACK H. BLAINE Counsel of Rece cd

Vice President, PATRICIA A. DUNN

State Relations, and JONES, Day, Reavy: & POGUE

General Counsel Metropolitan Square

PHILLIP E. STANO 655 Fifteenth Street, N.W.

Senior Counsel Washington, D.C. 20005-5701

AMERICAN COUNCIL OF (202) 879-3939

LIFE INSURANCE Counsel for the Amici

1850 K Street, N.W.

Washington, D.C. 20006-2284

(202) 862-4000

JoE W. PEEL

Vice President and

General Counsel

JOHN P. DINEEN

Associate General Counsel

HEALTH INSURANCE

ASSOCIATION OF AMERICA

1025 Connecticut Ave., N.W.

Suite 1200

Washington, D.C. 20026

(202) 223-7780

August, 1986

QUESTIONS PRESENTED

(1) Whether the Employee Retirement Income Secu-

rity Act of 1974 (“ERISA”) preempts an employee’s

state common law contract and tort claims, arising from

an alleged mishandling of a claim for benefits under an

insured employee benefit plan, against an insurance com-

pany acting as a claims review administrator?

(2) Whether state common law causes of action of gen-

eral application, sounding in contract and tort, are laws

which regulate insurance under the proper construction

of Section 514(b) of ERISA and are thus saved from

preemption?

(i)

TABLE OF CONTENTS

PR RL RERE NAE RE a AD ORT CE OR

I.

II.

Ill.

CONCLUSION

THE DECISION BELOW IS INCONSISTENT

WITH THE BROAD PREEMPTIVE LAN-

GUAGE OF ERISA, ITS LEGISLATIVE HIS-

TORY, AND THE POLICIES EMBODIED IN

Se NE TT

THE FIFTH CIRCUIT’S APPLICATION OF

ERISA’S SAVING CLAUSE IS INCONSIST-

ENT WITH THIS COURT’S CONSTRUCTION

OF AND CONGRESSIONAL INTENT UN-

DERLYING THE MCCARRAN-FERGUSON

GPT. suits eanccociacipessatiaiaiianeaniintiadanapienal TEL cissen

THE DECISION BELOW MISAPPLIES THIS

COURT’S DECISION IN METROPOLITAN

LIFE INSURANCE CO v. MASSACHUSETTS

AND DRAWS AN UNWORKABLE DISTINC-

TION BETWEEN INSURED AND UNIN-

Pe I ihcanscchenicsntelasiiaciansitesinnipoetiniteinevecs

A. Metropolitan Life Does Not Require Exemp-

tion of State Common Law Actions from

ERISA’s Preemptive Reach

B. Metropolitan Life Does Not Support the Dis-

tinction Between Insured and Uninsured

Plans Drawn by the Court Below

(iii)

12

18

18

19

25

27

nn

iv

TABLE OF AUTHORITIES

CASES: Page

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

CROUIID aiccaencnnnensnccernseinnsntensnmnsnnnnecnernnemenvenarsncncnnnnn 8, 12

American Progressive Life and Health Insurance

vy. Corcoran, 715 F.2d 784 (2d Cir. 1983) .........--- 1l

Benvenuto v. Connecticut General Life Insurance

Co., No. 84-3601 (D.N.J. Feb. 27, 1986) ......-.---- 16 ,21

Blakemen v. Mead Containers, 779 F.2d 1146 (6th

Che, 1OBB) -...2..----..-00000-20-ens-ns-nssnsennsensnneensasessnsannconens 21

Children’s Hospital v. Whitcomb, 778 F.2d 239

(Sth Cir. 1985) ........-.-..----------------ccersnenensoenseeneeennnnes 20

Cuttle v. Federal Employees Metal Trades Council,

623 F. Supp. 1154 (D. Me. 1985) ...........-.------------ 20

Dedeaux v. Pilot Life Insurance Co., 770 F.2d 1311

(Sth Cir. 1985) ........-------------s-s-cesessssoseressererenenseees 4,5

Dillard v. Teamsters Council 83 Health & Welfare

Fund, 6 Emp. Ben. Cas. (BNA) 2558 (W.D. Va.

DO accncscctcssnenccnsscnncensnenesncees oD i aalipeaandey 20

Ellenburg v. Brockway, Inc., 763 F.2d 1091 (9th

._ =_ =e nn cadesumnmeensamnats 21

Eversole v. Metropolitan Life Insurance Co., 500

F. Supp. 1162 (C.D. Cal. 1980) ........... Aion ae 22

FTC v. National Casualty Co., 357 U.S. 560

CRITI acne sesesnce an nn sncnennnnsnesenvsnnnanecasncssoncnonnnnonscns 14, 15

Franchise Tax Board v. Construction Laborers

Vacation Trust, 463 U.S. 1 (1983) ...........---.-----. 7-8

Group Life and Health Insurance Co. v. Royal

Drug Co., 440 U.S. 205, reh’g denied, 441 U.S.

GIT CIDTB) ...----20.--<-2------- ai latina 15

Hamilton Life Insurance Co. v. Republic Nationa

Life Insurance Co., 408 F.2d 606 (2d Cir. 1969) 15

Hart v. Orion Insurance Co., 453 U.S. 1358 (10th

Che, BBTL) .....--0-.--<ccceencecenessesesesseoncsnsosesscnveranseses = 15

Holland v. Burlington Industries, Inc., T72 F.2d

1140 (4th Cir. 1985), aff'd mem., 106 S.Ct. 3267

ID vccsccanctecscccnnsniesantaneneteniacccnnsoe a aad 7

Hutchinson v. Benton Casing Service, Inc., 619

F. Supp. 831 (S.D. Miss. 1985) -..............--------- 21

Kanne v. Connecticut General Life Insurance Co.,

607 F. Supp. 899 (C.D. Cal. 1985) ...........-.------ 21

Vv

TABLE OF AUTHORITIES—Continued

Page

Kilmer v. Central Counties Bank, 623 F. Supp.

EE 20

Lessard v. Metropolitan Life Insurance Co., 618

F. Supp. 1268 (D. Me. 1985) ................................ 21

Light v. Blue Cross and Blue Shield of Alabama,

790 F.2d 1247 (5th Cir. 1986), aff’g, 616 F.

Supp. 558 (S.D. Miss. 1985) ................................. 21

Lucash v. Strick Corp., 602 F. Supp. 430 (E.D.

Pa. 1984), aff'd mem., 760 F.2d 259 (3d Cir.

AREAS RIES SARE Ce coe ace Ny ae 21

McLaughlin v. Connecticut General Life Insurance

Co., 565 F. Supp. 484 (N.D. Cal. 1983) —............ 21

Massachusetts Mutual Life Insurance Co. v. Rus-

sell, 106 S.Ct. 3065 (19665) .................................... 4, 22

Metropolitan Life Insurance Co. v. Massachusetts,

105 S.Ct. 2380 (1985) —.......... 4, 5, 6, 8, 13, 14, 18, 19, 20

Michigan United Food and Commercial Workers

Union v. Baerwaldt, 767 F.2d 308 (6th Cir.

1985), cert. denied, 106 S.Ct. 801 (1986)... 11

Moore v. Provident Life & Accident Insurance Co.,

786 F.2d 922 (9th Cir. 1986) ................00000 0... 21

Nachman Corp. v. Pension Benefit Guaranty Corp.,

i es 7

Northwest Department ILGWU Health and Wel-

fare Fund v. Teamsters Local Union No. 229

Welfare Fund, 764 F.2d 147 (3d Cir. 1985)... 11

Powell v. Chesapeake & Potomac Telephone Co.,

780 F.2d 419 (4th Cir. 1985), cert. denied, 106

Rn as 11, 16, 21, 23

Presti v. Connecticut General Life Insurance Co.,

605 F. Supp. 163 (N.D. Cal. 1985)... 21-22

Robertson v. California, 328 U.S. 440 (1946) 14

SEC v. National Securities, Inc., 393 U.S. 453

TEE eee ta en ee lorena eee Lee 14

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983)... 8, 12

Sommers Drug Store Co. Employee Profit Sharing

Trust v. Corrigan Enterprises, Inc., No. 85-2377

(5th Cir. July 14, 1986)... 23

vi

TABLE OF AUTHORITIES—Continued

Page

Troqner v. New York Life Insurance Co., 633 F.

i I isi 21, 22

Union Labor Life Insurance Co. v. Pireno, 458

shi. A Ee 15

Wadswoth v. Wheland, 562 F.2d 70 (ist Cir.

1977), cert. denied, 4%) U.S. 980 (1978) ........ 11

Wayne Chemical, Inc. v. Columbus Agency Service

Corp., 567 F.2d 692 (7th Cir. 1977) 200000. 11

STATUTES, RULES AND REGULATIONS:

Employee Retirement Income Security Act of 1974

(“ERISA”), 29 U.S.C. § 1001 et seq. _.............. 2

ERISA § 409(a), 29 U.S.C. §1109(a) 200. 22

ERISA § 502(a) (3), 29 U.S.C. § 11382(a) (3) ........ 23

ERISA § 514, 29 U.S.C. § 1144 000... 2, 26

ERISA § 514(a), 29 U.S.C. § 1144(a) _......... 4, 5, 7, 8, 10,

11, 16

ERISA § 514(b), 29 U.S.C. § 1144(b) ....5, 6, 12, 13, 18, 19

ERISA § 514(b) (2), 29 U.S.C. § 1144(b) (2)... 10, 12

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

IRE «ee Nn CC Rt 4, 11, 13, 16

ERISA § 514(b) (2) (B), 29 U.S.C. § 1144(b) (2)

PEE eee ence Ee eras sae Pep Se 13, 19

ERISA § 514(b) (4), 29 U.S.C. § 1144(b) (4)... 12

ERISA § 514(c) (1), 29 U.S.C. § 1144(c) (1)... 7, 16

McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1012... 2, 10,

13, 27

aE AO oe NOT 10

LEGISLATIVE MATERIAL:

H.R. Rep. No. 533, 98d Cong., 1st Sess. (1973),

reprinted in 2 Legislative History of the Em-

ployee Retirement Income Security Act of 1974

(“Legislative History”), 2348 9

H.R. Conf. Rep. No. 93-1280, 93d Cong., 2d Sess.

(1974), reprinted in 3 Legislative History,

a REE Ee ee See 10

ad ee Se pet ©

vii

TABLE OF AUTHORITIES—Continued

POPS PSSSSS SecesecoosseeeooeeCcecoeseseo

Manno, “ERISA Preemption and the McCarran

Ferg’. »» Act: The Need for Congressional Ac-

tion’. - ‘ amp. L. Q. "5 (1979)

Page

17

9,11

13, 24

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No. 85-1043

PILoT LIFE INSURANCE Co.,

Petitioner,

Vv.

EVERATE W. DEDEAUX,

Respondent.

On a Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

BRIEF AMICI CURIAE FOR

AMERICAN COUNCIL OF LIFE INSURANCE AND

HEALTH INSURANCE ASSOCIATION OF AMERICA

IN SUPPORT OF PETITIONER

INTERESTS OF THE AMICI:

As indicated in the Motion accompanying this Brief,

the American Council of Life Insurance (the “Council’’)

is the largest life insurance trade association in the

United States, representing the interests of 627 member

life insurance companies. The Health Insurance Associa-

tion of America (the “HIAA”) represents the interests

of 327 member companies. The combined memberships

2

of the HIAA and the Council represent over ninety per-

cent of the health insurance written by insurance com-

panies in the United States.

The legal and practical consequences of the Fifth Cir-

cuit’s opinion below are matters of grave concern to the

members of the Council and the HIAA. Many members

of the Council and the HIAA provide group insurance

policies for and administer employee benefit plans gov-

erned by the Employee Retirement Income Security Act

of 1974 (“ERISA” or the “Act’”), 29 U.S.C. §§ 1001

et seg. By subjecting insurers that undertake ERISA

administrative responsibilities to suit under state common

law rules—in addition to or in lieu of ERISA—the deci-

sion below drastically enlarges the risk of such insurers to

the varying, and often inconsistent, standards of conduct

imposed by state common law rules. That risk is height-

ened by the prospect that the adjudication of benefit

claims under diverse state common law rules, rather than

ERISA, will be accompanied by substanial, yet unpredict-

able, compensatory and punitive damages awards. Faced

with the uncertainties and inconsistencies fostered by the

decision below, members may be unable to provide afford-

able group insurance policies to employers who sponsor

benefit plans, or to undertake administrative responsibili-

ties for such plans. The Council and the HIAA thus have

a direct and immediate interest in the issues presented in

this case.

STATUTES INVOLVED

This case involves Section 514 of ERISA, 29 U.S.C.

§ 1144, and the McCarran-Ferguson Act, 15 U.S.C.

$§ 1011-1012. These provisions are set forth in the

Appendix, infra pp. 27-28.

ef

8

STATEMENT

Entex, Inc. (“Entex”) sponsors a Long-Term Disabil-

ity Plan (the “Plan”) which provides disability benefits

to its employees who become disabled due to work-related

injuries. The Plan, which is an employee welfare benefit

plan governed by ERISA, pays benefits during the first

two years of disability if the employee is unable to per-

form the duties of his occupation. Thereafter, benefits

are payable only if the employee is disabled from “any

and every occupation or employment for which [he] is

reasonably fitted by education, training or experience.”

Benefits under the Plan are provided through a group

insurance policy issued to Entex by Petitioner Pilot Life

Insurance Company (“Pilot Life”). Although Entex is

the Plan sponsor and administrator, Pilot Life has re-

sponsibility for processing benefits claims under the Plan.

The respondent, an employee of Entex, injured his back

in a work-related accident in March, 1975. Respondent

sought, and Pilot Life provided, disability benefits for

the first two years after respondent’s accident. Although

disputes arose after the two-year period concerning re-

spondent’s continued eligibility for benefits, Pilot Life

paid disability benefits to respondent until March, 1980.

At that time, Pilot Life discontinued respondent’s bene-

fits on the basis of independent medical reports which

concluded that respondent was able to perform light or

sedentary work.

No internal appeal of Pilot Life’s decision to terminate

disability benefits, as required by ERISA, was filed by

respondent. Rather, on May 30, 1980, respondent brought

a diversity action against Entex and Pilot Life in the

United States District Court for the Southern District

of Mississippi. In his complaint, respondent asserted

various state common law causes of action, including

breach of contract, breach of fiduciary duty, and fraud.

Respondent sought $750,000 in compensatory damages

4

and $500,000 in punitive damages. Respondent did not

assert any claim under ERISA.'*

The Proceedings Below

On May 21, 1982, Pilot Life moved for summary judg-

ment, asserting, inter alia, that ERISA preempted re-

spondent’s state law claims relating to Pilot Life’s termi-

nation of disability benefits. The district court granted

the motion, holding that Section 514(a) of ERISA pre-

empted respondent’s state law causes of action and that

ERISA provided the exclusive remedy for his claims.

On appeal, the Fifth Circuit reversed the decision of

the district court. Recognizing the breadth of ERISA’s

preemption of state law, the court conceded that respond-

ent’s claims would have been preempted if Entex had

self-insured, rather than purchased insurance for, its

Plan. Thus, the narrow issue on appeal was whether

Section 514(b)(2)(A) of ERISA—the so-called insur-

ance “saving clause”—released respondent’s state tort

and contract claims from preemption.

The Fifth Circuit held that it did. Relying principally

upon Metropolitan Life Insurance Co. v. Massachusetts,

105 S. Ct. 2380 (1985), the court below held that

ERISA’s insurance saving clause, construed in light of

analogous language in the McCarran-Ferguson Act, is

broad enough to encompass respondent’s state common

law claims against Pilot Life. Specifically, the court

found that these common law claims of general applica-

1As the Fifth Circuit noted on appeal of this action, “[t]he

reason why Dedeaux did not pursue this tack is obvious—Dedeaux

sought $500,000 in exemplary damages, but ERISA neither ex-

pressly nor implicitly authorizes such an award. Massachusetts

Mut. Life Insurance Co. v. Russell, —— U.S. ——, 105 S. Ct. 3085,

87 L.Ed.2d 96 (1985).” Dedeauz v. Pilot Life Ins. Co., 770 F.2d

1311, 1313 n.3 (5th Cir. 1985) (citations omitted). Mississippi

common law, on the other hand, does permit punitive damages

awards in certain circumstances. /d.

ee

5

tion, like the mandated-benefit statute at issue in Metro-

politan Life, are laws “which regulate[] insurance” and,

as such, are saved from preemption by Section 514(b)

of ERISA. The court thus concluded that “state laws pro-

scribing the same conduct as ERISA may provide a cause

of action in place of, in addition to, or coequal with any

cause of action available under ERISA.” 770 F.2d at

1317.

SUMMARY OF ARGUMENT

By its terms, ERISA preempts “any and all State

laws” which “relate to any employee benefit plan.” 29

U.S.C. §1144(a). This is subject to a “saving clause”

which exempts from preemption “any law of any State

which regulates insurance.” 29 U.S.C. § 1144(b). Given

the sweeping breadth of ERISA’s preemptive reach, the

court below concedes—and the parties to this case do not

dispute—that state common law rules of general appli-

cation, when applied to uninsured employee benefit plans,

are preempted by ERISA.

Nothing in the words or legislative history of ERISA

suggests that the same generally applicable common law

rules should survive preemption merely because an em-

ployer purchases insurance for, rather than self-insures,

an employee benefit plan. In holding that state common

law rules of general application are saved from preemp-

tion by ERISA’s insurance saving clause when applied

to insurers acting as claims review administrators, the

decision below unravels the preemptive fabric of ERISA

and disrupts the uniformity ERISA was designed to pro-

mote. It means that state common law rules of general

applicability, not specifically directed to insurance, may

provide a cause of action in place of or in addition to

ERISA whenever an employer purchases insurance for

and retains an insurance company to administer its em-

ployee benefit plan. Because the great majority of plans

are insured or insurer-administered, the decision below

6

means that state law—more often than ERISA—will de-

termine liability for claims handling under ERISA-

governed plans. The decision below thus strikes at the

very objectives underlying ERISA: to establish federal

primacy over employee benefit plan regulation and to

ensure that such plans are uniformly enforced and admin-

istered without reference to varying state laws.

Not only does the decision below contravene the inten-

tion of Congress to preempt all state laws that fall within

ERISA’s sphere, but it reaches this result by miscon-

struing the insurance saving clause contained in Section

514(b) of ERISA. Intended to preserve the McCarran-

Ferguson Act’s reservation of insurance regulation to

the states, the saving clause releases from preemption

only those state regulatory schemes which regulate the

“business of insurance.” It does not shelter state com-

mon law rules which apply, in general terms, to the

parties to any sort of contract—insurance or otherwise.

For this reason, this Court’s decision in Metropolitan Life

Insurance Co. v. Massachusetts, 105 S. Ct. 2380 (1985),

does not require, as the court below concluded, application

of ERISA’s saving clause here. Unlike the mandated-

benefits statute at issue in Metropolitan Life, which was

focused directly on insurance, the common law rules at

issue in this case are not peculiarly applicable to insurers

and do not regulate the “business of insurance” within

the meaning of either the McCarran-Ferguson Act or

ERISA.

Moreover, Metropolitax Life does not support the dis-

tinction between insured and uninsured plans drawn by

the court below. This Court in Metropolitan Life recog-

nized that ERISA, by operation of the “deemer clause,”

distinguishes between insured and uninsured plans when

state regulation of the insurance business is inyulved.

But it did not hold—and ERISA does not require—that a

similar distinction exists when state common law rules

of general application are applied. In holding that in-

“a

sured plans, but not their self-insured counterparts, may

be subjected to state common law rules, the court below

gave life to a distinction which is unsupported by the

words of ERISA, is wholly inconsistent with ERISA’s

comprehensive remedial scheme, and is entirely unwork-

able in practice.

ARGUMENT

I. THE DECISION BELOW IS INCONSISTENT WITH

THE BROAD PREEMPTIVE LANGUAGE OF

ERISA, ITS LEGISLATIVE HISTORY, AND THE

POLICIES EMBODIED IN THE ACT

In its simplest terms, this case involves the continued

primacy of ERISA in the field of employee benefit plan

regulation. The question here is whether ERISA pre-

empts state common law actions against an insurer aris-

ing from the alleged mishandling of a benefit claim under

an insured employee welfare benefit plan. Relying upon

ERISA’s narrow insurance saving clause, the court be-

low held that it does not. But the court clearly misapplied

the broad command of Section 514(a) of ERISA, as

shown by its legislative history, and ignored important

policies underlying the Act.

ERISA is a “comprehensive and reticulated statute,”

Nachman Corp. v. Pension Benefit Guaranty Corp., 446

U.S. 359, 361-62 (1980), which by its clear terms “super-

sede[s] any an all State laws insofar as they may now

or hereafter relate to any employee benefit plan. .. .”

29 U.S.C. §1144(a) (emphasis added). Evidencing its

“unparalleled breadth,” Holland v. Burlington Industries,

Inc., 772 F.2d 1140, 1147 (4th Cir. 1985), aff'd mem.,

106 S. (+. 3267 (1986), ERISA preempts not only state

statutory enactments relating to benefit plans, but also

“all laws, decisions, rules, regulations, or other State

action having the effect of law, of any State.” 29 U.S.C.

§ 1144(c) (1).

That this “virtually unique pre-emption provision,”

Franchise Tax Board v. Construction Laborers Vacation

8

Trust, 463 U.S. 1, 24 n.26 (1983), was intended to have

a sweeping reach has been recognized by this Court. In-

deed, most recently, the Court declined to interpret Sec-

tion 514(a) so as to limit its preemption to state laws

dealing specifically with the subject matters covered by

ERISA (e.g., reporting, disclosure, fiduciary responsibil-

ity). It concluded instead that “RISA “was intended to

displace all state laws that fall within its sphere, even

including state laws that are consistent with ERISA’s

substantive requirements.” Metropolitan Life Insurance

Co. v. Massachusetts, 105 S. Ct. at 2389. In short, the

principles which have emerged from this Court’s deci-

sions are clear: that, with several narrowly articulated

exceptions, ERISA was intended to make employee bene-

fit plan regulation a matter of virtually exclusive federal

concern. See Metropolitan Life Insurance Co. v. Massa-

chusetts, 105 S. Ct. at 2389; Shaw v. Delta Air Lines,

Inc., 463 U.S. 85 (1983) ; Alessi v. Raybestos-Manhattan,

Inc., 451 U.S. 504 (1981).

This broad view of ERISA’s preemption provision

is likewise compelled by the <Act’s legislative history.

Throughout its deliberations of ERISA, Congress was

acutely aware that establishing a comprehensive federal

regulatory scheme was critical to ensuring the uniform

administration and enforcement of employee benefit plans.

That Section 514 was intended to play a paramount role

in achieving uniformity in the application of ERISA—

and particularly its fiduciary standards—was emphati-

cally articulated:

[A] fiduciary standard embodied in Federal legisla-

tion is considered desirable because it will bring a

measure of uniformity in an area where decisions

under the same set of facts may differ from state to

state.... [I]t is evident that the operations of em-

ployee benefit plans are increasingly interstate. The

uniformity of decision which the Act is designed to

foster will help administrators, fiduciaries and par-

ticipants to predict the legality of proposed actions

9

without the necessity of reference to varying state

laws.

H.R. Rep. No. 533, 93d Cong., Ist Sess. 12 (1973), re-

printed in 2 Legislative History of the Employee Retire-

ment Income Security Act of 1974 (hereinafter “Legisla-

tive History”), at 2359. See also 120 Cong. Rec. 29,197

(1974) (remarks of Representative Dent) (broad federal

preemption was designed to eliminate “the threat of con-

flicting and inconsistent State and local regulations”) ;

120 Cong. Rec. 29,933 (remarks of Senator Williams)

(“the substantive and enforcement provisions . . . are

intended to preempt the field for Federal regulations, thus

eliminating the threat of conflicting or inconsistent State

and local regulation of employee benefit plans’’) .?

In the development of ERISA, Congress did consider a

narrower preemption clause, covering only those aspects

of state law relating to the substantive areas covered by

ERISA.* But as Senator Javits, one of the chief archi-

tects of ERISA, explained:

2 The Senate Committee similarly stated its intent with clarity:

Except ... in certain . . . enumerated circumstances, state law

is preempted. Because of the interstate character of employee

benefit plans, the Committee believes it essential to provide for

a uniform source of law in the areas of vesting, funding, in-

surance and portability standards, for evaluating fiduciary

conduct and for creating a single reporting and disclosure

system in lieu of burdensome multiple reports.

S. Rep. No. 127, 93d Cong., Ist Sess. 35 (1973), reprinted in 1

Legislative History, at 621.

3 See generally Hutchinson and Ifshin, “Federal Preemption of

State Law Under the Employee Retirement Income Security Act

of 1974,” 46 U. of Chi. L. Rev. 23, 38-43 (1978). Specifically, as

passed by the Senate, H.R. 2 provided for preemption of “any and

all laws of the States and of political subdivisions thereof insofar

as they may now or hereafter relate to the subject matters regu-

lated by this Act or the Welfare and Pension Plans Disclosure Act.”

H.R. 2, 93d Cong., 2d Sess. § 699(a) (1974), reprinted in 3 Leg-

10

Such a formulation raised the possibility of endless

litigation over the validity of State action that might

impinge on Federal regulation, as well as opening

the door to multiple and potentially conflicting State

laws hastily contrived to deal with some particular

aspect of private welfare or pension benefit plans not

clearly connected to the Federal regulatory scheme.

_.. [T]he emergence of a comprehensive and per-

vasive Federal interest and the interests of uniform-

ity with respect to interstate plans required—but for

certain exceptions—the displacement of State action

in the field of private employee benefit programs.

120 Cong. Rec. 29,942 (1974) (emphasis added). Thus,

in choosing the broader preemption clause—called the

“erowning achievement of the legislation” ‘Congress

made clear its intent to supersede all state laws that fall

within ERISA’s substantive reach, and to preempt state

laws that more generally apply to employee benefit plans

as well.

Nothing in the carefully written exceptions provided

in Section 514(a) reflects a contrary intent. Section

514(b) (2) of ERISA—the insurance saving clause—pre-

serves “any law of any State which regulates insurance

...,” 29 U.S.C. § 1144(b) (2), and was clearly designed

to preserve the provisions of the McCarran-Ferguson Act,

15 U.S.C. §§ 1011-1012. See Metropolitan Life Insurance

Co. v. Massachusetts, 105 S. Ct. at 2392 n.21.° Giving

those words their common sense meaning, as this Court

has done in construing ERISA, id. at 2389-90, it is obvious

from the words themselves that Congress meant to save

islative History, 3820. This limited language was rejected by the

Conference Committee, which chose the more expansive preemption

clause. See H.R. Conf. Rep. No. 93-1280, 93d Cong., 2d Sess. 383

(1974), reprinted in 3 Legislative History, 4650.

4120 Cong. Rec. 29,197 (remarks of Representative Dent).

5 That Act provides in part that “[t]he business of insurance...

shall be subject to the laws of the several States which relate to the

regulation or taxation of such business.” 29 U.S.C. § 1012(a).

11

from preemption only state legislative and regulatory

schemes specifically applicable to insurance—not judicially

created laws, or indeed statutory laws, of general appli-

cation. See Poweil v. Chesapeake & Potomac Telephone

Co., 780 F.2d 419, 423 (4th Cir. 1985), cert. denied, 106

S. Ct. 2892 (1986) (the saving clause “exempts from

ERISA’s preemptive effect only those state insurance laws

that regulate the ‘business of insurance’” and not state

common law claims); Northeast Dept. ILGWU Health

and Welfare Fund v. Teamsters Local Union No. 229

Welfare Fund, 764 F.2d 147, 158 n.8 (8d Cir. 1985)

(court stated in dictum that “judge-made rules regarding

interpretation of insurance contracts are not the kind of

state insurance regulations that the Congress intended to

preserve” in ERISA).®

Moreover, the legislative history of ERISA shows that

a more sweeping exception to the broad preemption clause

contained in the Act was not intended. Rather, the care-

fully tailored exceptions to Section 514(a) were meant

to be construed narrowly. See, e.g., 120 Cong. Rec. 29,197

(1974) (remarks of Representative Dent) (“narrow ex-

ceptions specifically enumerated”) ; 120 Cong. Rec. 29,933

(remarks of Senator Williams) (“narrow exceptions

specified in the bill”). Had Congress intended to create

an all-encompassing exception for common law rules

which, in general terms, relate to the obligations of par-

On the other hand, many courts have concluded—giving the

saving clause its intended meaning—that state statutes specifically

applicable to the business of insurance are “saved” from preemption

by Section 514(b)(2)(A) of ERISA. See, e.g., Michigan United

Food & Commercial Workers Union v. Baerwaldt, 767 F.2d 308

(6th Cir. 1985), cert. denied, 106 S.Ct. 801 (1986) (state mandated-

benefit law); American Progressive Life and Health Ins. v.

Corcoran, 715 F.2d 784 (2d Cir. 1983) (state insurance law

establishing minimum sales commissions) ; Wadsworth v. Whaland,

562 F.2d 70 (1st Cir. 1977), cert. denied, 485 U.S. 980 (1978) (state

mandated-benefit law); Wayne Chemical, Inc. v. Columbus Agency

Service Corp., 567 F.2d 692 (7th Cir. 1977) (state insurance law

forbidding sale of unauthorized group policies) .

12

ties to any contract—insurance or otherwise—it surely

could have done so. Congress obviously knew how to ex-

empt laws of general application in ERISA, as it did

when it saved from preemption “any generally applicable

criminal law of a State.” 29 U.S.C. §1144(b) (4) (em-

phasis added).

Against this background, the collision of the decision

below with the legislative intent underlying the Act is

quite clear. In holding that state common law actions

arising from alleged mishandling of benefit claims are not

preempted by ERISA when asserted against insurers act-

ing as claims review administrators, the decision below

ignores the clear intent of Congress to “establish[] benefit

plan regulation ‘as exclusively a federal concern,’ Alessi

v. Raybestos-Manhattan, Inc., 451 U.S., at 523, . . . [and

to] minimize[] the need for interstate employers to ad-

minister their plans differently in each State in which they

have employees.” Shaw v. Delta Air Lines, Inc., 463 U.S.

at 105. Because it permits the practices of the states, as

reflected in their common law rules, to assume a prom-

inence equal, if not superior, to ERISA with respect to

the handling of benefit claims, the decision below achieves

precisely the result Congress carefully sought to avoid

when it enacted ERISA.

Il. THE FIFTH CIRCUIT’S APPLICATION OF ERISA’S

SAVING CLAUSE IS INCONSISTENT WITH THIS

COURT’S CONSTRUCTION OF AND CONGRES-

SIONAL INTENT UNDERLYING THE MCCARRAN-

FERGUSON ACT

Not only does the decision below contravene Congress’

explicit intent to give ERISA a sweeping preemptive

reach, but the decision rests upon a fundamental mis-

interpretation of the language of ERISA’s saving clause.

In holding that a state common law rule of general appli-

cation is a law “which regulates insurance” within the

meaning of Section 514(b), the court below gave the sav-

ing clause an unduly broad reading. Properly construed,

13

the saving clause can only apply to state regulatory

schemes specifically applicable to insurance, like those

protected by the McCarran-Ferguson Act, 15 U.S.C.

$§ 1011-1012, and not to judicially-created laws of gen-

eral application in all fields.

The McCarran-Ferguson Act provides in relevant part

that “[t]he business of insurance .. . shall be subject to

the laws of the several States which relate to the regu-

lation or taxation of such business.” 15 U.S.C. § 1012(a)

(emphasis added). “The blanket grant of authority to

the states in the insurance area is, however, no mor all-

encompassing than the blanket interdiction against them

in the employee benefit field.” Manno, “ERISA Preemp-

tion and the McCarran-Ferguson Act: The Need for Con-

gressional Action,” 52 Temp. L. Q. 51, 54 (1979). That

interdiction, found in Section 514 of ERISA, mandates

preemption of all state laws which directly or indirectly

“relate to” employee benefit plans. But “to preserve the

McCarran-Ferguson Act’s reservation of the business of

insurance to the States,” Metropolitan Life Insurance Co.

v. Massachusetts, 105 S. Ct. at 2392 n.21, ERISA saves

from preemption “any law of any State which regulates

insurance.” 29 U.S.C. §1144(b)(2)(A) (emphasis

added) .”

The conclusion that ERISA’s saving clause is properly

limited to state statutory schemes regulating insurance is

supported, if not compelled, by the construction given to

the strikingly similar words used in the McCarran-Fer-

™ Congress’ extraction of words from the McCarran-Ferguson

Act for use in ERISA was clearly not accidental. In addition to

the language quoted above, the “deemer clause” set forth in Section

514(b) of ERISA provides that “an employee benefit plan .. .

shall [not] be deemed to be an insurance company or other insurer

.. or to be engaged in the business of insurance . . . for purposes

of any law of any State purporting to regulate insurance com-

panies [or] insurance contracts... .” 29 U.S.C. § 1144(b) (2) (B)

(emphasis added).

14

guson Act to establish state primacy over insurance regu-

lation. See Metropolitan Life Insurance Co. v. Massachu-

setts, 105 S. Ct. at 2391. While a unanimous approach

to the meaning or scope of the saving clause has not

emerged in the decade of ERISA’s existence, a rather

uniform interpretation has been provided by courts to

analogous language in the McCarran-Ferguson Act. Deal-

ing with the meaning of “regulating the business of in-

surance,” this Court in SEC v. National Securities, Inc.,

393 U.S. 453 (1969), provided support for the argument

that “regulation” of insurance encompasses legislative and

administrative actions directed to the insurance business,

and not actions brought under generally applicable state

common law. In that case, the Court stated:

Insurance companies may do many things which are

subject to paramount federal regulation; only when

they are engaged in the ‘business of insurance’ does

the [McCarran-Ferguson Act] apply. Certainly the

fixing of rates is part of this business. . . . The sell-

ing and advertising of policies, FTC v. National Cas-

ualty Co., 357 U.S. 560 (1958), and the licensing of

companies and their agents, cf. Robertson v. Cali-

fornia, 328 U.S. 440 (1956), are also within the

scope of the statute. Congress was concerned with

the type of state regulation that centers around the

contract of insurance. ... The relationship between

insurer and insured, the type of policy which could be

issued, its reliability, interpretation, and enforcement

—these were the core of the ‘business of insurance.’

... But whatever the exact scope of the statutory

term, it is clear where the focus was—it was on the

relationship between the insurance company and the

policyholder. Statutes aimed at protecting or regu-

lating this relationship, directly or indirectly, are

laws regulating the ‘business of insurance.’

Id. at 459-60 (emphasis added). See also FTC v. Na-

tional Casualty Co., 357 U.S. 560, 564-65 (1958) (per

curiam) (in concluding that states had “regulated” in-

surance by enacting prohibitory legislation authorizing

15

administrative enforcement, the Court declined to decide

whether there was any distinction in the McCarran-Fer-

guson Act between “legislation” and “regulation’”’).

That the “business of insurance” was not meant to in-

clude generally applicable state common law rules which

only incidentally relate to insurance is further supported

by this Court’s more recent decisions. See Union Labor

Life Ins. Co. v. Pireno, 458 U.S. 119 (1982) ; Group Life

& Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, reh’g

denied, 441 U.S. 917 (1979).* In Pireno and Royal Drug,

this Court articulated three criteria for determining

whether a particular activity constitutes the “business of

insurance” within the meaning of the McCarran-Fergu-

son Act: “first, whether the practice has the effect of |

transferring or spreading a policyholder’s risk; second,

whether the practice is an integral part of the policy

relationship between the insurer and the insured; and

third, whether the practice is limited to entities within

the insurance industry.” Union Labor Life Ins. Co. v.

Pireno, 458 U.S. at 129. An even cursory examination

of these criteria reveals that state common law rules re-

lating generally to damages for failure to meet contract

obligations cannot be deemed the regulation of insurance.

They certainly do not purport to affect spreading or trans-

fering the policyholder’s risk, which is the “one ‘indis-

pensable characteristic of insurance’.” Union Labor Life

Ins. Co. v. Pireno, 458 U.S. at 127 (quoting Group Life

& Health Ins. Co. v. Royal Drug Co., 440 U.S. at 211-12).

Nor are they specifically limited to entities in the insur-

8 The distinction between laws of general application and laws

regulating insurance has also been drawn by some lower federal

courts in interpreting the McCarran-Ferguson Act. See, e.g., Hart

v. Orion Ins. Co., 458 F.2d 1358, 1360 (10th Cir. 1971) (arbitra-

tion statutes are “laws of general application pertaining to the

method of handling contract disputes,” and thus do not regulate

the business of insurance within the McCarran-Ferguson Act) ;

Hamilton Life Ins. Co. v. Republic National Life Ins. Co., 408 F.2d

606, 611 (2d Cir. 1969) (same).

16

ance industry or an “integral” part of the insurer-insured

relationship. Rather, they are generally applicable to

parties to any type of contractual relationship—insur-

ance or otherwise—and, accordingly, are not laws “which

regulate[] insurance,” as the court below found. See

Powell v. Chesapeake & Potomac Telephone Co., 780 F.2d

419 (4th Cir. 1985), cert. denied, 106 S. Ct. 2892

(1986); Benvenuto v. Connecticut General Life Insur-

ance Co., No. 84-3601 (D.N.J. Feb. 27, 1986) .°

Nothing in the legislative history of the McCarran-

Ferguson Act supports a contrary result. Indeed, in dis-

cussing the proviso to Section 2(b) dealing with federal

antitrust laws, Senator Ferguson shed light on the mean-

ing of “regulation” in that Act:

Mr. O’Mahoney. I believe the Senator from Michi-

gan went a little further than was his intention when

he said that if the States have legislated certain

things will take place. The bill says if the States

have regulated.

Mr. Ferguson. I had reference to legislation deal-

ing with regulation and taxes.

91 Cong. Rec. 1443 (1945) (emphasis added). The great

care exercised by Congress in discussing the meaning of

this critical term is evident from other passages of the

® Congress surely understood the distinction between insurance

regulation and common law rules of general application when it

enacted ERISA. Indeed, in the definitional section found in Section

514, Congress expressly defined “State law”—a phrase it did not

use in the insurance saving clause—as “all laws, decisions, rules,

regulations, or other State action having the effect of law, of any

State.” 29 U.S.C. § 1144(c) (1). Congress’ use of the phrase “State

law” in Section 514(a), but not in Section 514(b)(2)(A), was

almost surely intentional. It is entirely consistent with the terms

and policies of the Act for Congress to preempt all “State law”

relating to benefit plans, including decisional and administrative

laws, while saving from preemption only state regulatory laws

applicable to the business of insurance within the meaning of the

McCarran-Ferguson Act.

17

legislative history, as for example, where Senator McCar-

ran, the other chief sponsor of the bill, stated:

. . . the States may, if they see fit to do so, enact

legislation for the purpose of regulation. If they do

enact such legislation, to the extent that they regu-

late they will have taken the business of insurance

in the respective States out from under the Sherman

Anti-trust Act, the Clayton Act and the other acts.

91 Cong. Rec. 1443 (1945) (emphasis added).”* Thus, in

its deliberations on the McCarran-Ferguson Act, Congress

made clear its intent that regulation meant the exercise

of control by regulatory agencies over insurance, pursu-

ant to state legislation.

Reading the language of the McCarran-Ferguson Act

in pari materia with ERISA’s saving clause thus reveals

the infirmities inherent in the analysis of the court be-

low. The decision below—that a state common law rule

of general applicability is a law “which regulates insur-

ance” within the meaning of ERISA when applied to an

insurer’s handling of benefit claims—purports to draw its

strength from an analogous statute which, in no uncertain

terms, supports a contrary result. To permit that decision

to stand would be to upset a delicate balance struck by

Congress when it enacted ERISA—a balance which estab-

lished federal primacy in the field of employee benefits

while it narrowly saved traditional state authority, as

preserved in the McCarran-Ferguson Act, to regulate the

business of insurance.

1© Other similar examples of Congress’ intent concerning the

meaning of “regulation” abound. See, e.g., 91 Cong. Rec. 1444

(1945) (remarks of Senators McCarran and White) ; 91 Cong. Rec.

481-82 (remarks of Senator Radcliffe); 91 Cong. Rec. 1087 (re-

marks of Representative Hancock); 90 Cong. Rec. 6525 (1944)

(remarks of Representative Hancock). See also Weller, “To Pre-

empt or to Accommodate: The Question of State and Federal Anti-

trust Laws under the McCarran-Ferguson Act,” 9 U. Tol. L. Rev.

421 (1978).

18

Ill. THE DECISION BELOW MISAPPLIES THIS

COURT’S DECISION IN METROPOLITAN LIFE

INSURANCE CO. v. MASSACHUSETTS AND

DRAWS AN UNWORKABLE DISTINCTION BE-

TWEEN INSURED AND UNINSURED PLANS

In holding that state common law claims for breach of

contract, breach of fiduciary duty, and fraud are not pre-

empted by ERISA, the court below relied upon this

Court’s decision in Metropolitan Life Insurance Co. v.

Massachusetts, 105 S. Ct. 2380 (1985). Nothing in Met-

ropolitan Life, however, compels a finding that state com-

mon law rules of general application, as opposed to laws

which specifically “regulate” insurance, are saved from

preemption by ERISA’s insurance saving clause.

A. Metropolitan Life Does Not Require Exemption of

State Common Law Actions from ERISA’s Preemp-

tive Reach

The narrow issue presented to this Court in Metropoli-

tan Life was whether Massachusetts’ mandated-benefit

law, which required insurers to provide for certain men-

tal health care benefits in insurance policies issued to

Massachusetts residents, was a law which “regulates in-

surance” within the meaning of ERISA’s saving clause.

Reaffirming its conclusion that ERISA’s preemptive scope

is broad, the Court stated that all state laws which “re-

late to” employee benefit plans, like the mandated-benefit

law at issue, are preempted unless saved by Section 514(b).

In addressing the application of ERISA’s saving clause,

the Court relied upon the “common-sense view” of the

Act’s language and upon analogous language in the

McCarran-Ferguson Act. Finding that the McCarran-

Ferguson Act “strongly supports the conclusion that

regulation regarding the substantive terms of insurance

contracts falls squarely within the saving clause as laws

‘which regulate insurance,’” id. at 2391, the Court con-

cluded that the mandated-benefit law at issue was saved

from preemption.

19

The court below misconstrued this Court’s decision in

Metropolitan Life when it held that state common law

claims for breach of contract, breach of fiduciary duty

and fraud were saved from preemption by Section 514 (b)

of ERISA. This Court’s decision in Metropolitan Life

involved the application of ERISA’s saving clause to a

state mandated-benefit statute applying only to insurance

and insurers, which clearly constituted a regulation of

insurance. Unlike state statutes regulating the content

of insurance contracts, however, the present case involves

state common law rules generally applicable to the rela-

tions of parties to any sort of contract. Such common law

rules do not regulate the substantive content of insurance

contracts; nor are they peculiarly applicable to the in-

surer-insured relationship. Thus, contrary to the conclu-

sion of the court below, Metropolitan Life does not sweep

so broadly as to prevent the application of ERISA’s

expansive preemption clause to the state common law

actions at issue here.

B. Metropolitan Life Does Not Support the Distinction

Between Insured and Uninsured Plans Drawn by

the Court Below

Nor does Metropolitan Life require, as the court below

suggests, an unnatural enlargement of the distinction be-

tween insured and self-insured plans created by Section

514(b) (2) (B) of ERISA. The so-called “deemer clause”,

which qualifies the insurance saving clause, provides that

no employee benefit plan shall be “deemed” to be an insur-

ance company or engaged in the business of insurance for

purposes of any law of any state which regulates insur-

ance. 29 U.S.C. § 1144(b) (2) (B). But the distinction

created by the deemer clause is relevant only when states

regulate the business of insurance. It provides no basis

for preventing the preemption of state common law ryles

of general applicability as applied to either insured or

uninsured plans.

This Court in Metropolitan Life “gave life to a distinc-

tion created by Congress in the ‘deemer clause’ ’’, 105 S.

20

Ct. at 2393, when it held that insured plans, but not un-

insured plans, are governed by state statutes regulating

the content of insurance contracts. That decision did not,

however, state or suggest that a similar distinction ap-

plies when state common law claims, like those at issue

here, are involved." Nor would so facile a distinction—a

distinction rendering insured plans, but not their unin-

sured counterparts, subject to the varying standards and

remedies available under state common laws—be sup-

portable under ERISA. Indeed, ERISA’s fiduciary stand-

ards apply to all “employee welfare benefit plans’—

regardless of whether they are funded “through the pur-

chase of insurance or otherwise.” 29 U.S.C. § 1002(1).

Surely, Congress did not intend to apply uniform federal

standards to fiduciaries of self-insured plans, and, at the

same time, require insurer-administrators to assess the

legality of their conduct under entirely different—and

widely varying—state laws.

Moreover, the expanded distinction drawn by the court

below is entirely unworkable in practice, as the divergent

results achieved by the lower federal courts addressing

ERISA’s preemptive reach clearly show. Not surpris-

ingly, many courts have held that ERISA preempts state

common law actions arising from mishandling of benefit

11 By declining to read a broader distinction into ERISA, this

Court would not render the “deemer clause” meaningless. Indeed,

adhering to this Court’s decision in Metropolitan Life, several

courts have held that state insurance statutes, by operation of the

deemer clause, do not apply to self-funded employee benefit plans.

See, e.g., Children’s Hospital v. Whitcomb, 778 F.2d 239 (5th Cir.

1985) (Louisiana’s mandated-benefits statute held inapplicable to

self-insured plans); Dillard v. Teamsters Council 83 Health &

Welfare Fund, 6 Emp. Ben. Cas. (BNA) 2558 (W.D.Va. 1985)

(state anti-subrogation statute preempted when applied to self-

funded plan); Cuttle v. Federal Employees Metal Trades Council,

623 F. Supp. 1154 (D. Me. 1185) (state insurance conversion stat-

utes preempted by ERISA to the extent that they apply to self-

insured plans) ; Kilmer v. Central Counties Bank, 623 F. Supp. 994

(W.D. Pa. 1985) (state no-fault insurance statute held inapplicable

to self-funded plan).

21

claims, including claims for breach of fiduciary duty,

breach of contract and fraud. See, e.g., Light v. Blue

Cross and Blue Shield of Alabama, 790 F.2d 1247 (5th

Cir. 1986), aff'g, 616 F. Supp. 558 (S.D. Miss. 1985) ;

Blakeman v. Mead Containers, 779 F.2d 1146 (6th Cir.

1985) ; Ellenburg v. Brockway, Inc., 763 F.2d 1091 (9th

Cir. 1985); Hutchinson v. Benton Casing Service, Inc.,

619 F. Supp. 831 (S.D. Miss. 1985); Lucash v. Strick

Corp., 602 F. Supp. 480 (E.D. Pa. 1984), affd mem.,

760 F.2d 259 (3d Cir. 1985). Like the court below, how-

ever, a number of courts—with some notable exceptions ™

—have concluded that the same common law actions, when

applied to insurer-administrators are not preempted. See,

e.g., Trogner v. New York Life Insurance Co., 633

F.Supp. 503 (D. Md. 1986) ; Kanne v. Connecticut General

Life Insurance Co., 607 F. Supp. 899 (C.D. Cal. 1985) ;

Lessard v. Metropolitan Life Insurance Co., 618 F. Supp.

1268 (D. Me. 1985); McLaughlin v. Connecticut General

Life Insurance Co., 565 F. Supp. 484 (N.D. Cal. 1983) ;

12In Powell v. Chesapeake & Potomac Telephone Co., 780 F.2d

419 (4th Cir. 1985), cert. denied, 106 S. Ct. 2892 (1986), an

employee sued her employer and the insurer-administrator of a self-

funded employee welfare benefit plan for mishandling her claim

for disability benefits. The plaintiff alleged, inter alia, breach of

contract, breach of the implied covenant of good faith and fair

dealing, and intentional infliction of emotional! distress, and sought

$5 million in extracontractual and punitive damages. The Court

of Appeais for the Fourth Circuit held that ERISA preempted

plaintiff’s state common law claims relating to the plan, and re-

jected her argument that such claims, when asserted against an

insurer, are preserved by ERISA’s insurance saving clause. Find-

ing that such claims do not regulate the business of insurance

within the McCarran-Ferguson Act or ERISA, the court held that

plaintiff’s common law claims were not saved from preemption.

See also Moore v. Provident Life & Accident Insurance Co., 786

F.2d 922 (9th Cir. 1986) (saving clause does not preserve common

law actions against insurer that provides excess insurance for

self-funded plan and reviews administrator’s claims decisions) ;

Benvenuto v. Connecticut General Life Insurance Co., No. 84-3601

(D.N.J. Feb. 27, 1986) (saving clause does not preserve state

common law claims against insurer-administrator of insured plan).

22

Presti v. Connecticut General Life Insurance Co., 605 F.

Supp. 163 (N.D. Cal. 1985); Eversole v. Metropolitan

Life Insurance Co., 500 F. Supp. 1162 (C.D. Cal. 1980) .*

The resultant fragmentation of ERISA’s enforcement

and remedial scheme is thus quite real. Under the deci-

sion below, state common law rules which relate to em-

ployee benefit plans in general terms will survive pre-

emption whenever an insurance company insures and as-

sumes claims handling responsibilities for such plans.

Plans insured and administered by insurers, but not self-

funded or self-administered plans; will face the haphazard

application of substantive standards embodied in varying

state laws, in addition to or in lieu of those established in

ERISA. Moreover, the former, and not the latter, will be

exposed to the vagaries of state damages laws as well—

including common law or statutory rules permitting extra-

contractual or punitive damages. By allowing plan bene-

ficiaries to sue under state common law or statutory rules

for redress of conduct expressly regulated by ERISA,

therefore, the decision below endorses pleading tactics,

like those employed by the respondent in this case, clearly

designed to escape ERISA’s comprehensive remedial

scheme and secure awards of extra-contractual and puni-

tive damages—awards effectively foreclosed by this Court

in Massachusetts Mutual Life Ins. Co. v. Russell, 105

S. Ct. 3085 (1985) .™

18 The decision in Trogner v. New York Life Insurance Co., supra,

exemplifies the anomalous results spawned by this unworkable dis-

tinction. In that case, an employee sued her former employer and

the insurer of its disability plan, alleging wrongful denial of bene-

fits. Both the employer and the insurer asserted that the employee’s

common law claims were preempted by ERISA. Although the court

held that the common law claims asserted against the employer

“are precisely in the field which ERISA was intended to occupy”,

663 F. Supp. at 507, and thus were preempted, the common

law claims for breach of contract against the insurer were held

not to be preempted because they regulated the business of in-

surance within the meaning of the saving clause.

14In Russell, this Court held that a plan fiduciary cannot be held

personally liable under Section 409(a) of ERISA to a plan bene-

me ete eet

23

This disruption of ERISA’s carefully designed remedial

scheme is far-reaching. If the decision below stands, the

great majority of actions brought by plan beneficiaries

for mishandling of benefit claims will be governed by

state rather than federal law."* The uncertainty that such

a fragmented system generates falls most heavily on the

insurance industry, where the assessment of risks is

fundamental to the decision to insure or to administer

ERISA plans, and on employers who sponsor such plans.

Faced with open-ended exposure to varying state law

standards and remedies, these employers may be reluctant

to adopt insured plans. Thus, the decision below puts

pressure on employers to adopt self-funded and admin-

istered plans. This incentive to self-fund portends sig-

nificant—and unintended—consequences in the employee

benefit field. Although employees may be better protected

by insured plans, the decision below encourages employ-

ers to self-fund, thereby subjecting the stability of these

plans to the continued solvency of the employer. And em-

ployers who lack the resources to self-insure may choose

to provide no plans at all. As aptly stated by one com-

mentator :

ficiary for extra-contractual and punitive damages arising from an

improper handling of a benefit claim. Although this Court did not

address in Russell the availability of punitive damages under Sec-

tion 502(a) (3) of the Act, some lower federal courts have recently

held that punitive damages cannot be assessed under that provision.

See, e.g., Sommers Drug Stores Co. Employee Profit Sharing Trust

v. Corrigan Enterprises, Inc., No. 85-2377 (5th Cir. July 14, 1986) ;

Powell v. Chesapeake & Potomac Telephone Co., 780 F.2d at 424.

1% According to a survey prepared for the Department of Labor

in 1980, approximately 91 percent of plans covering fewer than

100 participants, and 83 percent of plans covering more than 100

employees, are insured and administered by insurance companies.

See “Employee Welfare Benefit Plans and Plan Sponsors in the

Private Nonfarm Sector in the United States, 1978-79,” Health

and Population Study Center, Battelle Human Affairs Research

Centers, Vol. IV (1980), at 43-45.

24

[I]ntroduction into the preemption controversy of a

distinction [between insured and self-funded plans]

. would clearly discriminate against insurance

companies in favor of self-insured plans, and thus

strike at the very institutions which are stable and

solvent providers of those very benefits that ERISA

sought to protect. ... [I]f followed, [this distinc-

tion] would be an incentive for employers to self-

insure in order to avoid the myriad mandates of

state insurance laws, even though by so doing they

may be subjecting themselves to whatever standards

the federal courts may dictate. This new aspect of

the preemption controversy, the making of distinc-

tions based not on the nature of the benefits, but on

the provider thereof, exemplifies the far-reaching and

disruptive results that are possible... .

Manno, “ERISA Preemption and the McCarran-Ferguson

Act: The Need for Congressiona! Action,” 52 Temp. L.Q.

at 75 (1975).

As Congress surely recognized, the victims of this un-

warranted distinction would be not only employers and

insurers who undertake ERISA fiduciary responsibilities,

but the very individuals ERISA was enacted to protect

as well. There is no sound basis for construing ERISA to

reach such a result.

wtb cenconen ss =

25

CONCLUSION

The decision below should be reversed.

Respectfully submitted,

Of Counsel: ERWIN N. GRISWOLD

JACK H. BLAINE Counsel of Record

Vice President, PATRICIA A. DUNN

State Relations, and JONES, Day, REAVIs & POGUE

General Counsel Metropolitan Square

PHILLIP E. STANO 655 Fifteenth Street, N.W.

Senior Counsel Washington, D.C. 20005-5701

AMERICAN COUNCIL OF (202) 879-3939

LIFE INSURANCE Counsel for the Amici

1850 K Street, N.W.

Washington, D.C. 20006-2284

(202) 862-4000

JOE W. PEEL

Vice President and

General Counsel

JOHN P. DINEEN

Associate General Counsel

HEALTH INSURANCE

ASSOCIATION OF AMERICA

19025 Connecticut Ave., N.W.

Suite 1200

Washington, D.C. 20036

(202) 223-7780

August, 1986

27

APPENDIX

Statutory Provisions

Section 514 of the Employee Retirement Income Secu-

rity Act of 1974 (“ERISA”) provides, in pertinent part,

that:

(a) Except as provided in subsection (b) of this sec-

tion, the provisions of this subchapter and subchapter

III of this chapter shall supersede any and all State

laws insofar as they may now or hereafter relate

to any employee benefit plan described in section

1003 (a) of this title and not exempt un section

1003 (b) of this title. ~

[(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.

[(b) (2)](B) Neither an employee benefit plan de-

scribed in section 1003(a) of this title, which is not

exempt under section 1003(b) of this title . . . nor

any trust established under such a plan, shall be

deemed to be an insurance company or other in-

surer ... or to be engaged in the business of in-

surance ... for purposes of any law of any State

purporting to regulate insurance companies, [or]

insurance contracts. .. .

[(c)](1) The term “State law” includes all laws,

decisions, rules, regulations, or other State action

having the effect of law, of any State. ...

[(c)](2) The term “State” includes a State, any

political subdivisions thereof, or any agency or in-

strumentality of either, which purports to regulate,

directly or indirectly, the terms and conditions of

employee benefit plans covered by this subchapter.

29 U.S.C. § 1144.

28

The McCarran-Ferguson Act provides, in relevant part,

that:

[1011.] Congress declares that the continued regu-

lation and taxation by the several States of the busi-

ness of insurance is in the public interest, and that

silence on the part of the Congress shall not be con-

strued to impose any barrier to the regulation or

taxation of such business by the several States.

[1012.] (a) The business of insurance, and every

person engaged therein, shall be subject to the laws

of the severai States which relate to the regulation

or taxation of such business.

(b) No Act of Congress shall be construed to invali-

date, impair, or supersede any law enacted by any

State for the purpose of regulating the business of

insurance, or which imposes a fee or tax upon such

business, unless such Act specifically relates to the

business of insurance... .

15 U.S.C. §§ 1011-1012.