Amicus Curiae Brief — UNUM Life Ins. Co. of America v. Ward

MOTION FILED

Jur 20 1996

No. 97-1868

IN THE

Supreme Court of the United States

OCTOBER TERM, 1997

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Petitioner,

Vv.

JOHN E. WARD,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE NINTH CIRCUIT

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE AND

BRIEF AMICI CURIAE OF AMERICAN COUNCIL OF LIFE

INSURANCE, HEALTH INSURANCE ASSOCIATION OF

AMERICA, AETNA LIFE INSURANCE COMPANY,

CONNECTICUT GENERAL LIFE INSURANCE COMPANY,

LIFE INSURANCE COMPANY OF NORTH AMERICA,

INSURANCE COMPANY OF NORTH AMERICA, AND INA

LIFE INSURANCE COMPANY OF NEW YORK IN SUPPORT

OF THE PETITIONER

ROBERT N. ECCLES

(Counsel of Record)

KAREN M. WAHLE

MELISSA COLE

O'MELVENY & MYERS LLP

555 Thirteenth Street, NW

Washington, DC 20004

(202) 383-5300

Counsel for Amici Curiae

| Additional counsel listed on inside front cover.|

IN THE

SUPREME COURT OF THE UNITED STATES

ARTHUR A. PALMUNEN PHILLIP E. STANO OCTOBER TERM, 1997

AETNA LIFE INSURANCE AMERICAN COUNCIL OF LIFE

COMPANY INSURANCE

151 Farmington Avenue 1001 Pennsylvania Avenue, NW No. 97-1868

Hartford, CT 06156 Washington, DC 20004

(860) 273-1300 (202) 624-2183

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Counsel for Aetna Life Counsel for American Council Petitioner.

Insurance Company of Life Insurance : v.

JOHN E. WARD,

Respondent.

JEFFREY L. GABARDI DINAH J. BEE

HEALTH INSURANCE CIGNA COMPANIES

ASSOCIATION OF AMERICA 900 Cottage Grove Road ) On Petition for a Writ of Certiorari to the United States

555 Thirteenth Street, NW Hartford, CT 06152 7 a Court of Appeals for the Ninth Circuit

Washington, DC 20004 (860) 726-5474 )

(202) 824-1621 ~

Counsel for Connecticut General M¢ TION FOR LEAVE TO FILE

Counsel for Health Insurance Life Insurance Company, Life . BRIEF AMICI CURIAE

Association of America Insurance Company of North

America, Insurance Company of

North America, INA Life The American Council of Life Insurance represents

Insurance Company of New York the interests of more than 500 member life insurance

companies that together underwrite the vast majority of

disability and life insurance in the United States. The Health

Insurance Association of America is an advocate for the

private market-based health insurance system, representing

more than 200 members which provide medical expense and

supplemental insurance, as well as long-term care insurance

and disability income protection, to more than 65 million

Americans.

—————— ee

Aetna Life Insurance Company, Connecticut General

Life Insurance Company, Life Insurance Company of North

America, Insurance Company of North America, and INA

Life Insurance Company of New York are among the largest

insurance companies in the United States. They are major

nationwide providers of disability, life and other group

insurance to employee benefit plans subject to the Employee

Retirement Income Security Act of 1974 ("ERISA").

The petition in this case presents two questions of

vital interest to these amici relating to the scope of ERISA’s

preemption of state law. The Ninth Circuit’s decision in this

case permits state law to apply to claims for benefits under

ERISA-covered employee benefit plans and thus undermines

the uniform federal regulation that Congress intended to

create by enacting ERISA’s preemption provision. Many of

the employee benefit plans served by amici or their members

are administered on a multistate or even nationwide basis.

The practical effect of the Ninth Circuit’s decision, unless

reviewed and reversed by this Court, will be to increase the

~ complexity and cost of administering these plans to conform

to varying state rules, thus making it likely that employers

will decide either not to offer these types of benefits to

employees or to offer benefits on a less generous basis than

they currently do.

Therefore, amici request this Court to accept the

attached brief in support of the petition for certiorari in this

case. Petitioner has consented to the filing of this brief;

respondent has not consented.

Respectfully submitted,

ROBERT N. ECCLES

Counsel of Record

KAREN M. WAHLE

MELISSA COLE

O"MELVENY & MYERS LLP

555 Thirteenth Street, NW

Washington, DC 20004

(202) 383-5300

Counsel for Amici Curiae

ARTHUR A. PALMUNEN

AETNA LIFE INSURANCE

COMPANY

151 Farmington Avenue

Hartford, CT 06156

(860) 273-1300

Counsel for Aetna Life

Insurance Company

JEFFREY L. GABARDI

HEALTH INSURANCE

ASSOCIATION OF AMERICA

555 Thirteenth Street, NW

Washington, DC 20004

(202) 824-1621

Counsel for Health Insurance

Association of America

PHILLIP E. STANO

AMERICAN COUNCIL OF LIFE

INSURANCE

1001 Pennsylvania Avenue, NW

Washington, DC 20004

(202) 624-2183

Counsel for American Council

of Life Insurance

DINAH J. BEE

CIGNA COMPANIES

900 Cottage Grove Road

Hartford, CT 06152

(860) 726-5474

Counsel for Connecticut General

Life Insurance Company, Life

Insurance Company of North

America, Insurance Company of

North America, INA Life Insurance

Company of New York

July 20, 1998

ee] _—_—

TABLE OF CONTENTS

INTEREST OF AMICI CURIAE ..............

REASONS FOR GRANTING THE WRIT ........

II.

REVIEW IS WARRANTED TO RESOLVE

CONFLICTS AMONG THE CIRCUITS OVER

INTERPRETATION OF ERISA’S INSURANCE

Pee es eee

A. A Conflict Exists Over Whether a State Law

Must Satisfy All of the McCarran-Ferguson

Factors to Fall Within the Saving Clause .

B. A Conflict Exists Over the Application of

the McCarran-Ferguson Factors in

Construing ERISA’s Saving Clause .

1. Effect on Risk Spreading ......

2. Effect on an Integral Part of the Insurer-

Insured Relationship.........

3. Limitation to the Insurance Industry .

REVIEW IS WARRANTED TO RESOLVE A

CIRCUIT CONFLICT OVER WHETHER A

STATE LAW THAT IS APPLIED TO ALTER

THE TERMS OF AN ERISA PLAN "RELATES

TO" THAT PLAN FOR PREEMPTION

SEL a + «2 o:8S 0.064 oe een Oh

ES ee TP eee oe

10

12

i

TABLE OF AUTHORITIES

Page

Cases

Anderson v. Humana Inc.,

24 F.3d GBD (Tie Cir. 1994)... ecw cee 9

Anschultz v. Connecticut Gen. Life Ins. Co.,

850 F.2d 1467 (llth Cir. 1988) ..........-.. 7

Barnett Bank of Marion County, N.A. v. Nelson,

Fee Bo fF ers a aa eae ea 8

Campbell v. Allstate Insurance Co.,

ee Fe Fo 0) era 13

CIGNA Healthplan of La., Inc. v. leyoub,

82 F.3d 642 (Sth Cir. 1996),

cert. denied, 117 S. Ct. 387 (1997) ........ 6, 7

Cisneros v. UNUM Life Insurance Co.,

134 F.3d 939 (9th Cir. 1998),

pet. for cert. filed, 66 U.S.L.W. 3773

(U.S. May 20, 1998) (97-1867) .... 3, 6-10, 12, 14

Davies v. Centennial Life Insurance Co..,

128 F.3d 934 (6th Cir. 1997) .......... 6, 7, 11

Elfstrom v. New York Life Insurance Co.,

pe he Dee 3, 4, 14, 15

Fort Halifax Packing Co. v. Coyne,

Ge es DEM 8 ck cedure Ode Ct eee ce ces 4

TABLE OF AUTHORITIES (cont’d)

Gaylor v. John Hancock Mutual Life Insurance Co.,

112 F.3d 460 (10th Cir. 1997) ............ 13

Group Life & Health Insurance Co. v. Royal Drug Co..,

ey OD . 660 ooh 0356 bin ee 16 Sus 8

Howard v. Gleasén Corp.,

901 F.2d 1154 (2d Cir. 1990) ............. 16

Ingersoll-Rand Co. v. McClendon,

er a a 16

Jass v. Prudential Health Care Plan.

Fe hn 16

Metropolitan Life Insurance Co. v. Massachusetts,

471 U.S. 724 (1985) ......-..... 5, 8, 10, 12

O'Connor v. UNUM Life Insurance Co..

No. 97-5244, 1998 U.S. App. LEXIS 15117

@.C. Ce. Sly 7, 1998) ......... 6, 7, 9, 11, 12

Pilot Life Ins. Co. v. Dedeaux,

404 U.S. 41 (987)... ...... 4,5, 8, 10, 12, 14

Reed v. Pacific Indemnity Co. ,

225 P20 250 (Cel. App. 1900)... . 2... ww. 13

Schachner v. Blue Cross and Blue Shield of Ohio,

77 F.3d 889 (6th Cir.),

cert. denied, 117 S. Ct. 173 (19%) ....... 12, 13

iv

TABLE OF AUTHORITIES (cont’d)

Page

Smith v. Blue Cross & Blue Shield United of Wisconsin,

959 F.2d 655 (7th Cir. 1992) .........-.. 11, 13

Smith v. Jefferson Pilot Life Insurance Co.,

14 F.3d 562 (11th Cir.),

cert. denied, 513 U.S. 808 (1994) .......... 11

Stuart Circle Hosp. Corp. v. Aetna Health Mgmt.,

995 F.2d 500 (4th Cir.),

cert. denied, 510 U.S. 1003 (1993) .......... 7

Tingle v. Pacific Mutual Insurance Co.,

996 F.2d 105 (Sth Cir. 1993) .......... 6, 7,9

Turrill v. Life Insurance Co. of North America,

753 F.2d 1322 (Sth Cir. 1985) .......... 15, 16

Union Labor Life Insurance Co. v. Pireno,

bib Bf, eer ree 7

Statutes

Employee Retirement Income Security Act of 1974,

29 U.S.C. § 1001, ef seq.

ERISA § 2(a), 29 U.S.C. § 1001(a) ..... 1.6.46. ~

ERISA § 514(a), 29 U.S.C. § 1144(a).........-.. 5

ERISA § 514(b)(2)(A), 29 U.S.C. § 1144(b)(Q2)(A) . . . 5

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1997

No. 97-1868

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Petitioner,

Vv.

JOHN E. WARD,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

BRIEF AMICI CURIAE OF AMERICAN

OF LIFE INSURANCE, HEALTH DGURANGE

ASSOCIATION OF AMERICA, AETNA LIFE

INSURANCE COMPANY, CONNECTICUT

GENERAL LIFE INSURANCE COMPANY, LIFE

INSURANCE COMPANY OF NORTH AMERICA,

INSURANCE COMPANY OF NORTH AMERICA,

AND INA LIFE INSURANCE COMPANY OF NEW

YORK IN SUPPORT OF PETITIONER

2

INTEREST OF AMICI CURIAE'

The interest of the amici curiae is set forth in the motion

accompanying this brief.

REASONS FOR GRANTING THE WRIT

The petition in this case presents two questions

concerning the scope of preemption of state law by the

federal Employee Retirement Income Security Act of 1974

("ERISA"), 29 U.S.C. § 1001, ef seg. Because these

questions are recurring and important ones as to which the

circuit courts have disagreed, review by this Court is

warranted.

Respondent Ward was a participant in an employee

welfare benefit plan sponsored by his employer, Management

Analysis Company, and subject to ERISA. (Pet. 2a, 52a.)

Ward's employer purchased an insurance policy issued by

UNUM Life Insurance Company of America ("UNUM") to

provide plan benefits, and contracted with UNUM for

administrative and claims processing services for the plan.

(Pet. 4la-Sla.) Ward's claim for long term disability

benefits under the plan was denied as untimely because it

was not filed within the deadline set in the plan and in the

insurance policy. (Pet. 3a.) The district court granted

summary judgment dismissing Ward’s suit to obtain benefits

' Pursuant to Rule 37.6, amici curiae state that this brief

was not authored, in whole or in part, by counsel to a party and

that no monetary contribution to the preparation or submission of

this brief was made by any person or entity other than the amici

curiae or their counsel.

3

and held that his failure to meet the plan's unambiguous

filing deadline disposed of his claim. (Pet. 4a.)

The Ninth Circuit reversed, setting forth two alternative

routes through which Ward might recover -- despite the

plan’s terms -- through the application of principles of

California common law. First, following a recent decision

by the same panel in Cisneros v. Ui' UM Life Insurance Co.,

134 F.3d 939 (9th Cir. 1998), pet. for cert. filed, 66

U.S.L.W. 3773 (U.S. May 20, 1998) (97-1867), the Ninth

Circuit applied the “notice-prejudice" rule adopted by

California courts. (Pet. Sa.) Under this rule, UNUM may

give effect to the plan’s filing deadline only if it can

demonstrate actual prejudice from Ward's late filing of his

claim. Second, and alternatively, the Ninth Circuit held that

the "Elfstrom rule" adopted by the California courts prior to

ERISA -- under which an employer that arranges for a group

insurance policy to provide benefits to e1uployees may be

deemed the insurer’s agent -- could permit Ward to prevail

contrary to the plan terms and even if UNUM could show

actual prejudice from the late filing. (Pet. 24a-25a.)

The Ninth Circuit's decision both creates new conflicts

with decisions of other circuits and magnifies existing

conflicts over the interpretation of ERISA preemption. The

court’s holding that the California notice-prejudice rule is

saved from preemption expands a multifaceted conflict

among the circuits over the interpretation of ERISA’s

insurance saving clause. Its application of California’s

Elfstrom rule of agency revives and deepens a conflict over

the threshold preemption issue of whether state law rules

may be applied to claims seeking benefits under ERISA

4

plans. Absent review by this Court, these conflicts are

likely to grow, not recede.

Review by this Court is also warranted because the Ninth

Circuit's decision undermines the congressional intent that

employee benefit plans be subject to exclusively federal

regulation. As this Court has recognized many times,

ERISA’s “deliberately expansive” preemption provision,

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45-46 (1987),

was intended to displace a patchwork of varying state

regulation and clear the field for uniform federal regulation,

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987).

The decision below undoes that federal uniformity in two

ways. On the one hand, its application of the California

notice-prejudice rule greatly expands the scope of the

principal statutory exemption from preemption by holding

that a common law rule may be saved from preemption as a

law which regulates insurance. On the other hand, its

application of California’s Elfstrom rule of agency narrows

the basic scope of preemption by holding that a state law

rule that is directly applied to alter an employee benefit

plan’s terms nonetheless does not “relate to” the plan for

preemption purposes. The Ninth Circuit's decision thus

chops ERISA preemption from both ends and subjects

employee benefit plans to a wide variety of state regulation.

In enacting ERISA, Congress found that “the operational

scope and economic impact of [employee benefit] plans is

increasingly interstate." See ERISA § 2(a), 29 U.S.C.

§ 1001(a). The interstate nature of plans has only increased

in the more than two decades since that finding. Many plans

operate in more than one state, and large plans may be

administered on a nationwide basis. To subject these plans,

5

as the Ninth Circuit decision does, to differing regulation in

fifty states will make uniform plan operation impossible and

greatly increase the complexity and cost of plan

administration. ERISA’s preemption provision was designed

to avoid exactly these consequences. Accordingly, to

resolve the circuit conflicts and preserve the uniformity of

federal regulation, the petition should be granted.

I. REVIEW IS WARRANTED TO RESOLVE

CONFLICTS AMONG THE CIRCUITS OVER

INTERPRETATION OF ERISA’S INSURANCE

SAVING CLAUSE

Section 514(a) of ERISA, 29 U.S.C. § 1144(a), provides

generally that the provisions of ERISA "shall supersede any

and all State laws insofar as they may now or hereafter relate

to any employee benefit plan" subject to ERISA. A state

law that meets this threshold standard for preemption

because it “relate[s] to” an ERISA plan may nonetheless be

"saved" from preemption under § 514(b)(2)(A), 29 U.S.C.

§ 1144(b)(2)(A), if it is a law “which regulates insurance,

banking, or securities." In Metropolitan Life Insurance Co.

v. Massachusetts, 471 U.S. 724, 740-43 (1985), this Court

held that whether a law "regulates insurance” for purposes

of this insurance saving clause should be determined in light

of a “common sense” definition of insurance regulation as

well as consideration of the three factors developed by this

Court for determining whether a state law regulates the

business of insurance under the McCarran-Ferguson Act.

See also Pilot Life, 481 U.S. at 50-51.

The Ninth Circuit's holding that California’s common law

notice-prejudice rule is saved from ERISA preemption by

virtue of the insurance saving clause rested on an earlier

6

decision by the same panel of that court in Cisneros. As

discussed below, the Ninth Circuit's construction of ERISA’s

insurance saving clause conflicts with decisions of other

courts of appeal in multiple significant ways.

A. A Conflict Exists Over Whether a State Law Must

Satisfy All of the McCarran-Ferguson Factors to

Fall Within the Saving Clause

In Cisneros, the Ninth Circuit acknowledged that the

notice-prejudice rule did not satisfy the first of the three

factors developed under the McCarran-Ferguson Act for

determining whether a state law regulates the business of

insurance, i.e., whether the state law affects the tunsfer or

spreading of risk. 134 F.3d at 945-46. The court held,

however, that it was not necessary for a state law to satisfy

all three of the McCarran-Ferguson factors in order to fall

within the insurance saving clause, concluding instead that

the factors are “simply relevant considerations or

guideposts.” Jd. at 946.

The Ninth Circuit recognized that its holding directly

conflicts with two decisions from the Fifth Circuit, Tingle v.

Pacific Mutual Insurance Co. , 996 F.2d 105, 108, 110 (Sth

Cir. 1993), and CIGNA Healthplan of La., Inc. v. leyoub,

82 F.3d 642, 650 (Sth Cir. 1996), cert. denied, 117 S. Ct.

387 (1997). Cisneros, 134 F.3d at 946. This conflict has

subsequently deepened as a result of the decisions in

Davies v. Centennial Life Insurance Co., 128 F.3d 934, 940

(6th Cir. 1997) and O’Connor v. UNUM Life Insurance Co..,

No. 97-5244, 1998 U.S. App. LEXIS 15117 (D.C. Cir. July

7, 1998), in which the Sixth and D.C. Circuits, respectively,

noted the circuit conflict and elected to follow Cisneros. As

the D.C. Circuit stated:

7

UNUM's primary argument against applying

the notice-prejudice rule here is that a state

law “regulates insurance" within the meaning

of the saving clause only if all three

McCarran-Ferguson factors favor that

characterization -- a position that the Fifth

Circuit has expressly adopted, see, e¢.g.,

CIGNA Healthplan of La., Inc. v. leyoub;

Tingle v. Pacific Mut. Ins. Co., and the

Eleventh Circuit has implicitly followed, see

Anschultz v. Connecticut Gen. Life Ins. Co.,

850 F.2d 1467, 1469 (11th Cir. 1988).

O'Connor, 1998 U.S. App. LEXIS 15117, at *11 (citations

and parentheticals omitted). A conflict over this issue is

particularly significant, since lower court decisions are likely

to continue to diverge in their interpretation of the insurance

saving Clause if they cannot agree what weight to accord to

particular McCarran-Ferguson factors.

Moreover, absent this Court’s intervention, it is unlikely

that this conflict will resolve itself. The Ninth, Sixth and

Fourth Circuits have relied on this Court’s statement in

Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119,

129 (1982), that "[nJone of the [McCarran-Ferguson factors]

is necessarily determinative in itself." Cisneros, 134 F.3d

at 946; Davies, 128 F.3d at 940; Stuart Circle Hosp. Corp.

v. Aetna Health Mgmt., 995 F.2d 500, 503 (4th Cir.), cert.

denied, 510 U.S. 1003 (1993). However, Pireno, an

antitrust case involving whether use of a peer review

committee to advise insurers about the reasonableness of

chiropractors’ charges was part of the business of insurance,

never reached the question presented here; because the Court

found that the practice failed to satisfy any of the three

McCarran-Ferguson factors, it had no occasion to decide

whether all three McCarran-Ferguson factors must be

satisfied. Similarly, in Pilot Life Insurance Co. v. Dedeaux,

the Court also was not required to address this issue because

the state law in question there “at most [met] one of the

three criteria.” 481 U.S. at 51. Accordingly, absent a

definitive resolution by this Court, the direct conflict in the

circuits over this issue will persist.

B. A Conflict Exists Over the Application of the

McCarran-Ferguson Factors in Construing

ERISA’s Saving Clause

In addition to the acknowledged conflict over whether all

three McCarran-Ferguson factors must be met, the decision

below and its companion decision in Cisneros also conflict

with decisions from other circuits regarding the proper

application of each of the three McCarran-Ferguson factors.

1. Effect on Risk Spreading

The first McCarran-Ferguson factor is whether the state

law affects the transfer or spreading of policyholder’s risk.

Metropolitan Life, 471 U.S. at 743. In Cisneros, the Ninth

Circuit concluded that the California notice-prejudice rule

"regulates insurance” even though the rule does not satisfy

this factor. 134 F.3d at 946. This conclusion conflicts with

decisions of this Court and circuit courts that have viewed

risk spreading as essential to the business of insurance.

In Group Life & Health Insurance Co. v. Royal Drug

Co., 440 U.S. 205, 212-213 (1979), this Court characterized

the “underwriting or spreading of risk” as “an indispensable

characteristic” and “a critical determinant in identifying”

insurance. See also Barnett Bank of Marion County, N.A. v.

9

Nelson, 116 S. Ct. 1103, 1112 (1996) (noting that spreading

of risk is “at the core of the McCarran-Ferguson Act's

concerns"). Other circuits have applied this principle in

interpreting ERISA’s insurance saving clause. For example,

in Anderson v. Humana Inc., 24 F.3d 889, 892 (7th Cir.

1994), the Seventh Circuit stated that "‘[i)nsurance’ under

McCarran-Ferguson requires some component of risk

pooling, and the sort of regulation preserved to the domain

of the states [by ERISA’s saving clause] is that expressly

directed at that insurance component -- as opposed to, say,

laws of general application that just happen to have some

bearing on the affairs of insurers.” Similarly, in Tingle, 996

F.2d at 108, the Fifth Circuit concluded that a state law

could not regulate insurance for purpose of ERISA’s

insurance saving clause because it did not affect the

spreading of risk.

The Ninth Circuit in Cisneros, however, took a flatly

inconsistent approach. After conceding that California’s

notice-prejudice rule may not “have the effect of transferring

or spreading the policyholder’s risk,” the court nonetheless

held that the notice-prejudice rule was saved as a law which

regulates insurance, rejecting a “rote application of the risk-

spreading factor.” Cisneros, 134 F.3d at 945-46. This

rationale was recently followed by the D.C. Circuit in

O'Connor, 1998 U.S. App. LEXIS 15117, at *7-*8.

Because these decisions cannot be squared with the decisions

of the Seventh and Fifth Circuits or of this Court, review by

this Court is appropriate.

10

2. Effect on an Integral Part of the Insurer-

Insured Relationship

The Ninth Circuit attempted to justify its rejection of the

significance of the risk-spreading factor by analogizing

California's notice-prejudice rule to a mandated benefits law,

such as the law held saved from preemption by this Court in

Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S.

724 (1984). The Ninth Circuit viewed the California rule as

"effectively creat[ing] a mandatory contract term,” satisfying

the second McCarran-Ferguson factor, i.e., whether the state

law at issue affects an integral part of the relationship

between insurer and insured. Jd. Thus, the court stated that

it "failed to discern much difference on one hand between

forcing minimum healthcare benefits into contracts that do

not contain them and subjecting contracts to a notice-

prejudice rule on the other.” Cisneros, 134 F.3d at 946.

In so stating, the Ninth Circuit remarked on an obvious

distinction between the Massachusetts mandated benefits

statute at issue in Metropolitan Life and the California notice-

prejudice rule. The Massachusetts law directly affected a

substantive term of the insurance contract by requiring that

certain benefits be included in the contract, while the

California rule merely shifted the legal risks that would be

faced when a claim was asserted under the contract. In Pilot

Life, this Court recognized the significance of this

distinction, noting that the Mississippi law of bad faith at

issue there “did not define the terms of the relationship

between the insurer and the insured” but merely provided a

remedy if the insurer breached the contract in bad faith. 481

U.S. at 51.

11

If the Ninth Circuit’s analysis were followed, then

virtually any procedural rule or remedy affecting an insured

employee benefit plan could be saved from preemption as a

law which regulates insurance. Moreover, the Ninth

Circuit’s analysis, now joined by the D.C. Circuit in

O'Connor, creates yet another conflict with decisions of

other circuits regarding interpretation of the second

McCarran-Ferguson factor, that is, whether a purely

administrative contract term can be considered an integral

part of the relationship between the insurer and insured.

In Smith v. Jefferson Pilot Life Insurance Co., 14 F.3d

562 (llth Cir.), cert. denied, 513 U.S. 808 (1994), the

Eleventh Circuit addressed a claim by an ERISA plan

beneficiary based on an alleged violation of a Georgia statute

that required written notice for cancellation of insurance

coverage to be effective. As part of its holding that the

Georgia statute was not saved from preemption, the Eleventh

Circuit concluded that the statute did not satisfy the second

McCarran-Ferguson factor because it “regulates the

administration of policies, not their substantive terms.” 14

F.3d at 570. Similarly, in Davies, 128 F.3d at 942, the

Sixth Circuit held that a state law permitting rescission of

coverage in the case of willful misrepresentation by an

ERISA plan participant was not saved from preemption and

could not be applied to defeat the claim of that participant.

Like the Eleventh Circuit in Smith, the Sixth Circuit held

that the state statute did not satisfy the second McCarran-

Ferguson factor because it did not “affect the substantive

terms of” the insurance contract. Jd. These decisions from

the Eleventh and Sixth Circuits cannot be reconciled with the

Ninth Circuit and D.C. Circuit decisions, warranting review

by this Court.

1?

-

3. Limitation to the Insurance Industry

The decision below also conflicts with decisions from

other circuits regarding the third McCarran-Ferguson factor,

i.e., whether the state law at issue is limited to entities in the

insurance industry. Metropolitan Life, 471 U.S. at 743.

The Ninth Circuit's discussion of this factor in Cisneros was

brief and conclusory. Thus, said the Ninth Circuit, the

"third McCarran-Ferguson factor is satisfied because the

notice-prejudice rule applies only to the insurance industry."

Cisneros, 134 F.3d at 946. Accord, O'Connor, 1998 U.S.

App. LEXIS 15117, at *8.

Other circuits have, however, applied this Court's

analysis in Pilot Life Insurance Co. v. Dedeaux to reach a

different conclusion. In Pilot Life, the Court held that the

Mississippi law of bad faith, although “identified” and

“associated with the insurance industry,” did not satisfy the

third McCarran-Ferguson factor because it “developed from

general principles of tort and contract law available in any

Mississippi breach of contract case.” 481 U.S. at 50-51.

Both the Sixth and Seventh Circuits have followed Pilot

Life to hold, in direct conflict with the decision below, that

state common law doctrines available only against insurers

did not satisfy the third McCarran-Ferguson factor. Thus,

in Schachner v. Blue Cross and Blue Shield of Ohio, 77 F .3d

889, 897-98 (6th Cir.), cert. denied, 117 S. Ct. 173 (1996),

the court held preempted an action based on an Ohio tort

cause of action for a bad faith breach of an insurance

contract. The Sixth Circuit explained that “the tort claim

against an insurer for a bad faith refusal to pay a claim does

not exist independent of traditional, generally-applicable

common law; rather, it exists simply because of the Ohio

13

courts’ determination that the relationship between insurer

and insured gives rise to a fiduciary duty and that a breach

of that duty is tortious.” Similarly, in Smith v. Blue Cross

& Blue Shield United of Wisconsin, 959 F.2d 655, 657-58

(7th Cir. 1992), the Seventh Circuit held that a claim based

on a Wisconsin "cause of action in tort against an insurer for

the bad faith refusal to honor a claim of the insured" was not

saved under the third McCarran-Ferguson factor because it

involved only “a typical tort case” that “relied on standard

contract principles." See also Gaylor v. John Hancock Mut.

Life Ins. Co., 112 F.3d 460, 466 (10th Cir. 1997) (holding

that a bad faith claim based on an Oklahoma statute that was

“specifically directed at the insurance industry" was

nonetheless preempted since the statute’s “origins are from

general principles of tort and contract law.")

In deciding that the notice-prejudice rule was specifically

directed at the insurance industry, the Ninth Circuit made no

attempt to explore the common law roots of the rule.’ Its

decision not to do so placed it in direct conflict with those

courts that have found the common law nature of a state law

to be dispositive of the analysis of the third McCarran-

Ferguson factor.

? The notice-prejudice rule was adopted by the California

Supreme Court in Campbell v. Allstate Insurance Co., 384 P.2d

155 (Cal. 1963), following lower court decisions that had derived

the rule from general principles of contract law. See, e.g., Reed

v. Pacific Indemnity Co., 225 P.2d 255 (Cal. App. 1950) (basing

adoption of rule on the principle that the intent of contracting

parties should be given effect).

14

ll. REVIEW IS WARRANTED TO RESOLVE A CIR-

CUIT CONFLICT OVER WHETHER A STATE

LAW THAT IS APPLIED TO ALTER THE TERMS

OF AN ERISA PLAN "RELATES TO" THAT PLAN

FOR PREEMPTION PURPOSES

The circuit conflict over interpretation of ERISA’s

insurance saving clause that is the subject of this petition

arises from the Cisneros decision, which was followed by the

court below in Ward. What makes the Ward decision

particularly appropriate for review by this Court is that it

separately revives and deepens a circuit split over the

threshold test for ERISA preemption.

In Ward, the Ninth Circuit, relying on a 1985 decision

from the Fifth Circuit, held that the application of

California's common law Elfstrom rule of agency in deciding

a claim for benefits under an ERISA plan was not preempted

because the rule did not "relate to” the plan. (Pet. 24a.) In

so holding, the Ninth Circuit placed itself squarely in

conflict with circuits that have read this Court’s 1987

decision in Pilot Life as requiring the conclusion that the

application of a state law rule to a plan “relates to” the plan

and falls within ERISA’s preemption clause. See Pilot Life,

481 U.S. at 47.

In Elfstrom v. New York Life Insurance Co., 67 Cal.2d

503 (1967), the California Supreme Court held that an

employer that purchases a group insurance policy to provide

benefits to employees may, if it exercises administrative

functions with respect to the group imsurance program,

become an agent of the insurer. The Ninth Circuit below

held that the Elfstrom rule could be applied to find that

UNUM had notice of Ward's claim within the plan's notice

1S

period because his employer knew of the injury that gave

rise to his claim. (Pet. 24a.) The Ninth Circuit reached this

conclusion despite policy terms that expressly disclaimed

such an agency relationship.

In holding that ERISA did not preempt the application of

the Elfstrom rule of agency, the Ninth Circuit relied heavily

on the rationale of a 1985 Fifth Circuit opinion, Turrill v.

Life Insurance Co. of North America, 753 F.2d 1322 (Sth

Cir. 1985). In Turvill, the Fifth Circuit looked to the

employer's fiduciary responsibilities under ERISA as

requiring the employer to perform administrative functions

with respect to a group insurance program. The Fifth

Circuit held that “proof of an employer's ERISA-based

reporting and fiduciary responsibilities with respect to a

group insurance policy in itself raises an issue under Texas

law as to the existence of an agency relationship between the

employer and the group insurer.” Jd. at 1325.

As the Ninth Circuit noted, with perhaps unintentional

irony, "[njothing in 7urrill even hints that state agency law

is somehow preempted by ERISA.” (Pet. 18a.) Indeed,

Turrill did not even address the possibility that ERISA might

preempt a state law rule that alters plan terms and would

permit a recovery that was otherwise unavailable under

ERISA. The Ninth Circuit, however, relied on Turrill to

conclude that application of the Elfstrom rule to the plan at

issue in this case does not “relate to” the plan. Rather,

Stating that, "ERISA and Elfstrom are not anathema,” the

Ninth Circuit concluded that ERISA’s imposition of fiduciary

duties on an employer who performs administrative

responsibilities regarding an ERISA plan “meshes smoothly"

with the state law rule adopted in Elfstrom. (Pei. 21a-22a.)

16.

The decision below and the Fifth Circuit’s decision in

Turrill, however, directly conflict with decisions of this

Court as well as of other circuits. In Jngersoll-Rand Co. v.

McClendon, 498 U.S. 133, 139 (1990), this Court held that

a state law claim for wrongful discharge to prevent the

employee from attaining benefits under an ERISA plan was

preempted because "the existence of a pension plan is a

critical factor in establishing liability" under the state law.

Likewise, a California common law rule of agency that

premises an agency relationship upon the exercise of

administrative responsibilities under an ERISA plan must

"relate to" that plan. Similarly, in Howard v. Gleason

Corp., 901 F.2d 1154 (2d Cir. 1990), the court considered

a New York statute that required employers to provide

specified notice to terminated employees about insurance

conversion privileges. The Second Circuit held that the state

law was preempted because it “purports to impose on an

employer obligations of the same general type as those

imposed by ERISA." Jd. at 1157. Rejecting the argument

that the New York law should not be preempted because it

"does not conflict with any express provision of ERISA in

the sense that both laws could be enforced side by side," the

Second Circuit held that the state statute was preempted

because it "intrudes into an area that Congress intended to be

fully occupied by federal statute." Jd. at 1158. See also

Jass v. Prudential Health Care Plan, 88 F.3d 1482, 1493

(7th Cir. 1996).

Likewise, here, California’s agency principles cannot be

applied to claims for benefits under ERISA plans, regardless

of whether they "mesh smoothly" with ERISA’s rules. By

holding to the contrary, the Ninth Circuit created a conflict

over the application of state law rules in deciding ERISA

17

claims. In order to reverse this decision and restore the

exclusivity of federal law as a source of uniform regulation

of employee benefit plans, review by this Court is

appropriate.

CONCLUSION

For the foregoing reasons, amici urge this Court to grant

the petition and reverse the decision below.

Respectfully submitted,

ROBERT N. ECCLES

Counsel of Record

KAREN M. WAHLE

MELISSA COLE

O’MELVENY & MYERS LLP

555 Thirteenth Street, NW

Washington, DC 20004

(202) 383-5300

Counsel for Amici Curiae

ARTHUR A. PALMUNEN

AETNA LIFE INSURANCE

COMPANY

151 Farmington Avenue

Hartford, CT 06156

(860) 273-1300

Counsel for Aetna Life

Insurance Company

JEFFREY L. GABARDI

HEALTH INSURANCE

ASSOCIATION OF AMERICA

555 Thirteenth Street, NW

Washington, DC 20004

(202) 824-1621

Counsel for Health Insurance

Association of America

18

PHILLIP E. STANO

AMERICAN COUNCIL OF LIFE

INSURANCE

1001 Pennsylvania Avenue, NW

Washington, DC 20004

(202) 624-2183

Counsel for American Council

of Life Insurance

DINAH J. BEE

CIGNA COMPANIES

900 Cottage Grove Road

Hartford, CT 06152

(860) 726-5474

Counsel for Connecticut General

Life Insurance Company, Life

Insurance Company of North

America, Insurance Company of

North America, INA Life Insurance

Company of New York

July 20, 1998