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

No. 97-1868

In the Supreme Court of the United States

OCTOBER TERM, 1998

UNUM LIFE INSURANCE COMPANY OF AMERICA,

PETITIONER

v.

JOHN E. WARD

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES AS

AMICUS CURIAE SUPPORTING PETITIONER IN

PART AND SUPPORTING RESPONDENT IN PART

SETH P. WAXMAN

Solicitor General

Counsel of Record

EDWIN S. KNEEDLER

Deputy Solicitor General

JAMES A. FELDMAN

Assistant to the Solicitor

JUDITH E. KRAMER

Deputy Solicitor of Labor

ALLEN H. FELDMAN

Associate Solicitor

NATHANIEL I. SPILLER General

Deputy Associate Solicitor Department of Justice

ELIZABETH HOPKINS Washington, D.C. 20530-0001

Attorney (202) 514-2217

Department of Labor

Washington, D.C. 20210

QUESTIONS PRESENTED

l. Whether the “notice-prejudice” rule under California

law, which prevents an insurance company from avoiding

liability on the basis of an untimely notice or submission of

proof unless the insurer has been substantially prejudiced by

the delay, is a state law that “regulates insurance” and is

thereby saved from preemption by Section 514(b)(2)(A) of

the Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. 1144 h ) in this case.

2. Whether a state common law rule of agency law,

known as the Elfstrom rule, under which an employer may,

in some circumstances, be deemed to be the agent of the

insurance company, “relate{s] to“ an ERISA plan within the

meaning of ERISA’s preemption provision, 29 U.S.C.

1144(a), when applied in an action by a plan participant to

recover benefits under ERISA Section 502, 29 U.S.C. 1132.

TABLE OF CONTENTS

Interest of the United States

Statement

Summary of argument

Argument:

I. California’s notice-prejudice rule is a law that

“regulates insurance” and is therefore saved

from preemption by 29 U.S.C. IIA RCC

A. The notice-prejudice rule “relates to”

ERISA plans

B. The notice-prejudice rule is saved from

preemption by ERISA’s insurance savings

clause

1 The court of appeals correctly held that

the notice-prejudice rule, as a matter of

of “common sense,” is directed toward

the insurance industry

2. The McCarran-Ferguson Act factors

also suggest that the California notice-

prejudice rule is a law that “regulates

insurance” under the ERISA savings

clause

The notice-prejudice rules does not con-

flict with ERISA’s civil enforcement pro-

visions

Il. The Elfstrom rule does “relate to” ERISA plans

when it is applied to them, and it is therefore

preempted

Conclusion

(IID

2

10

13

18

8

IV V

TABLE OF AUTHORITIES Cases—Continued: Page

8 Gade v. National Solid Wastes Management Ass'n,

Cases: * 505 U. S. 88 (1992) 24

Allis-Chalmers Corp. v. Lueck, 471 U.S. 202 Group Life & Health Insurance Co. v. Royal Drug

(1985) 28 Co., 440 U.S. 205 (1979) 15, 16

Anschultz v. Connecticut Gen. Life Ins. Co., 850 Howard v. Gleason Corp., 901 F.2d 1154 (2d Cir.

Fd 1467 (11th Cir. 1988) , 15 1990) 15

Boggs v. Boggs, 520 U.S. 883 (1997) 24 Huddleston v. Dwyer, 322 U.S. 232 (1944) 12

Brewer v. Lincoln Nat'l Life Ins. Co., 921 F.2d 150 Ingersoll-Rand Co. v. McClendon, 498 U.S. 138

(8th Cir. 1990), cert. denied, 501 U.S. 1288 (1991) 15 (1990) 22, 26

California Div. Of Labor Standards Enforcement v. John Hancock Mut. Life Ins. Co. v. Harris Trust

Dillingham Constr., N. A., 519 U.S. 316 (1997) 23, 24 & Sav. Bank, 510 U.S. 86 (1998) 9, 19, 24

CIGNA Healthplan of La., Inc. v. Louisiana ex rel.

leyoub, 82 F.3d 642 (Sth Cir.), cert. denied, 519

Kanne v. Connecticut Gen. Life Ins. Co., 867 F 2d

489 (9th Cir. 1988), cert. denied, 492 U.S. 906

U.S. 964 (1996) 15 (1989) 20

Cisneros v. UNUM Life Insurance Co. of Am., Kelley v. Sears, Roebuck & Co, 882 F.2d 453 (10th

134 F. ad 939 (9th Cir. 1998), petition for cert. Cir. 1989) — 5

pending, No. 97-1867 8, 4, 11, 18, 15 Life Ins. Co. of NM. Am., In re, 857 F.2d 1190 (8th

City of Hope Nat'l Med. Ctr. v. Healthplus, Inc., Cir. 1988) 20

156 F.3d 228 (1st Cir. 1998) 29 Lyman Lumber Co. v. Hill, 877 F.2d 692 (8th Cir.

Davies v. Centennial Life Ins. Co., 128 F. gd 984 1989) 28

(6th Cir. 1997) 14. 15 Mackey v. Lanier Collection Agency & Serv., 486

DeBruyne v. Equitable Life Assurance Soc of the U.S. 825 (1988) 27

United States, 920 F. 2d 457 (7th Cir. 1990) 14 McClure v. Life Ins. Co. of N. Am., 84 F.3d 1129

DeBuono v. NYSA-ILA Med. & Clinical Servs. (9th Cir. 1996) 2

Fund, 520 U.S. 806 (1997) 24.27 Mertens v. Hewitt Assocs., 508 U.S. 248 (1998) . 22

Elfstrom v. New York Life Ins. Co., Pad 731 Metropolitan Life Ins. Co. v. Massachusetts, 471

(Cal. 1967) 2, J. 4. 5, 7, 26, 27, 28 U.S. 724 (1985)

First Nat'l Bank v. Nationwide Ins. (Co., 278 Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58

S.E.2d 50% (N.C. 1981) 27 (1987)

FMC Corp. v. Holliday, 498 U.S. 52 (1990) . 16, 18, 19

Ford v. Uniroyal Pension Plan, 154 F.3d 613 (6th

Moriarty v. Glueckert Funeral Home, Ltd., 155

F. ad 859 (7th Cir. 1998) 29

Cir. 1998) 29 New York State Conference of Blue Cross & Blue

Franchise Tax Bd. v. Construction Laborers Shield Plans v. Travelers Ins. Co., 514 U.S. 645

Vacation Trust, 463 U.S. 1 (1983) 22 (1995) 8, 9, 24, 26, 27

Franklin H. Williams Ins. Trust v. Travelers Ins. O'Connor v. UNUM Life Ins. Co. of Am., 146 F. ad |

Co., 50 F.3d 144 (2d Cir. 1995) 20 959 (D.C. Cir. 1998) 12, 14, 15

VI

Cases—Continued: Page

Paulson v. Western Life Ins. Co., 686 Pd 985

(Or. 1981) 28

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41

(1987) passim

Runyon v. McCrary, 427 U.S. 160 (1976) 12

Security Life Ins. Co. of Am. v. Meyling, 146 F.3d

1184 (9th Cir. 1998) 12, 28

SEC v. National Sec., Inc., 398 U.S. 458 (1969)

Shaw v. Delta Air Lines, Inc., 463 U.S. 85

17

(1983) 8,9, 28, 28

Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal.

App. 4th 715 (Ct. App. 1998) 12

Sheridan v. United States, 487 U.S. 392 (1988) 12

Smith v. Jefferson Pilot Life Ins. Co., 14 F.2d 562

(11th Cir.), cert. denied, 513 U.S. 808 (1994) 14

Soniat v. Travelers Ins. Co., 588 So.2d 210 (La.

1989) 15

Tingle v. Pacific Mut. Ins. Co., 996 F.2d 105 (5th

Cir. 1998) 14, 15

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

(1982) 4, 16

United States Dep't of Treasury v. Fabe, 508 U.S.

491 (1993) 14

Constitution, statutes, rule and regulations:

U.S. Const. Art. VI, CI. 2 24

Employee Retirement Income Security Act of 1974,

29 U.S.C, 1001 et seq. passim

§ 401(1), 29 U.S.C. 1002(1) 8

§ 402(13), 29 U.S.C. 1002(13) 1

§ 404(a)(1)(D), 29 U.S.C. 1104(a)\(1)(D) 19

§ 502, 29 U.S.C. 1132 2, 6, 19, 20, 21, 22, 28, 25

§ 502(a), 29 U.S.C. 11820 18, 25

§ 502(a)(1)(B), 29 U.S.C. LIS (aM IXB) 6, 18,

19, 21, 24

§ 508, 29 U.S.C. 1138 19, 28

VII

Constitution, statutes, rule and regulations—Continued: Page

§ 506(b), 29 U.S.C. 1136(b) 1

§ 514(a), 29 U.S.C. 1144(a) 1, 5, 28, 26

§ 514(b)(2)(A), 29 U.S.C. 1144 ο 1, 3, 4, 5,

7, 9, 16, 23

§ 514(b\(4), 29 U.S.C. 1144(b\(4) 23

§ 514(b\(2)(B), 29 U.S.C. 1144(b)\(2(B) 10

§ 514(c)(1), 29 U.S.C. 1144(e\(1) 12

Labor Management Relations Act, 29 U.S.C.

141 et seq. 29

§ 301, 29 U.S.C. 185 25, 28

§ 301(a), 29 U.S.C, 185(a) 21

McCarran-Ferguson Act, 15 U.S.C. 1011 et seq... passim

15 U.S.C. 1012 4

15 U.S.C. 101200 17

Sup. Ct. R. 14.1(a) 11

29 C. F. R.:

Pt. 2560 9

Section 2560.503-1(c) 19

Section 2560.503-1(d) 19

Miscellaneous:

683 Fed. Reg. 48,390-48,409 (1998) 9

Robert E. Keaton & Alan I. Widiss, Jnsurance Law:

A Guide to Fundamental Principles, Legal

Doctrines, and Commerical Practices (1988) ecco 1

H.R. Conf. Rep. No. 1280, 98d Cong., 2d Sess.

(1974)

H.R. 3605, 105th Cong., 2d Sess. (1998)

S. 1890, 105th Cong., 2d Sess. (1998)

S. 1891, 105th Cong., 2d Sess. (1998)

S. 2330, 105th Cong., 2d Sess. (1998)

S. 2416, 105th Cong., 2d Sess. (1998)

120 Cong. Rec. 29,983 (1974)

—

In the Supreme Court of the United States

OCTOBER TERM, 1998

No. 97-1868

UNUM LIFE INSURANCE COMPANY OF AMERICA,

PETITIONER

v.

JOHN E. WARD

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

INTEREST OF THE UNITED STATES

This case presents questions concerning the scope of the

preemption provision of the Employee Retirement Income

Security Act of 1974 (ERISA), 29 U.S.C. 1144(a), as well as

the scope of the provision that saves state insurance regula-

tion from ERISA preemption, 29 U.S.C, 1144(b)(2)(A). Be-

cause the Secretary of Labor has primary authority for

enforcing and administering Title I of ERISA, see 29 U.S.C.

1002(13), 1136(b), the United States has a substantial inter-

est in ensuring that ERISA preemption principles are

appropriately applied.

STATEMENT

1. Respondent John E. Ward was president and chief

executive officer of Management Analysis Company (MAC)

until de resigned in May of 1992. Pet. App. 3a, 27a. During

his nine years of employment with MAC, respondent had

premiums deducted from his paycheck for long-term dis-

ability insurance under a group policy issued by petitioner

(1)

2

UNUM Life Insurance Co. of America to MAC. Id. at 28a.

This disability policy provides the benefits under MAC’s em-

ployee welfare plan, which is governed by ERISA. Id. at 2a.

In December 1992, respondent was diagnosed as suffering

from diabetic neuropathy, which had for some time been

causing him severe and disabling leg pain. Pet. App. 3a, 28a.

In 1993, he applied for and received an award of state dis-

ability benefits, and shortly thereafter, a determination of

eligibility for Social Security disability benefits. Ibid. Re-

spondent forwarded a copy of that determination to MAC’s

human resources department to arrange for continuation of

his health insurance coverage, but was not notified that he

might obtain coverage under the long-term disability plan.

Ibid.

In April 1994, while cleaning out a safety deposit box, he

came across a booklet summarizing the disability plan, at

which time he again contacted MAC’s human resources

department to inquire whether he might be covered. Pet.

App. 3a, 28a. He was informed by the company that he was

covered and was given an application for long-term disability

benefits, which he completed and returned to MAC. MAC

completed the employer’s portion of the application and

forwarded it to petitioner on April 11, 1994. Jd. at 3a, 28a-

29a. Two days later, petitioner denied respondent’s claim for

benefits as untimely under the terms of the policy, which

specifies that written proof of claim be given to petitioner

not later than one year and 180 days after the onset of dis-

ability. Id. at 3a, 4a-5a, 29a, 32a. On July 12, 1994, petitioner

affirmed its denial, after respondent requested review of his

claim. Id. at 3a; see id. at 29a (different date).

2. Respondent filed suit against the MAC plan and

petitioner under Section 502 of ERISA, 29 U.S.C. 1132, to

recover benefits. Pet. App. 77a. Respondent argued that

the claim was timely under the Elfstrom rule, see Elfstrom

v. New York Life Ins. Co., 432 P.2d 731 (Cal. 1967), a pre-

ERISA state agency principle providing that where an

3

employer administers an insured group health plan, it acts as

the agent of the insurance company. In respondent’s view,

MAC acted as petitioner’s agent for purposes of the

disability insurance policy, and the notice respondent gave

MAC therefore constituted timely notice of claim to peti-

tioner. The district court rejected that argument on the

ground that the Elfstrom rule is preempted by ERISA and

is not saved as a law that “regulates insurance” under

ERISA’s insurance savings clause, 29 U.S.C. 1144(b)(2)(A).

The court reasoned that the Elfstrom rule is not a saved

insurance regulation for two reasons: it does not transfer

risk, and it is not an integral part of the policy relationship

between the insurer and the insured, since California law

specifically allows insurance contracts to define the extent of

the employer’s agency relationship with the insurance

company. Pet. App. 30a-3la. The district court therefore

granted summary judgment for petitioner, agreeing that the

claim for benefits was untimely under the terms of the plan.

Id. at 32a-338a.

3. The Ninth Cireuit reversed, on two grounds. First,

although the court agreed that the notice and proof of claim

were clearly untimely under the express terms of the plan,

Pet. App. 4a-5a, the court nevertheless held that the case

should be remanded for-further consideration of whether,

under California’s “notice-prejudice” rule, petitioner suf-

fered actual prejudice from the untimely notice. Jd. at 6a.

The notice-prejudice rule provides that an insurer may not

deny a claim as untimely unless it can show actual prejudice

resulting from the delay. Id. at 5a-6a. In holding that

ERISA does not preempt the notice-prejudice rule, the court

relied on its recent decision in Cisneros v. UNUM Life

Insurance Co. of America, 134 F.3d 939, 945-947 (9th Cir.

1998), petition for cert. pending, No. 97-1867.

Cisneros held that the California notice-prejudice rule is

saved from ERISA preemption as a law “which regulates

insurance.” 29 U.S.C. 1144(b)(2)(A). Noting that the rule

+

dictates the terms of the insurance relationship and is

specifically and exclusively applicable to insurance contracts,

the court concluded in Cisneros that the rule is saved be-

cause it fits a common-sense understanding of insurance

regulation. 134 F.3d at 945, citing Metropolitan Life Insur-

ance Co. v. Massachusetts, 471 U.S. 724, 740-742 (1985). As

this Court had done in Metropolitan Life, the Cisneros court

also looked to the three factors that are-used in determining

whether a particular state law relates to the “business of

insurance” under the McCarran-Ferguson Act, 15 U.S.C.

1012. The Cisneros court concluded that the notice-

prejudice rule does not satisfy the first factor because it does

not transfer or spread policyholder risk as required by that

factor. But, the court held, that “imperfection” is not “dis-

positive,” Cisneros, 134 F.3d at 945, because the McCarran-

Ferguson criteria are simply factors to be weighed in

determining whether a law “regulates insurance,” id. at 946.

Because the notice-prejudice rule creates a mandatory con-

tract term and is applicable only to the insurance industry,

the court determined that it clearly meets the other two

McCarran-Ferguson factors, and that on balance it “regu-

lates insurance” under Section 514(b\(2)(A) of ERISA. Id. at

945-947.

Second, in addition to remanding in light of Cisneros, the

Ninth Circuit also held that the rule of state agency law

announced in Elfstrom—that “the employer is the agent of

the insurer in performing the duties of administering group

The three factors are:

Hirst, whether the practice has the effect of transferring or

spreading the 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.

Pilot Life v. Dedeauzx, 481 U.S. 41, 48-49 (1987) (quoting Union Labor Life

Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)).

5

insurance policies,” 432 P.2d at 737; see Pet. App. 9a—is not

preempted by ERISA Section 514(a), 29 U.S.C. 1144(a). Pet.

App. 22a. The court concluded that the Elfstrom rule does

not “relate to” employee benefit plans within the meaning of

Section 514(a) because it does not govern the structure or

administration of employee benefit plans or “create an

‘alternative enforcement mechanism.“ Jd. at 21a-22a (cita-

tion omitted). Moreover, reasoning that “(njothing in [Sec-

tion] 514(a) empowers a plan fiduciary to extend ERISA’s

preemptive reach by using policy language that negates

agency law principles,” the court declined to attach signifi-

cance to the fact that the policy expressly provided that the

employer should not be deemed to be the insurer's agent.

Id. at 22a-23a. The court left to the district court on remand

the question whether MAC in fact acted as an agent in

administering petitioner’s plan, particularly with respect to

the receipt and forwarding of benefit claims. Id. at 24Aa-25a.

SUMMARY OF ARGUMENT

I. The notice-prejudice rule under California law pro-

vides that an insurer may not deny benefits by reason of an

untimely claim, unless the insurer proves that it has suffered

prejudice as a result of the untimeliness. Although that rule

“relates to” ERISA plans when it is applied to a claim for

benefits under an ERISA plan and therefore falls within the

scope of ERISA’s basic preemption provision, 29 U.S.C.

514(a), it is not preempted, because it falls within the provi-

sion of ERISA that saves from preemption state laws that

“regulate[] insurance,” 29 U.S.C. 1144(b)\(2)(A). This Court

has employed a two stage-process for determining whether

state laws “regulate{] insurance” under the savings clause.

The notice-prejudice rule satisfies the first, “common sense”

component, because, as the court of appeals found, the rule is

not a generally applicable rule of contract law in California,

but is instead specifically directed toward the insurance

industry. It also generally satisfies the factors used to deter-

6

mine the application of the McCarran-Ferguson At, which

constitutes the second component of the ERISA insurance

savings clause analysis.

The court of appeals held that the notice-prejudice rule

does not satisfy the McCarran-Ferguson “risk spreading”

factor, but that, taking the analysis as a whole, it nonetheless

qualifies as a law that “regulates insurance” within the

meaning of the ERISA savings provision. Although it may

be argued that the notice-prejudice rule does spread certain

risks, the court of appeals’ conclusion that the rule “regu-

lates insurance” is correct in any event.

Petitioner argues that all three McCarran-Ferguson fac-

tors must be satisfied in order for a law to be found to

“regulate|| insurance.” This Court has repeatedly referred

to the McCarran-Ferguson factors, however, as “guides” or

items “relevant” to the analysis; it has stated that no single

factor is determinative; and it has actually applied the

factors flexibly. Textual differences between the McCarran-

Ferguson Act and the ERISA insurance savings clause, as

well as a consideration of the differing legal contexts in

which the two Acts operate, establish that, even if the

McCarran-Ferguson factors would be applied more rigidly in

a case arising under that statute, they should be construed

flexibly in the ERISA context.

Petitioner has argued that the court of appeals erred

because the notice-prejudice rule creates a new cause of

action based on a late-filed claim for benefits, and that it

therefore conflicts with ERISA’s civil enforcement scheme.

That argument is mistaken; respondent has simply brought

an action under Section 502(a)(1)(B) of ERISA itself for

benefits due, and state insurance law provides a relevant

rule of decision in that action. Petitioner’s contention may

be rejected on that ground alone, without addressing any

broader rationale regarding the preemptive effect of Section

502 on causes of action brought directly under a state law

that regulates insurance. Consideration of that broader

7

rationale would present the Court with the question whether

it should reconsider part of the rationale of its decision in

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987), regarding

the interaction between Congress's intent to make Section

502 the exclusive remedy for claims under ERISA and its

simultaneous intent to save state laws that “regulate |

insurance.”

II. The court of appeals erred in holding that the state-

law Elfstrom rule, under which an employer who carries out

agency-like duties under an insurance policy will be treated

like an agent of the insurance company, may be applied in

this case. When applied to an ERISA plan, the Elfstrom

rule requires the employer to take on additional legal duties

that vary from State to State, thereby regulating the basic

services that a plan may provide to its participants and

beneficiaries. It therefore “relates to” ERISA plans. The

Elfstrom rule is not saved by the insurance savings pro-

vision, because it appears merely to be an application of

quite general principles of agency law in the insurance con-

text. A federal court in a case like this could, however, apply

similar agency principles as a matter of federal common law

under ERISA.

ARGUMENT

CALIFORNIA'S NOTICE-PREJUDICE RULE IS A

LAW THAT “REGULATES INSURANCE” AND IS

THEREFORE SAVED FROM PREEMPTION BY 29

U.S.C. 1144(B)(2)(A)

A. The Notice-Prejudice Rule “Relates To” ERISA Plans

1. Under Section 514(a) of ERISA, 29 U.S.C. 1144(a), the

provisions of ERISA “shall supersede any and all State laws

insofar as they may now or hereafter relate to any employee

benefit plan.” The California notice-prejudice rule does

“relate to” ERISA plans. As stated by the court of appeals,

the rule provides that “the insurer * * * may not deny

benefits by reason of untimely notice or submission of proof

8

of claim unless the insurer proves that it has suffered actual

prejudice because of the delay.” Pet. App. 5a-6a. That rule

is equivalent to requiring each insurance policy—including

those issued to ERISA plans, see 29 U.S.C. 1002(1) (defining

“employee welfare benefit plan” under ERISA to apply to

plans providing benefit “through the purchase of insurance

or otherwise”)—to contain a term prohibiting a denial of

benefits on untimeliness grounds where prejudice cannot be

shown.

In Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

724 (1985), this Court addressed an analogous issue regard-

ing the preemption under ERISA of a state law mandating

that certain mental health benefits be provided to any state

resident who is insured under certain types of policies. The

Court held that a mandated benefits law of that kind “relates

to” ERISA plans insofar as it is sought to be applied to such

plans. 471 U.S. at 739. Neither the fact that the state law

was consistent with any substantive provision of the plan,

nor the fact that the state law applied widely to individuals

and entities other than ERISA plans, was sufficient to

remove it from the preemptive force of ERISA’s “relates to”

language. Accord New York State Conference of Blue Cross

& Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 668.

664 (1995) (“Because the regulated policies [in Metropolitan

Life| included those bought by employee welfare benefit

plans, we recognized that the law ‘directly affected’ such

plans.”); Shaw v. Delta Airlines, Inc., 463 U.S. 85, 97 (1983)

(state disability law “which requires employers to pay

employees specific benefits, clearly relatels] to’ benefit

plans”).

The same principle applies here. Although the notice-

prejudice rule does not mandate that insurance policies

issued to ERISA plans include any particular substantive

benefit, its effect is similar to that of the laws at issue in

Metropolitan Life and Shaw, because it in effect requires

plans to include particular provisions (in this case, regarding

the enforcement of claim filing deadlines) in their insurance

contracts. Indeed, the argument that the state law “relates

to” ERISA plans is stronger in this case than in Metropoli-

tan Life and Shaw, since—unlike the substantive benefits

that an insured ERISA plan must offer, as to which ERISA

itself is silent—the statute itself contains some provisions

regarding claims processing.’ Accordingly, like the rules at

issue in Metropolitan Life and Shaw, the notice-prejudice

rule mandatels] employee benefit structures or their ad.

ministration” when applied to ERISA plans. New York

State Conference of Blue Cross & Blue Shield Plans, 514

U.S. at 658. It therefore “relates to” such plans.

B. The Notice-Prejudice Rule Is Saved From Preemption

By ERISA's Insurance Savings Clause

Under the insurance savings clause of ERISA, Section

SA N, 29 U.S.C. 1144 , the general “relates to”

criterion for preemption is significantly qualified. The in-

surance savings clause provides that “nothing in this sub-

chapter shall be construed to exempt or relieve any person

from any law of any State which regulates insurance.” 29

U.S.C, 1144(b)(2)(A). By saving such insurance regulation

from preemption, ERISA “leaves room for complementary

or dual federal and state regulation” of the insurance

industry. John Hancock Mut. Life Ins. Co. v. Harris Trust

& Sav. Bank, 510 U.S. 86, 98 (1993). The ultimate question

in determining whether a state law is saved from preemption

under the insurance savings clause is whether the law “regu-

lates insurance.”

. The Department of Labor has issued regulations regarding claims

procedures, but they do not address the timing of notice of claims. See 29

C. F. R. Pt. 2560. See also 63 Fed. Reg. 48,390-48,409 (1998) (proposing

new, minimum claims-procedure regulations, which, among other things,

set shorter time limits for the resolution of claims and establish more

extensive disclosure and review requirements).

10

This Court has employed a two-stage analysis for deciding

whether a state law “regulates insurance” in this context.

First, the Court undertakes a “common-sense” examination

of the state law at issue. Metropolitan Life, 471 U.S. at 740.

“A common-sense view of the word ‘regulates’ would lead to

the conclusion that in order to regulate insurance, a law must

not just have an impact on the insurance industry, but must

be specifically directed toward that industry.” Pilot Life

Ins. Co. v. Dedeaux, 481 U.S. 41, 50 (1987). Second, because

a purpose of the insurance savings clause was “to preserve

the McCarran-Ferguson Act’s reservation of the business of

insurance to the States,” Metropolitan Life, 471 U.S. at 744

n.21, the three factors used to determine whether a state law

regulates the “business of insurance” within the meaning of

the McCarran-Ferguson Act are also relevant to the ERISA

determination. See note 1, supra.*

Under this two-tiered analysis, a state law that mandates

benefits to be provided in insurance purchased by an ERISA

plan falls within the savings provision and is not preempted.

Metropolitan Life, 471 U.S. at 746. On the other hand, gen-

eral state tort or contract law that applies to the insurance

industry, but is not specifically directed toward that indus-

try, is not a law regulating insurance that falls within the

savings provision and, to the extent it relateſs] to” a plan, is

preempted. Pilot Life, 481 U.S. at 50, 57.

1. The court of appeals correctly held that the notice-

prejudice rule, as a matter of “common sense,” is directed to-

ward the insurance industry. The court of appeals in this

A state law that purports to regulate insurance by “deem[ing]” a

plan to be an insurance company is outside the savings provision and

subject to preemption. 29 U.S.C. IAA B As a result of that

provision, self-insured plans are generally outside the scope of state

insurance regulation. See, ¢.g. Metropolitan Life, 471 U.S. at 747.

Because this case does not involve a self-insured plan or an attempt to

deem a plan to be an insurance company, this “deemer” clause is not at

issue in this case.

11

case relied on its recent decision in Cisneros v. UNUM Life

Insurance Co. of America, 134 F.3d 939 (9th Cir. 1998), peti-

tion for cert. pending, No. 97-1867, to hold that the notice-

prejudice rule is saved from preemption by virtue of the

ERISA insurance savings provision. In Cisneros, the court

reasoned that the notice-prejudice rule, “by requiring the

insurer. to prove prejudice before enforcing proof-of-claim

requirements, * * * dictates the terms of the relationship

between the insurer and insured and so seems, as a matter of

common sense, to ‘regulate insurance.“ Jd. at 945. The

court also noted that t he rule is directed specifically at the

insurance industry and is applicable only to insurance

contracts.” Ibid. The Ninth Circuit’s conclusion in Cisneros

that the notice-prejudice rule satisfies an ordinary under-

standing of insurance regulation is correct.

Petitioner belatedly argued in its reply brief at the

certiorari stage of this case that the notice-prejudice rule “is

nothing more than a basic principle of contract law which

applies to all contracts, not merely insurance policies.” Pet.

Reply Br. 5. Assuming that that issue is “fairly included” in

the questions presented in the petition, see Sup. Ct. R.

14.1(a), and is therefore properly before the Court, peti-

tioner’s new argument should be rejected. Determining

whether California’s notice-prejudice rule is directed at the

insurance industry narrowly, or is instead a “basic

of contract law” recognized throughout the State’s law,

* The notice-prejudice rule is not unique to California insurance

regulation. As one influential treatise has noted, “there is something

approaching a consensus in regard to the general proposition that an

insured’s coverage should only be lost when the insurer has been

prejudiced.” Robert E. Keeton & Alan I. Widiss, Insurance Law: A Guide

To Fundamental Principles, Legal Doctrines, and Commercial Practices

§ 7.2, at 768 (1988). Indeed, if the rule were not saved by the insurance

savings clause, the question would arise as to whether the rule should be

adopted as a matter of federal common law under ERISA itself. See, .

Pilot Life, 481 U.S. at 56.

12

requires an analysis of the law of California. Petitioner

offers no reason to disturb the conclusion of the court of

appeals, which is presumed to be familiar with the law of the

States in its cireuit, that the notice-prejudice rule under

California law is directed specifically at the insurance

industry. See Sheridan v. United States, 487 U.S. 392, 401-

402 (1988); Runyon v. McCrary, 427 U.S. 160, 181 (1976);

Huddleston v. Dwyer, 322 US. 232, 237 (1944).

In any event, our survey of California law reveals no cases

where the state courts apply the notice-prejudice rule as

such outside the insurance area. Nor is this surprising,

given that the rule is stated in terms of prejudice to an

“insurer” resulting from untimeliness of notice. See Shell

Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715,

760 (Ct. App. 1998) (“California law is settled that a defense

based on an insured’s failure to give timely notice requires

the insurer to prove that it suffered substantial prejudice.”).

Thus, even if petitioner were correct in viewing the notice-

prejudice rule (perhaps like much insurance regulation) as

having its roots in established common law contract doctrine,

or more broadly as being a species of harmless error doc-

trine, we agree with the Ninth and District of Columbia Cir-

cuits that, as it now exists, the rule of notice-prejudice “ap-

plies only to insurers.” O'Connor v. UNUM Life Ins. Co. of

Am., 146 F.3d 959, 964 (D.C. Cir. 1998); compare Security

Life Ins. Co. of Am. v. Meyling, 146 F.3d 1184, 1189 (9th Cir.

1998) (California insurance code provision allowing rescission

in the event of material misrepresentation merely codifies

the common law remedy of rescission and is not a regulation

of insurance).

5 We note that state common law created by the decisions of state

courts, such as the notice-prejudice rule, fits ERISA's literal definition of

state law. 29 U.S.C. 1144(cX1) eite term ‘State law’ includes all laws,

decisions, rules, regulations, or other State action having the effect of

law”).

13

2. The McCarran-Ferguson Act factors also suggest that

the California notice-prejudice rule is a law that “regulates

insurance” under the ERISA savings clause. In its prior

decision in Cisneros, upon which the court relied in this case,

the court of appeals considered the application of the

McCarran-Ferguson Act factors to the California notice-

prejudice rule. The court held that the notice-prejudice rule

clearly satisfies two of the factors, concluding that the rule is

“an integral part of the policy relationship between the

insurer and the insured” and that it “is limited to entities

within the insurance industry.” See Cisneros, 134 F.3d at

946. Those conclusions are correct. By “effectively creat-

ling] a mandatory contract term” that requires the insurer to

prove prejudice before enforcing a timeliness-of-claim provi-

sion, the notice-prejudice rule “dictates the terms of the rela-

tionship between the insurer and the insured, and con-

sequently, is integral to that relationship.” Jbid. In addition,

as discussed above, the notice-prejudice rule appears to be

specifically tailored to the insurance industry and applies

only in that context. The primary dispute in this case, then,

concerns the remaining McCarran-Ferguson factor—

whether the notice-prejudice rule “has the effect of transfer-

ring or spreading a policyholder’s risk.” Metropolitan Life,

471 U.S. at 743.

a. The Cisneros court held that the notice-prejudice rule

does not satisfy the McCarran-Ferguson “risk spreading”

criterion. The court held that that criterion “refers to the

risk of injury for which the insurance company contractually

agreed to compensate the insured.” 134 F.3d at 945-946.

The court stated that, although It Ihe notice-prejudice rule

does shift the risk of lost coverage as a result of late

submission of proof,” it “does not alter the allocation of risk

for which the parties initially contracted, namely the risk of

lost income from long-term disability.” Jd. at 946.

In our view, although the distinction the court of appeals

attempted to draw between different types of risk spreading

14

finds substantial support in the case law.“ it is ultimately

unsatisfactory. Insofar as the notice-prejudice rule shifts the

risk of late notice and stale evidence from the insured to the

insurance company in some instances, it has the effect of

raising premiums and spreading risk among policyholders.

See United States Dep't of Treasury v. Fabe, 508 U.S. 491,

503-504 (1993) (in holding that the actual performance of a

contract constitutes the “business of insurance” within the

meaning of the McCarran-Ferguson Act, the Court notes

that “(without performance of the terms of the insurance

policy, there is no risk transfer at all.). Therefore, the

notice-prejudice rule could, in our view, be found to satisfy

the McCarran-Ferguson “risk spreading” factor.’

b. The Court need not, however, determine the sound-

ness of the court of appeals’ conclusion that the notice-pre-

judice rule does not spread risk under the McCarran.

See Davies v. Centennial Life Ins. Co., 128 F.3d 984, 941 (6th Cir.

1997); Tingle v. Pacific Mut. Ins. Co., 996 F.2d 106, 108 (5th Cir. 1993);

DeBruyne v. Equitable Life Assurance Soc / of the United States, 920

Fd 457, 469 (7th Cir. 1990); Smith v. Jefferson Pilot Life Ins. Co., 14 F.3d

5€2, 569 n.9 (11th Cir.), cert. denied, 518 U.S. 808 (1994); cf. O'Connor, 146

F. ad at 962 note (noting that because policyholder conceded the point, it

had no occasion to decide whether the notice-prejudice rule transfers or

spreads policyholder risk).

Although the court of appeals attempted to rely on this Court's

15

Ferguson factors. Even if the notice-prejudice rule does not

spread the kind of risk addressed by the McCarran-

Ferguson factors, the fact that it does not is not fatal to the

contention that the rule “regulates insurance” within the

meaning of the ERISA savings clause. That is because, as

the Ninth Circuit correctly held, “the McCarran-Ferguson

factors are simply relevant considerations or guideposts, not

separate essential elements of a three-part test that must

each be satisfied for a law to escape preemption.” Cisneros,

134 F.3d at 946.“

Initially, this Court itself has made it clear that the

McCarran-Ferguson criteria were not intended to introduce

a rigid three-part test under that Act. Although the Court

stated in Group Life & Health Insurance Co. v. Royal Drug

* The Ninth Cireuit’s view is in line with that of the District of

Columbia and Sixth Circuits, O'Connor, 146 F.3d at 968; Davies, 128 F. ad

at 940; ef. Soniat v. Travelers Ins. Co, 588 So. 2d 210, 214-215 (La. 1989)

(holding policy-cancellation provision saved under common-sense ap-

proach without resort to Pireno factors), while the Fifth Circuit is the only

cireuit to have directly held that all three factors are essential. CIGNA

Healthplan of La., Inc. v. Lowisiana ex rel. leyoub, 82 F.3d 642, 650 (5th

Cir.) AIK a statute fails * * * to satisfy any one element of the three-

factor Metropolitan Life test, then the statute is not exempt from

preemption by the ERISA insurance savings clause.”), cert. denied, 519

U.S. 964 (1996); accord Tingle, 996 F.2d at 108 (holding statute preempted

that “fails to satisfy at least one prong of the three part Metropolitan Life

test”). Other courts have reached varying results that appear to depend

on u more flexible analysis, not a rigid rule requiring state laws to satisfy

each of the MeCarran-Ferguson criteria to come within the ERISA in-

surance savings clause. See, ¢.g., Brewer v. Lincoln Nat'l Life Ins. Co,

921 F.2d 150, 153 (8th Cir. 1990) (common law rule not saved because it

failed two factors), cert. denied, 501 U.S. 1238 (1991); Howard v. Gleason

Corp, 901 F.2d 1154, 1158-1159 (2d Cir. 1990) (statutory provision not

saved because it failed to meet common sense test and two factors); Kelley

v. Sears, Roebuck & Co., 882 F.2d 488, 456 (10th Cir. 1989) (statute not

saved because it failed to meet two of three factors); Anschultz v.

Connecticut Gen. Life Ins. Co., 850 F.2d 1487, 1469 (11th Cir. 1988) (state

law that failed to meet two of MeCarran-Ferguson factors is not saved),

16

Co., 440 U.S. 205, 211-212 (1979), that risk-spreading is an

“indispensable characteristic of insurance,” it does not follow

that regulation of the business of insurance always directly

involves the regulation of risk-spreading, either under the

McCarran-Ferguson Act itself or under ERISA. Indeed,

since its initial articulation of the three criteria in Royal

Drug, the Court has been consistent in disavowing any

attempt to use them as a rigid three-part test. That has

been true both in cases directly applying the McCarran-Fer-

guson Act, such as Union Labor Life Ins. Co. v. Pireno, 458

U.S. 119, 129 (1982) (“None of these criteria is necessarily

determinative in itself.”), and in cases applying the ERISA

insurance savings clause, such as Pilot Life, 481 U.S. at 48,

49 (referring to the factors as guideſs] or “considerations

to be] weighed”) and Metropolitan Life, 471 U.S. at 743

(“three criteria relevant to determining whether a particular

practice falls within * * * the ‘business of insurance’”)

(emphasis added). Indeed, in FMC Corp. v. Holliday, 498

U.S. 52, 61 (1990), the Court found a state anti-subrogation

provision to be an insurance law without any reference to

the Pireno factors.

The Court’s analysis in Pilot Life also indicates that the

insurance savings clause calls for a more flexible approach.

After determining that the state law in that case met neither

a “common-sense” understanding of insurance nor the first

McCarran-Ferguson factor, because it did not spread risk,

481 U.S. at 50, the Court proceeded to address the other two

factors as well. Jd. at 50-51. That additional analysis would

not have been necessary if petitioner were correct that a

regulation must qualify under all three prongs.

Furthermore, the textual differences between the

McCarran-Ferguson Act and the ERISA insurance savings

clause suggest a somewhat broader scope for the latter. The

ERISA insurance savings clause saves any law that

“regulates insurance,” 29 U.S.C. 1144(b)(2)(A)—a somewhat

broader formulation than the McCarran-Ferguson Act’s

17

reference to laws “enacted * * * for the purpose of

regulating the business of insurance.” 15 U.S.C. 1012(b).

Consequently, the stricter approach that may be appropriate

in McCarran-Ferguson Act cases to distinguish between the

“business of insurance,” which displaces federal antitrust

and securities laws, and the “business of insurance com-

panies,” which may be subject to those laws, see SEC v.

National Sec., Inc., 393 U.S. 453, 459 (1969), would not have

controlling significance in the ERISA context.

Finally, the differing legal contexts in which the

McCarran-Ferguson Act and the ERISA insurance savings

clause operate suggest that, even if a somewhat stricter

application of the McCarran-Ferguson criteria were appro-

priate elsewhere, a more flexible approach should be applied

in the ERISA context. The McCarran-Ferguson Act was

primarily directed toward drawing a line between a well-

developed federal regulatory regime under the federal anti-

trust laws and the equally well-developed state regulation of

insurance; accordingly, a conclusion that the McCarran-

Ferguson Act does not apply does not prohibit all regulation,

but merely has the effect of subjecting an insurer to the

federal regime. By contrast, a conclusion that a state law is

not a law that “regulates insurance” under the ERISA in-

surance savings clause frequently has the opposite effect: it

displaces a settled state scheme that has been found neces-

sary to protect consumers and beneficiaries of insurance

policies, without subjecting insurers to any corresponding

scheme of substantive regulation under federal law. The

Congress that enacted ERISA was deeply concerned with

the basic goal of protecting the rights of plan participants

and beneficiaries. A too-rigid application of principles drawn

from McCarran-Ferguson Act cases in the context of the

ERISA insurance savings clause could easily result in

depriving ERISA participants and beneficiaries—whom

Congress sought to protect—of needed consumer protec-

tions without providing any alternative.

18

C. The Notice-Prejudice Rule Does Not Conflict With

ERISA'S Civil Enforcement Provisions

Petitioner contends that, even if the notice-prejudice rule

would be saved under the insurance savings clause, it is

nonetheless preempted because it conflicts with a substan-

tive provision of ERISA and with the written terms of the

ERISA plan in this case. Petitioner relies on Pilot Life, .

which it reads as having held that “ERISA would bar these

state] causes of action for improper claims processing and

failure to pay benefits|—even if the ‘saving’ clause were ap-

plicable—because they conflict with one of ERISA’s sub-

stantive provisions, its exclusive civil enforcement scheme in

Section] 502(a).” Pet. 23, citing Pilot Life, 481 U.S. at 51-57.

Petitioner is wrong, however, in its basic premise.

1. Petitioner's premise that a claim that conflicts with

the written terms of a plan could not be a claim for benefits

under Section 502(a) of ERISA, 29 U.S.C. 1132(a)—and

therefore must be a state cause of action for improper claims

processing or failure to pay benefits—is mistaken. In this

case, the notice-prejudice rule is relevant not because it

creates a separate state cause of action, but because it

supplies a legal rule of decision to be applied in an ordinary

action under Section 502(a)(1)(B), 29 U.S.C. 1132(a)(1)(B), “to

recover benefits due * * * under the terms of the plan.” In

this respect, this case is analogous to Metropolitan Life,

which held a state substantive law mandating certain insur-

ance benefits to be saved. It is also analogous to FMC Corp.,

in which the Court concluded that a state anti-subrogation

rule would be saved, notwithstanding that the state rule

affected the plan’s payment of benefits. Analytically, there

is no reasonable distinction to be made among a state

mandatory-insurance-benefit law, an anti-subrogation rule,

and a notice-prejudice requirement. Each kind of mandate

must be viewed, as a matter of state insurance law, as

incorporated into the terms of the insurance purchased by

19

plans in that State; none of these state mandates “conflict(s)

with a substantive provision of ERISA.” Pilot Life, 481 U.S.

at 57 (referring to Metropolitan Life); cf. John Hancock, 510

U.S. at 99 n.9 (“[nJo decision of this Court has applied the

saving clause to supersede a provision of ERISA itself”).

In short, as the Court concluded in FMC Corp., 498 U.S.

at 64, “if a plan is insured, a State may regulate it indirectly

through regulation of its insurer and its insurer’s insurance

contracts.” Petitioner’s argument to the contrary would

virtually “read[{] the saving clause out of ERISA entirely,”

Metropolitan Life, 471 U.S. at 741, since even the mandated

benefits law at issue in Metropolitan Life would not be saved

under such analysis.“

2. For the reasons stated in point 1, petitioner’s con-

tention that applying the notice-prejudice rule would conflict

with Section 502 of ERISA should be rejected on the ground

that this is an action for benefits under Section 502; applying

the notice-prejudice rule as a rule of decision on the merits in

a suit under Section 502 therefore in no way conflicts with

any intent by Congress to make Section 502 the exclusive

source of a cause of action. Petitioner’s contention may be

* Contrary to petitioner’s contention (Pet. 25), the notice-prejudice

rule does not conflict with the requirement in Section 503 of ERISA, 29

U.S.C, 1183, that plans must provide notice and the opportunity for review

of denied claims, 29 U.S.C. 1133, or with the Secretary’s regulation

providing that Ja] claim is filed when the requirements of a reasonable

claim filing procedure * * have been met,” 29 C. F. R. 2560.503-1(c) and

(d). Rather, the notice-prejudice rule complements ERISA and the

Secretary's regulation by providing a longer time to file a claim in the

context of insured plans, if the insurer will not suffer prejudice thereby.

Nor is petitioner correct in asserting (Pet. 25) that application of the

notice-prejudice rule, contrary to a plan’s express terms, conflicts with the

statutory requirements that fiduciaries follow the written terms of the

plan and pay benefits in accordance with those terms. 29 U.S.C.

1104(aX1(D), 1132(a)(1(B). Those provisions could not reasonably be

read to require fiduciaries to follow a plan’s terms in contravention of

applicable federal or state law.

20

rejected on that ground alone. If the Court does so, there

will be no occasion for it to revisit the difficult issue of

whether ERISA preempts a state law cause of action or

remedy independent of Section 502, even where the state

law in question “regulates insurance” within the meaning of

the insurance savings provision. Resolving the interaction

between Congress’s intent to make Section 502 an exclusive

remedy for claims under ERISA and its simultaneous intent

to save state laws that “regulatel] insurance” would present

the Court with the question whether it should reconsider

part of the rationale of its decision in Pilot Life v. Dedeaux.

As we explain below, there may be substantial reasons for

the Court to do so, but there is no occasion for the Court to

address that issue in this case.

We recognize that Pilot Life has been read to preclude

even state law causes of action arising under laws that

“regulate[] insurance.“ That portion of Pilot Life's ration-

ale is, however, in significant tension with the text of the

insurance savings provision and was unnecessary to Pilot

Life’s holding that the law at issue there was not in any

event an insurance regulation within the meaning of that

provision.“

-

~

10 Most lower courts to have confronted the issue have concluded, like

petitioner here, that Pilot Life requires the preemption of claims for

benefits or remedies under state-law provisions that otherwise clearly

constitute insurance law. See Kanne v. Connecticut Gen. Life Ins. Co.,

867 F. 2d 489, 493-494 (9th Cir. 1988), cert. denied, 492 U.S. 906 (1989); Jn

re Life Ins. Co. of N. Am., 857 F.2d 1190, 1194-1195 (8th Cir. 1988) (citing

district court cases); but see Franklin H. Williams Ins. Trust v. Travelers

Ins. Co., 50 F.3d 144, 151 (2d Cir. 1995).

A number of bills were introduced in the Second Session of the 105th

Congress that would have altered ERISA’s preemption provisions to

permit additional actions or remedies by participants and beneficiaries in

health care plans. See, ¢.g., H.R. 3605, S. 1890, S. 1891, S. 2330, S. 2416

(1998).

21

In Pilot Life, the Court considered whether ERISA pre-

empted state common law tort and contract causes of action

for bad faith processing of a claim for benefits by an insurer.

Analyzing the state common law creating the cause of action

at issue, the court initially concluded that (a) under a “com-

mon sense” view, the cause of action was rooted in general

principles of Mississippi tort and contract law and was not

“specifically directed toward thle insurance] industry,” 481

U.S. at 50; and (b) it “at most meets one of the three criteria

used to identify the ‘business of insurance’ under the

McCarran-Ferguson Act,” id. at 51. Those holdings were

sound, and they provided ample basis to conclude that the

state law did not come within the ERISA insurance savings

clause. The Court’s holding in Pilot Life that the state law

was preempted was therefore correct.

In a succeeding portion of the Pilot Life opinion, however,

the Court—consistent with the position of the Solicitor Gen-

eral in a brief filed at the petition stage of the case (see 481

U.S. at 52; see note 14, infra)—went on to consider whether

its conclusion that the state law was preempted was sup-

ported by the express provision in ERISA of a cause of

action by a participant or beneficiary for plan benefits under

Section 502(a)(1)(B), on the theory that that cause of action is

exclusive of any others, such as a cause of action arising

under state law. The Court concluded that it was, see 481

U.S. at 52-57, stating that At he policy choices reflected in

the inclusion of certain remedies and the exclusion of others

under the federal scheme would be completely undermined if

ERISA-plan participants and beneficiaries were free to

obtain remedies under state law that Congress rejected in

ERISA.” 481 U.S. at 54. In that portion of its opinion, the

Court did not advert to the text of the insurance savings

clause. Instead, it relied heavily on Congress’s intent with

respect to Section 502, evident from the legislative history

of ERISA, to federalize ERISA remedies in the same way

that Section 301(a) of the Labor Management Relations Act

22

(LMRA), 29 U.S.C, 185(a), had federalized remedies for

violations of collective bargaining agreements. See 481 U.S.

at 54-56.

We do not question that reasoning in Pilot Life as a gen-

eral matter. Unquestionably, “Congress intended § 502(a) to

be the exclusive remedy for rights guaranteed under

ERISA.” Ingersoll-Rand Co. v. MeClendon, 498 U.S. 133,

144 (1990) (emphasis added); Mertens v. Hewitt Assocs., 508

U.S. 248, 253-254 (1993) (because of comprehensive enforce-

ment scheme, Court will not infer additional federal causes

of action). And it is certainly true that, outside the context

of state laws that “regulate insurance” within the meaning of

the ERISA insurance savings clause, that exclusivity of the

Section 502 civil enforcement provisions also appropriately

informs the Court's understanding of the scope of ERISA

preemption where a plaintiff brings a cause of action under

state law that “relates to” an ERISA plan. See, e., Inger-

soll-Rand, 498 U.S. at 142. Congress, in short, clearly

intended the remedial provisions of ERISA to be exclusive

of any generally applicable state-law remedies related to

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

327 (1974); see also Metropolitan Life Ins. Co. v. Taylor, 481

U.S. 58, 62-64, 66 (1987); Franchise Tax Bd. v. Construction

Laborers Vacation Trust, 463 U.S. 1, 24 (1983).

It does not follow, however, that ERISA Section 502

should inform the preemption inquiry to the same extent

with respect to a state-law cause of action or remedy that

specifically “regulates insurance” as it does with respect to

one of general applicability. In that situation, Congress has

saved state substantive law, and it is not clear why Congress

would have wanted to foreclose all access to state-created

remedies or sanctions to enforce that substantive law, see,

e.g., Metropolitan Life, 471 U.S. at 734 (suit by state

Attorney General against insurer of ERISA plans to enforce

provision of state insurance law), especially where the causes

23

of action provided under Section 502 itself are not suited to

chat purpose.”

The savings clause states that “nothing in this subchapter

shall be construed to exempt or relieve any person from any

law of any State which regulates insurance.” 29 U.S.C.

1144(b)\(2)(A) (emphasis added). “(T)his subchapter” in-

cludes Section 502, which has been construed to provide

exclusive remedies under ERISA, as well as the preemption

provision itself, Section 514(a). Accordingly, the savings

clause by its terms directs that nothing in Section 502, which

concerns causes of action and remedies under ERISA, shall

be “construed” to relieve or exempt any person from “any

law” of a State that regulates insurance. Thus, the insurance

savings clause, on its face, saves state law conferring causes

of action or affecting remedies that regulate insurance, just

as it does state mandated-benefits laws and other prescrip-

tive measures that do so.

2 During the congressional debate on ERISA, substantive and

enforcement provisions of law were linked by Senator Williams with

reference to both the rule of preemption and its exceptions. Senator

Williams observed that “with the narrow exceptions specified in the bill,

the substantive and enforcement provisions of the conference substitute

are intended to preempt the field for Federal regulations.” 120 Cong. Rec.

29,933 (1974), quoted in Shaw, 463 U.S. at 99. To the extent ERISA pre-

empts the field for federal regulation, see California Div. of Labor

Standards Enforcement v. Dillingham Constr, N. A., 519 U.S. 316, 335-

$36 (1997) (Scalia, J., concurring), it follows that both state substantive law

an.’ de measures to enforce that state law are preempted. But where

ERISA does not preempt the field—here, because the insurance “excep-

tion” in Section 514(b) applies—there is force to the corresponding

proposition that both state substantive insurance law and at least some

enforcement measures necessary to make that substantive law effective

are saved. Surely, for example, ERISA’s saving of “any generally appli-

cable criminal law of a State,” 29 U.S.C. 1144(b)(4), authorizes the State to

bring a criminal prosecution, not merely to have its substantive law

applied in a suit brought under ERISA.

24

This Court gave effect to the facially unrestricted scope of

the insurance savings clause in Metropolitan Life, when it

“declin{ed] to impose any limitation on the saving clause

beyond those Congress imposed in the clause itself and in

the ‘deemer clause’ which modifies it,” and concluded that

Ait a state law ‘regulates insurance,’ as mandated-benefit

laws do, it is not preempted.” 471 U.S. at 746; ef. Pilot Life,

481 U.S. at 56-57 (Metropolitan Life clearly “rejected an

interpretation of the [iresrance] saving clause * * * that

saved from preemption o ily state regulations unrelated to

the substantive provisions of ERISA ).“ In addition, the

force of the savings provision's express terms is reinforced

by the Court’s frequent recognition—particularly in recent

cases—that ERISA’s preemption provisions must be read

against the background of the “assumption that the historic

police powers of the States were not to be superseded by the

Federal Act unless that was the clear and manifest purpose

of Congress.” Travelers, 514 U.S. at 655; see also De Buono

v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806,

813 n.8 (1997); California Div. of Labor Standards Enforce-

'S Of course, notwithstanding the savings clause, an insurance law that

conflicts with a provision of ERISA itself is preempted by virtue of the

Supremacy Clause. See John Hancock, 510 U.S. at 99-100. Although the

insurance savings clause “leaves room for complementary or dual federal

and state regulation,” ERISA “calls for federal supremacy when the two

regimes cannot be harmonized or accommodated.” Id. at 98. IIln the case

of a direct conflict, federal supremacy principles require that state law

yield.” Id. at 100. Such conflict preemption occurs “where compliance

with both federal and state regulations is a physical impossibility, or

where state law stands as an obstacle to the accomplishment and execu-

tion of the full purposes and objectives of Congress.” See Boggs v. Boggs,

520 U.S. 833, 834 (1997), citing Gade v. National Solid Wastes Manage-

ment Ass'n, 505 U.S. 88, 98 (1992). There is no indication, for example,

that Congress believed that judicial enforcement of state insurance law by

a participant or beneficiary would in all circumstances conflict with the

purposes of the provision in Section 502(a\1\B) for a participant to bring

an action for benefits under the plan itself.

ment v. Dillingham Construction, N.A., 519 U.S. 316, 325

(1997).

Furthermore, insofar as the significance of Section 502 for

the preemption inquiry derives from Congress’s intent to

pattern suits under Section 502 on suits under Section 301 of

the LMRA, that intent does not bear directly on the pre-

emption of a state-law cause of action or remedy that

“regulates insurance.” That is because LMRA Section 301

does not contain any statutory exception analogous to

ERISA’s insurance savings provision. While Section 301 is

no doubt highly instructive in cases in which the scope of

ERISA’s broad “relates to” preemption provision is at issue,

Congress’s enactment of the insurance savings provision

suggests that it did not intend that parallel to be controlling

where the state law, while within the scope of the preemp-

tion provision, also falls within the terms of insurance

savings clause. Thus, the general background of Section

502(a) discussed in Pilot Life does not in itself require that a

state law that “regulates insurance,” and so comes within the

terms of the savings clause, is nevertheless preempted if it

provides a state- law cause of action or remedy."

10 In a brief filed in response to the Court’s invitation at the petition

stage in Pilot Life, we argued “that since Congress intended the pro-

cedures it established in Section 502 to be the exclusive procedures for

enforcing claims for benefits due under employee benefit plans, the states

are barred from establishing alternative procedures.” Brief for the United

States as Amicus Curiae at 19, Pilot Life Ins. Co. v. Dedeaux, No. 85-1043.

We adhere to that conclusion in circumstances like those that were before

the Court in Pilot Life, where a beneficiary invoked a general “state com-

mon law cause of action,” ibid., to obtain benefits under a plan, as well as

other remedies. For the reasons given in the text, however, the exclusive

nature of Section 502 may come into conflict with, rather than reinforce,

the terms of the insurance savings clause where the participant or bene-

ficiary (like the State Attorney General in Metropolitan Life, see 471 U.S.

at 734) invokes a cause of action under state law that “regulates in-

surance”—¢.g., to enforce a specific provision of state insurance law that

could not be enforced in a suit under Section 502. Insofar as our discussion

26

II. THE ELFSTROM RULE DOES “RELATE TO”

ERISA PLANS WHEN IT IS APPLIED TO THEM,

AND IT IS THEREFORE PREEMPTED

The court of appeals erred in concluding that the Elfstrom

rule, as a general principle of state agency law, does not

unduly interfere with plan administration and thus does not

“relate to” an employee benefit plan in this instance. To the

contrary, the Elfstrom rule “relate[s) to” plans within the

meaning of Section 514(a), because, when applied in the

context of deciding a claim for benefits under ERISA, it

could directly interfere with the goal of national uniformity

in plan administration.”

The Elfstrom rule, which pre-dates ERISA and which

provides that “the employer is the agent of the insurer in

performing the duties of administering group insurance

policies,” Elfstrom v. New York Life Ins. Co., 482 P.2d 731,

737 (Cal. 1967), may net explicitly refer to or be dependent

on the existence of an ERISA plan. See Ingersoll-Rand, 498

U.S. at 139. But the application of the Elfstrom rule to

claims for benefits—like those advanced by respondent in

in the text departs from the views we expressed at the certiorari stage in

Pilot Life, it is worth noting that our submissions concerning ERISA

preemption —like the Court’s analyses—have been refined in light of the

benefit of significant experience with ERISA preemption in the inter-

vening 12 years. Specifically, it is now clear that preemption analysis

must begin with the presumption that Congress did not intend to preempt

state law, particularly in “fields of traditional state regulation.” Travelers,

514 U.S. at 654-655. That presumption is particularly strong in the area of

state insurance regulation, whose continued validity and application to

ERISA plans Congress expressly provided for.

5 In the same way, the notice-prejudice rule also “relate[s] to” the

plan. Unlike the Elfstrom rule, however, notice-prejudice is a law regulat-

ing insurance that is saved from preemption, and any “disuniformities”

that result from the application of the notice-prejudice rule “are the in-

evitable result of the congressional decision to ‘save’ local insurance regu-

lation.” Metropolitan Life, 471 U.S. at 747.

27

this case—does have a direct effect on plan administration.

In effect, it forces the employer, as plan administrator, to

assume a role, with attendant legal duties and consequences,

that it has not undertaken voluntarily. Compare De Buono,

520 U.S. at 815-816 (economic impact alone insufficient to

“relate to” plan); Travelers, 514 U.S. at 662, 668 (same). That

is especially troubling because, as petitioner points out (Pet.

28), state agency law varies from state to state, and it could

easily be the case that one multi-state plan would be subject

to contradictory agency principles depending on what state

law is applied. See, e., First Nat'l Bank v. Nationwide Ins.

Co., 278 S.E.2d 507, 514-515 (N.C. 1981) (North Carolina law

“establishes that the employer-master policyholder is not

ordinarily the agent of the insurer”). Moreover, unlike a

garnishment law like that at issue in Mackey v. Lanier

Collection Agency & Service, 486 U.S. 825, 831-832 (1988),

the effect on administration is not only substantial, but cen-

tral and pervasive; it affects not merely the plan’s book-

keeping obligations regarding to whom benefits checks must

be sent, but also regulates the basic services that a plan may

or must provide to its participants and beneficiaries. Ac-

cordingly, application of the Elfstrom rule to claims for

benefits like that of respondent is contrary to ERISA’s goal

of uniform federal administration of employee benefit plans

and thereby “relates to” ERISA plans s

16 Although the issue apparently was presented to the district court,

see Pet. App. 30a-3la, no party appears to be contending that the EI

strom rule, although formulated in the context of insurance, is a state law

that “regulates insurance” for purposes of the ERISA insurance savings

clause. In our view, the Elfstrom rule is not a law that “regulates insur-

ance,” both because it is not specifically directed at insurance and for the

additional reasons discussed by the district court, see Pet. App. 3la. The

court of appeals described as “sound” and “comport{ing) with [the Ninth

Circuit's) prior determination of the same issue” a formulation that makes

quite clear that the rule is not law directed specifically at insurers, but is

instead an application of general principles of agency law: “as the em-

28

Although we believe that the state-law Elfstrom rule is

preempted, we are not suggesting that general agency

principles, or indeed contract or trust principles, have no

place in deciding an ERISA benefits claim. In this respect,

the analogy to LMRA Section 301 is instructive. As in cases

under that Act and in the absence of pertinent regulations

issued by the Department of Labor, see 29 U.S.C. 1133, the

federal courts are required to develop a uniform “federal

common law of rights and obligations,” Pilot Life, 481 U.S. at

56, concerning the circumstances under which ERISA plans

will be held to have acted as agents of insurance companies.

See, e. g., Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 210

(1985)(“[A] suit * * * alleging a violation of a provision of a

labor contract must be brought under § 301 and be resolved

by reference to federal law.”). In developing that federal

common law, the courts certainly can look to state-law prin-

ciples. Lyman Lumber Co. v. Hill, 877 F.2d 692, 693 (8th

Cir. 1989). But, by subjecting plans to a federal common law

standard, the statutory goal of consistent application in a

multi-state setting can be achieved. See Shaw, 463 U.S. at

105. Given their roots in general principles of agency law,

rules similar to the Elfstrom rule appear to be widespread in

state law. See Pet. App. 12a (citing cases). Thus, on remand

the courts below should consider whether the Elfstrom rule,

or something like it, applies to the circumstances of this case

as a matter of federal, not California, common law.”

ployer assumes responsibility for more administrative or sales functions

which are customarily performed by an insurer, a question of fact will

arise as to the agency relationship between the insurer and the employer.”

Pet. App. 13a n.6 (quoting Paulson v. Western Life Ins. Co., 636 Pd, 935,

939 (Or. 1981)). Cf. Pet. App. 24a (noting that t he question ultimately

for the district court under Elfstrom becomes whether MAC acted for

UNUM and under UNUM'’s control in receiving and forwarding long-term

disability claims”).

7 See, ¢.g., Security Life Ins. Co. of Am. v. Meyling, 146 F.3d 1184,

1191 (9th Cir. 1998) (holding that rescission is an available remedy under

CONCLUSION

The judgment of the Ninth Circuit with respect to the

applicability of California’s notice-prejudice rule should be

affirmed. The court’s judgment with respect to the appli-

cability of the Elfstrom rule, however, should be reversed.

Respectfully submitted.

SETH P. WAXMAN

Solicitor General

EDWIN S. KNEEDLER

JUDITH E. KRAMER Deputy Solicitor Genero!

Deputy Solicitor of Labor JAMES A. FELDMAN

ALLEN H. FELDMAN Assistant to the Solicitor

Associate Solicitor General

NATHANIEL I. SPILLER

Deputy Associate Solicitor

ELIZABETH HOPKINS

Attorney

Department of Labor

NOVEMBER 1998

the federal common law of ERISA); McClure v. Life Ins. Co. of N. Am., 84

F.3d 1129, 1135 (9th Cir. 1996) (adopting “reasonable expectations” doc-

trine as a matter of federal common law to aid in interpretation of ERISA

insurance policies); City of Hope Nat'l Med. Ctr. v. Health Plus, Inc., 156

F.3d 223, 228-229 (Ist Cir. 1998) (applying federal common law princi-

ples of assignment in context of ERISA claim); Ford v. Uniroyal Pension

Plan, 154 F.3d 613, 619 (6th Cir. 1998) (refusing to apply state law when

calculating prejudgment interest award in context of successful ERISA

benefits claim, but instead applying federal common law principles);

Moriarty v. Glueckert Funeral Home, Ltd., 155 F.3d 859, 865-867 (7th Cir.

1998) (in case arising under ERISA and LMRA, court applied federal

common law of agency in determining whether member of multi-employer

association was bound by particular provision of collective bargaining

agreement concerning contributions to employee benefit plan).