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

(0) FILED

DEC 2 1996

No. 97 - 1868

2s.

In The

Supreme Court of the United States

October Term, 1998

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Petitioner,

v.

JOHN E. WARD,

Respondent.

On Writ of Certiorari to

The United States Court of Appeals For The Ninth Circuit

BRIEF OF AMICI CURIAE

ASSOCIATION OF PRIVATE PENSION AND

WELFARE PLANS, CHAMBER OF COMMERCE OF

THE UNITED STATES, NATIONAL ASSOCIATION OF

MANUFACTURERS, AND NEW ENGLAND LEGAL

FOUNDATION IN SUPPORT OF PETITIONER

Michael E. Malamut

Of Counsel: Counsel of Record

See inside front cover Loretta M. Smith

New England Legal Foundation

150 Lincoln Street

Boston, MA 02111

(617) 695-3660

Counsel for Amici Curiae

1331 Pennsylvania Avenue, N.W.

Washington, D. C. 20004-1790

(202) 637-3000

Stephen A. Bokat

Sussan Mahallati Kysela

National Chamber

1615 H Street, N.W.

Washington, D.C. 20062

(202) 463-5337

James A. Klein

Association of Private

Pension and Welfare Plans

1212 New York Avenue, N.W.

Suite 1250

Washington, D.C. 20005

(202) 289-6700

QUESTIONS PRESENTED

Whether the United States Court of Appeals

for the Ninth Circuit erred in holding that

California’s “notice-prejudice” common law

rule is not preempted by ERISA when the rule

“relates to” ERISA plans and does not spread

the risk of loss.

Whether the United States Court of Appeals

for the Ninth Circuit erred in holding that

California’s common law Elfstrom rule does

not “relate to” an ERISA plan and is,

therefore, not preempted by ERISA when the

rule alters the written terms of the plan and

creates fiduciary duties which’ are contrary to

those set forth in ERISA and which the parties

did not agree to create.

TABLE OF CONTENTS

QUESTIONS PRESENTED .....---- 5 ee ccc eeeerereeeees i

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INTEREST OF AMICI CURIAE ..... 2-6. - ee eee eee eee eees 1

STATEMENT OF THECASE ........--ceccecreecseeees 4

SUMMARY OF ARGUMENT .......-- 0000 e cece eeeeeees 4

pmo 8 oc abd cba cae becbnsccccboesese ren 5

L THE NINTH CIRCUIT ERRED IN IMPOSING TWO

CALIFORNIA COMMON LAW RULES ON THE

ADMINISTRATION OF ERISA PLANS THEREBY

DISRUPTING THE UNIFORMITY OF REGULATION THAT

ERISA SOUGHT TO ENSURE ....... 2-66-0500 55> 5

IL CALIFORNIA’S “NOTICE PREJUDICE” RULE WHICH

“RELATES TO” AND DISRUPTS ERISA PLANS IS

PRN gg. cn ccctcodsedesvaetcberecbes s

Ii. THE ELFSTROM RULE “RELATES TO” ERISA PLANS

Assets Be PRREPTEID. «o.oo occ ccccccccvccscccccnses 14

COREEDEIIERE nn cc ccccccetecetecccendsccecesscoun 19

TABLE OF AUTHORITIES

CASES

Bass v. John Hancock Mutual Life Ins. Co., 10 Cal.3d 792,

518 P.2d 1147, 112 Cal. Rptr. 195 (1974) ............. 16

Bozeman v. Connecticut General Life Ins. Co.,

Be le Sa nicnncdcuca cackccus SRL 8042. 14

Cisneros v. UNUM Life Ins. Co. of America , 134 F.3d 939

(9th Cir. 1998), petition for cert. filed, 67 U.S.L.W. 3035

(U.S. May 20, 1998) (No. 97-1867) ..........0....5. 7,9

Elfstrom v. New York Life Ins. Co., 37 Cal.2d 503, 432 P.2d

731, 63 Cal Rptr. 35 (1967) .............. 14 n.3, passim

v

I a dd De 5,6

Ingersoll-Rand Co. v. McClendon,

498 U.S. 133 (1990) ..................... 7: 8, 13

M litan Life Ins. Co. v. Massact

De ee MER! 10

New York State Conf. of Blue Cross & Blue Shield Plans v.

Travelers Ins. Co., 514 U.S. 645 (1995) .............. 17

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) ... 11, 13

Shaw v. Delta Air Lines, Inc., 362 U. S. 85 (1983) . . 5,6, 19

Ward v.M Analysis Co. Empl Disabili

Benefit Plan, 135 F.3d 1276 (9th Cir. 1998), cert. granted,

67 U.S.L.W. 3257 (Oct. 13, 1998) (No. 97-1868) ... 8-9, 17

STATUTES

UES ON A aig os occas éccveiaeee 5

WUBL. 8 MOB occneccecvonseceestscah Bui 16

DUBC. OUD 6566 ain 0) 8b EGR ae 18

DUSC. $1906 ..... SasSe. WO A. 12, 15.4

DUSC, G10 6s ck ead ek ib 15, 18

DUS DAT 6. ocean eal etnies cent 12

WURL BAGG oc ccinwcesndsesssoxssdiceloddeet 9

REGULATIONS

29 CFR. § 2560.503-1 ...........000. ~ PRY 12

RULES

Supreme Court Rule 37 ............0eeeeseeees In.l,3

MISCELLANEOUS

Senate Comm. on Labor and Public Welfare, Legislative

History of the Employee Retirement Income Security Act of

1974, 94th Cong., 2d Sess. 2359

GED avctntveeddcnvegretveuseas 11,15

iv

Barry R. Ostrafer & Thomas R. Newman, Handbook on

Insurance Coverage Disputes (9th ed. 1998) .

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,

Respondent.

On Writ of Certiorari to The

United States Court of Appeals for the Ninth Circuit

BRIEF OF AMICI CURIAE

ASSOCIATION OF PRIVATE PENSION AND

WELFARE PLANS, CHAMBER OF COMMERCE OF

THE UNITED STATES, NATIONAL ASSOCIATION OF

MANUFACTURERS, AND NEW ENGLAND LEGAL

FOUNDATION IN SUPPORT OF PETITIONER

INTEREST OF AMICI CURIAE'

The Association of Private Pension and Welfare Plans

(“APPWP”) is a broad-based, non-profit trade association

1. Pursuant to Supreme Court Rule 37.6, counsel for amici states

that neither counsel for Petitioner nor Respondent authored this brief

in whole or in part and no person or entity other than amici made a

monetary contribution to the preparation or submission of the brief.

l

founded in 1967 to protect and foster the growth of the private

employer-sponsored employee benefit plan system in the United

States. The members of the APPWP include both small and

large employer sponsors (including many Fortune 500

companies) of employee benefit plans, as well as numerous

plan support organizations, such as consulting and actuarial

firms, investment firms, banks, insurers and other professional

benefit organizations. Collectively, its more than 240 members

sponsor or administer plans covering more than 100 million

plan participants. This broad-based membership provides the

APPWP with substantial expertise and experience with respect

to the entire spectrum of issues relating to all types of benefit

plans. The .PPWP has filed amicus curiae briefs in numerous

cases involving important issues for the employee benefit plan

community.

The Chamber of Commerce of the United States (“the

Chamber”) is the world’s largest business federation. The

Chamber represents an underlying membership of more than

three million businesses and organizations of every size, in

every sector and region. An important function of the Chamber

is 0 represent the interests of its members in the federal courts

in cases addressing issues of widespread concern to the

American business community. The Chamber has participated

as amicus curiae in several hundred cases before the Court,

icing numerous ERISA cases. See. £.., California Div. of

"117 S. Ct. 832 (1997); Lockheed Corp. v. Spink, 517 U.S.

882 (1996); Varity Corp. v. Howe, 516 U.S. 489 (1996);

District of Columbia v. Greater Washington Bd. of Trade, 506

U.S. 125 (1992); Ingersoll-Rand Co. v. McClendon, 498 U.S.

133 (1990); and FMC Corp. v. Holliday, 498 U.S. 52 (1990).

The National Association of Manufacturers (“the

NAM”) is the nation’s oldest and largest broad-based industrial

2

trade association. Its nearly 14,000 member companies and

subsidiaries, including 10,000 small manufacturers, employ

approximately eighty-five percent of all manufacturing workers

and produce over eighty percent of the nation’s manufactured

goods. More than 158,000 additional businesses are affiliated

with the NAM through its Associations Council and National

Industrial Council.

The New England Legal Foundation (“NELF’”), a non-

profit, public interest law firm, was incorporated in 1977. Its

membership consists of corporations, individuals, and others

who believe in promoting balanced economic growth for New

England, protecting the free enterprise system and defending

economic rights. NELF’s more than 130 members and

supporters include a cross-section of large and small

corporations from all parts of New England and the United

States. NELF has regularly appeared in state and federal court,

as party or counsel, in cases raising issues of general economic

significance to the business community. See, e.g., Lockheed

Corp. v. Spink, 517 U.S. 882 (1996); Reich v. Southern New

England Telecommunications Corp., 121 F.3d 58 (2d Cir.

1997); Cigna Health Plan of Louisiana v. Louisiana, 82 F.3d

642 (Sth Cir. 1996).

Amici are concerned that, if allowed to stand, the

decision below will create and foster conflicting federal and

state regulation of ERISA plans to the great detriment of those

employers and their employees who rely on the availability of

group insurance plans to provide employee health and welfare

benefits.

Pursuant to Supreme Court Rule 37.2, counsel for amici

have secured written consent for the filing of this brief from

counsel for Petitioner and Respondent.

STATEMENT OF THE CASE

Amici accept and adopt the Statement of the Case

contained in the Brief of the Petitioner UNUM Life Insurance

Company of America (“UNUM”).

SUMMARY OF ARGUMENT

The Ninth Circuit erroneously concluded that two

California common law rules that are inconsistent with ERISA

and contrary to the express terms of an ERISA plan are not

preempted. Application of these common law rules to claims

for benefits by California plan participants destroys the

uniformity of plan administration that Congress intended and

prohibits multi-state employers from providing the same

benefits to all plan participants. The added burdens that the

Ninth Circuit recognized its holding imposed on plan

administrators may lead to the reduction of benefits, a result

that Congress sought to avoid by enacting ERISA’s preemption

provision.

California’s “notice-prejudice” rule relates to ERISA

plans, as the Ninth Circuit correctly recognized. The Ninth

Circuit, however, erred in holding that this common law rule

was saved from preempted as a law which regulates insurance.

The “notice-prejudice” rule does not spread the risk of loss and

conflicts with substantive provisions of ERISA. Application of

the “notice-prejudice” rule alters the express terms of ERISA

plans and would result in the payment of benefits to California

plan participants that are precluded by the express terms of the

plan. The Ninth Circuit’s holding supplants ERISA’s

enforcement provisions and is, therefore, preempted.

4

Similarly, California’s Elfstrom rule, which holds that

an employer acts as the agent of the insurer when it undertakes

administrative tasks necessary to effectuate insurance for its

employees, relates to ERISA plans because it alters the terms of

those plans. The Elfstrom rule alters the allocation of fiduciary

responsibilities set forth in ERISA plans and creates respondeat

it conflicts with ERISA and destroys the uniformity of plan

administration that Congress intended to achieve, California’s

Elfstrom rule is preempted.

ARGUMENT

1. THE NINTH CIRCUIT ERRED IN IMPOSING Two

CALIFORNIA COMMON LAW RULES ON THE

ADMINISTRATION OF ERISA PLANS THEREBY

DISRUPTING THE UNIFORMITY OF REGULATION THAT

ERISA SOUGHT TO ENSURE.

At issue is whether ERISA, 29 U.S.C. §§ 1001 et seq.,

preempts two California common law rules which are

inconsistent with the express terms of a written ERISA plan and

which, if applied as envisioned by the United States Court of

Appeals for the Ninth Circuit, would result in the provision of

disability benefits that the plan would prohibit. If the decision

below is not reversed, plan participants who fail to follow the

claims initiation and processing procedures set forth in their

benefits plans will be encouraged to turn to state law to attempt

to alter or nullify those terms and to supplant ERISA’s

enforcement provisions through the application of state law.

The resulting chaos and increased costs of insured plans which

will be created by conflicting state and federal regulation of

ERISA plans was precisely what ERISA preemption attempted

5

to avoid.

This Court has repeatedly emphasized that Congress

designed ERISA’s preemption provision, 29 U.S.C. §1144(a),

to “eliminat[e] the threat of conflicting and inconsistent State

and local regulation” of ERISA plans. Fort Halifax Packing

Co. v. Coyne, 482 U.S. 1, 9 (1987), quoting 120 Cong. Rec.

29197 (1974) (remarks of Representative Dent). See, e.g.,

Shaw v. Delta Air Lines, Inc., 463 U. S. 85, 105 (1983). This

Court has also repeatedly explained why Congress believed it

was necessary to eliminate “conflicting and inconsistent State

and local regulation”:

The most efficient way to meet [the

responsibilities of administering an employee

benefit plan) is to establish a uniform

administrative scheme, which provides a set of

standard procedures to guide processing of

claims and disbursement of benefits. Such a

system is difficult to achieve, however, if a

benefit plan is subject to differing regulatory

requirements in differing States. A plan would

be required to keep certain records in some

States but not in others; to make certain benefits

available in some states but not in others; to

process claims in a certain way in some States

but not in others; and to comply with certain

fiduciary standards in some States but not in

others.

Fort Halifax Packing Co. 482 U.S. at 9 (emphasis added).

Yet under the Ninth Circuit’s decision, California

participants in an employer’s multi-state plan will be entitled to

disability benefits that participants in other states, with different

6

common law rules regarding notice and imputed agency, will

not be entitled to receive. As a result, multi-state employers

will be precluded from offering uniform benefits to their

that ERISA attempted to avoid placing employers in such an

untenable position:

To offset the additional expenses [necessarily

incurred by complying with conflicting state

laws], the employer presumably would reduce

wages or eliminate those benefits not required

by any State. Another means by which the

employer could retain its uniform nationwide

plan would be by eliminating classes of benefits

that are subject to state requirements with which

the employer is unwilling to comply. ERISA’s

comprehensive pre-emption of state law was

meant to minimize this sort of interference with

the administration of employee benefit plans.

Shaw, 463 U.S. at 105 n.25 (emphasis added). Achieving

uniformity is so central to ERISA’s goals, that this Court has

“not hesitated to enforce ERISA’s pre-emption provision where

State law created the prospect that an employer's administrative

scheme would be subject to conflicting requirements.” Fort

Halifax Packing Co., 482 U.S. at 10 (emphasis added). This

Court should not hesitate to strike down the conflicting claims-

processing rules which the Ninth Circuit sanctioned, “fully

cognizant of the complications and extra burdens” that at least

one of these common law rules would create for insurers and

employers. Cisneros v. UNUM Life Ins. Co. of America , 134

F.3d 939, 947 (9th Cir. 1998), petition for cert. filed, 67

U.S.L.W. 3035 (U.S. May 20, 1998) (No. 97-1867).

“Otherwise, the inefficiencies created could work to the

detriment of plan beneficiaries.” Ingersoll-Rand Co. v.

7

McClendon, 498 U.S. 133, 142 (1990).

As demonstrated in the following sections, ERISA

preempts both California common law rules.

Il. CALIFORNIA’S “NOTICE PREJUDICE” RULE WHICH

“RELATES TO” AND DisrupTS ERISA PLANS

PREEMPTED.

John Ward, former president and CEO of Management

Analysis Company (“MAC”), applied for benefits under a long-

term disability insurance policy (the “Plan”) sponsored by MAC

and issued by UNUM. Ward v. Management Analysis Co.

Employee Disability Benefit Plan, 135 F.3d 1276, 1278 (9th

Cir. 1998). UNUM denied the claim as untimely. Id. Under

the terms of the Plan, Mr. Ward was required to give UNUM

written notice of his claim no later than 18 months after the

onset of his disability. Id. at 1280. Although Mr. Ward

claimed that his disability first began on May 5, 1992, while he

was still employed by MAC, he did not submit any notice of

claim to UNUM until April 11, 1994 — more than 23 months

after the alleged onset of the illness and more than 5 months

after the proof-of-claim deadline. Id.

Mr. Ward sued UNUM «'‘aiming that California's

“notice-prejudice rule” precluded UNUM from denying his

claim as untimely. Id. at 1279. He also claimed that, under

California’s Elfstrom rule, MAC should be considered

UNUM’s agent and, therefore, his alleged notice to MAC of his

disability constituted notice to UNUM. Id. at 1281. The U.S.

District Court for the Southern District of California granted

UNUM’s motion for summary judgment, holding that the two

common law rules were preempted by ERISA. Id. at 1279.

The Ninth Circuit reversed. Id. at 1289.

The Ninth Circuit held that, under the express terms of

the Plan, “timely submission of proof [of claim] is a condition

precedent to payment of benefits.” Ward, 135 F.3d at 1280.

Mr. Ward did not give UNUM written notice of his claim

within the time limits set forth in the Plan. The Ninth Circuit

excused his failure to comply with the Plan's terms by applying

California’s “notice-prejudice” common law rule. Under the

Niwth Circuit’s formulation of the California rule, “the insurer

of an ERISA benefit plan may not deny benefits by reason of

untimely notice or submission of proof of claim unless the

insurer proves it suffered actual prejudice because of the

delay.”* Id.

939 (9th 1998), petition for cert. filed, 67 U.S.L.W. 3035 (U.S.

May 20, 1998) (No. 97-1867), to hold that the “notice-

prejudice” rule is not preempted by ERISA. While recognizing

that the “notice-prejudice” rule “relates to” an employee benefit

plan, the Ninth Circuit held that it fell within ERISA’s “savings

clause” and was, therefore, “exempt from preemption.” Id. at

944,

ERISA’s “savings clause” exempts from preemption

any state law which “regulates insurance.” 29 U.S.C. § 1144

(b2)(A). To determine whether a state law “regulates

2. “Prejudice is not presumed from the delay alone, . .

ssid ae Milde Lis PRAGA. Wad en eve pitty ot

prejudice, in order to avoid liability.” Cisneros v. UNUM Life Ins.

Co. of America, 134 F.3d 939, 944 (1998) (citation omitted;

emphasis in original).

insurance,” the Court considers “a common-sense view of the

matter,” Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

724, 740 (1985), and the three criteria developed under the

McCarran-Ferguson Act concerning the rneaning of the phrase

“business of insurance”:

[First, whether the practice has the effect of

transferring or spreading a policyholder’s risk;

second, whether the practice is an integral part

of the policy relationship between the insurer

is limited to entities in the insurance industry.

Id. at 743, quoting Union Labor Life Ins. Co. V. Pireno, 458

U.S. 119, 129 (1982) (emphasis omitted). The Ninth Circuit

concluded that, although the “notice-prejudice” rule does not

spread the policyholder’s risk of loss, it satisfies the two other

McCarran-Ferguson criteria: it is directed at the insurance

industry and forms “an integral part of the relationship between

the insurer and the insured.” Cisneros, 134 F.3d at 946-47. The

Ninth Circuit held that a law need not satisfy all three

McCarran-Ferguson criteria to be preempted. Id. at 946.

Moreover, it rejected the view that spreading the risk of loss is

indispensable to a finding that a state law regulates insurance.

Id.

As Petitioner UNUM’s Brief demonstrates, to be saved

from preemption a state law must satisfy all three McCarran-

Ferguson criteria and California’s “notice-prejudice” rule does

not. Amici would add a practical argument to UNUM’s legal

argument. If a state law may be saved from preemption when

it is not a law that spreads the risk of loss, it will be virtually

impossible for Plan Administrators and claims processors to

predict with any degree of certainty whether a state law which

clearly relates to an ERISA plan is preempted. Such a result

10

would fly in the face of Congress’s intent:

The uniformity of decision which the Act is

designed to foster will help administrators,

fiduciaries and participants to predict the

legality of proposed actions without the

necessity of reference to varying state laws.

H.R. Rep. No. 93-533 at 12 (1973), reprinted in 2 Senate

Comm. on Labor and Public Welfare, Legislative History of the

Employee Retirement Income Security Act of 1974, 94th

Cong., 2d Sess. 2359 (Comm. Print 1976) (“Legislative

History”). The Ninth Circuit’s analysis, if affirmed, would not

only require “reference to varying state laws,” it would greatly

reduce the ability of plan administrators “to predict the legality

of proposed actions.” Indeed, because “notice-prejudice” rules

are replacing the traditiomal rule % sqwne svates, see Barry R.

Ostrafer & Thomas R. Newman, Hapdbook on insurance

Coverage Disputes § 4.02 {c}(2} (%th ed. 1998), “predicting the

legality of proposed actions” will De impossible.

There is a more fundamemta) reason for preemption

here. A state law that conflicts with any of BRISA’s

substantive provisions is preempied. Pilot Life Ins. Co. v.

Dedeaux, 481 U.S. 41, 51-57 (1987). The Ninth Circuit

recognized that there was a direct conflict between ERISA and

the notice-prejudice rule, noting that the rule caused “a plan’s

written terms [to be] altered,” caused “complications and extra

burdens” on plan administration, and made the plan “more

difficult to administer” because the rule “differ{s} markedly in

various states.” Id. at 947. The Court nonetheless held that the

common law rule was not preempted.

These conflicts alone require a holding that the “notice-

prejudice” rule is preempted. ERISA requires fiduciaries to

discharge their duties “in accordance with the documents and

instruments governing the plan,” 29 U.S.C. § 1104 (a)(1)(D).

It does not provide that fiduciaries discharge their duties “in

plans as those instruments may be altered by the varying

common law of the fifty states.” In addition, ERISA permits “a

participant or beneficiary” to “recover benefits due to him under

the terms of his plan.” 29 U.S.C. § 1132 (a)(1)(B). No benefits

were “due” Mr. Ward “under the terms of his plan.” The

“notice-prejudice” rule supplants this enforcement provision by

entitling Mr. Ward to benefits that are not “due” under the Plan.

Moreover, while ERISA does not dictate any particular

claims processing procedure, the Department of Labor’s

regulations set forth some minimum requirements. As to

claims initiation and processing, the regulations provide, in

pertinent part:

Every employee benefit plan shall establish and

(1) A claims procedure will be deemed

reasonable only if it:

(ii) Is described in the summary plan description

(111) Does not contain any provision, and is not

administered in a way, which unduly inhibits or

hampers the initiation or processing of plan

claims ....

29 C.F.R. § 2560.503-1(b)( 1 (ii) & (iii) (emphasis added). The

claim initiation and processing procedures are set forth in the

Plan Summary, see Petition at 42a-47a, and the 18-month

12

period to file a proof of claim does not “unduly hamper” the

initiation of a claim. Indeed, Mr. Ward did not claim that the

time limits set forth in the written Plan inhibited the initiation

of his disability claim. Had he done so, the Ninth Circuit would

have been required to look to federal common law to determine

if the time limit was unreasonable, as Congress intended. See

Pilot Life Ins. Co., 481 U.S. at 56, quoting 120 Cong. Rec.

29933 (remarks of Senator Javits) (“[i}t is also intended that a

body of Federal substantive law be developed by the courts to

deal with issues involving rights and obligations under private

welfare and pension plans”). Indeed, as this Court noted,

Congress determined that the development of federal common

law was preferable to permitting state law to supplant ERISA’s

enforcement provisions:

The expectations that a federal common law of

rights and obligations under ERISA-regulated

plans would develop, indeed, the entire

comparison of ERISA’s § 502(a) to § 301 of the

LMRA, would make little sense if the remedies

available to ERISA participants and

beneficiaries under § 502(a) could be

Sa

permitted the “notice-prejudice” rule to supplant ERISA’s

Finally, as noted above, permitting the “notice-

prejudice” rule to revive a claim barred by the written terms of

an ERISA plan conflicts with the purpose of ERISA “to

sateatiinn dle aieeitieneatinnn ond Gomeaihtemtewed tying

with conflicting directives among States or between States and

the Federal Government.” Ingersoll-Rand Co., 498 U.S. at 142.

13

For this reason as well, California’s “notice-prejudice” rule is

preempted.

Ill. THE ELFSTROM RULE “RELATES TO” ERISA PLANS

AND Is PREEMPED.

More than fifty years ago, this Court explained the

typical relationship between the employer and the insurer of an

insured employee benefit plan:

Employers regard group insurance not only as

protection at low cost for their employees but

also aS advantageous to themselves in that it

makes for loyalty, lessens turn-over and the like.

When procuring the policy, obtaining

applications of employees, taking payroll

deduction orders, reporting changes in the

insured group, paying premiums and generally

in doing whatever may serve to obtain and keep

the insurance in force, employers act not as

agents of the insurer but for themselves.

, mn: ns. Co., 301 U.S. 196,

204-05 (1937). ee eet aces ccunes

view and deems the employer the agent of the insurer when the

employer administers an insured plan. As demonstrated below,

the Elfstrom rule conflicts with ERISA and is preempted.

Congress permitted co-fiduciaries of ERISA plans to

3. Elfstrom vy. New York Life Ins. Co., 37 Cal.2d 503, 432 P.2d

731, 63 Cal Rptr. 35 (1967).

14

“allocate responsibilities among themselves and, by so doing,

generally limit their liability to the extent of their specified

duties.” S. Rep. 93-127 at 34 (1973), reprinted in 1 Legislative

History 620. Accordingly, ERISA provides:

(1) the instrument under which a plan is

maintained may expressly provide for

procedures (A) for allocating fiduciary

responsibilities (other than trustee

responsibilities) among named fiduciaries . .

. .. by his failure to comply with section 404(a)

(1)* in the administration of his specific

responsibilities which give rise to his status as a

fiduciary, he has enabled such other fiduciary to

commit a breach; or

. .. has knowledge of a breach by such other

fiduciary, unless he makes reasonable efforts

under the circumstances to remedy the breach.

4. Section 404 (a) of ERISA, 29 U.S.C. § 1104(a)(1) requires a

plan fiduciary to discharge his duties with respect to the plan solely

in the interest of the participants and beneficiaries.”

15

29 U.S.C. §1105(a). ERISA thus imposes personal liability on

fiduciaries; it does not create respondeat superior liability.

Consistent with these provisions, MAC was designated

as the Plan Sponsor and Plan Administrator. 29 U.S.C. § 1002

(16)(A) & (B). MAC’s duties under the Plan included

providing UNUM “information relative to employees . . . who

qualify to become insured; . . . whose amounts of insurance

change; and/or . . . whose insurance terminates.” Petition at

42a. The Plan also provided that MAC “acts on its own behalf

or as agent of the employee” and not UNUM’s agent absent

“written authorization.”’ Id. at 44a. Under the terms of the

Plan, UNUM was responsible for receiving, processing, and

paying claims under the terms of the Plan. See id at 42a-44a.

The Plan unambiguously required participants to provide

UNUM, not MAC, “written notice of claim” within the time

limits set forth in the Plan. Id. at 42a.

Mr. Ward did not provide written notice of his claim to

UNUM during the time limits set forth in the Plan. Rather, he

contended that MAC became aware of his disability and could

be considered UNUM’s agent pursuant to California’s Elfstrom

rule for purposes of determining whether notice was timely.

Under the Elfstrom rule “the employer is the agent of the

insurer in performing the duties of administering group. .

policies.” Bass v. John Hancock Mutual Life Ins. Co., 10

Cal.3d 792, 518 P.2d 1147, 1150, 112 Cal. Rptr. 195, 198

(1974). According to the Ninth Circuit, the Elfstrom rule may

make MAC an agent of UNUM for the purpose of receiving

5. The Plan provides: “For purposes of this policy, the

policyholder acts on its own behalf or as agent of the employee.

Under no circumstances will the policyholder be deemed the agent

of the Company without a written authorization.” Petition at 44a.

16

notice notwithstanding the express language in the Policy that

MAC is not UNUM’s agent and notwithstanding the contrary

allocation of fiduciary responsibilities in the Plan.

Despite the drastic rewriting of the Plan that the

Elfstrom rule would impose, the Ninth Circuit held that this

common law rule does not “relate to” ERISA plans and is,

U.S. 645 (1995), the court held that the Elfstrc:n rule does not

“mandat[e] employee benefit structures or their administration”

and did not “providje] alternative enforcement mechanisms.”

Ward, 135 F.3d at 1287. Ignoring the fact that the application

of the Elfstrom rule would result in the payment of benefits that

the written terms of the Plan precluded, the Ninth Circuit

reasoned it was not preempted because:

Elfstrom does not dictate the benefits to be

provided or the manner in which the plan will

be administered. Elfstrom does not require an

employer to participate in the administration 0°

a group insurance policy or an insurer to

delegate its functions to an employer. Nor does

Elfstrom create an “alternative enforcement

mechanism” for ERISA plan obligations beyond

those set forth in the statute.

Id. at 1287 (footnote omitted). There is no substance to this

reasoning.

“A law ‘relates to’ an employee benefit plan, in the

normal sense of the phrase, if it has a connection with or

reference to such a plan.” Shaw, 463 U.S. at 96-97. While

some state laws “may affect employee benefit plans in too

tenuous, remote, or peripheral a manner to warrant a finding

17

that the law ‘relates to’ the plan,” id. at 100 n. 21, the Elfstrom

rule is not such a law. By deeming the employer to be the

unwilling agent of the insurer, the Elfstrom rule clearly dictates

the manner in which the plan will be administered because it

substitutes oral or written notice to the employer for the written

notice of claim to the insurer that is required by the express

terms of the Plan. The rule also creates an “alternative

enforcement mechanism” because it allows a participant to

receive benefits without complying with the Plan as written and

would require the payment of benefits when the express terms

of the Plan preclude such payment. Put simply, the Elfstrom

rule “relates to” the Plan because it changes the Plan.

Moreover, the Elfstrom rule conflicts with the terms of

ERISA. ERISA requires a written plan which designates the

named fiduciaries and permits the named fiduciaries to

delineate their respective duties and responsibilities. 29 U.S.C.

§ 1102(a)(1); id., § 1105(c)(1). Unless the plan provides

procedures for delegating a fiduciary’s duty to another fiduciary

or person, those duties may not be delegated. Id., §1105(c)(2).

The Elfstrom rule flouts these provisions. Through its

imputation of an agency relationship, the rule creates a

fiduciary® and assigns that fiduciary duties and responsibilities

that he did not agree to undertake or perform.

In addition, the Ninth Circuit’s rationale for the

imposition of the Elfstrom rule ignores reality. While the Ninth

Circuit characterizes the employer’s provision of employee

information, which is necessary to effectuate the insurance, as

6. “Agency is the fiduciary relation which results from the

manifestation of consent by one party to another that the other shall

act on his behalf and subject to his control, and consent by the other

so to act.” Restatement (Second) of Agency § 1.

the “function” of the insurer, that information is peculiarly in

the hands of the employer, not the insurer. It is the employer,

not the insurer, who knows that a new employee has begun

employment and the terms of that employment.’ To avoid the

unintended creation of an agency relationship under the

Elsftrom rule, insurers would be required to uncover or develop

this information without relying on the employer, adding

significant costs to the administration of ERISA plans to the

detriment of employers and their employees.

ERISA sought to encourage employers to offer and

insure employee benefit plans. Multi-state employers will be

unable to offer a single national plan if varying common law

rules of the fifty states can be used to circumvent the express

terms of benefit plans. Congress did not intend this result when

it enacted ERISA and its “crowning espn ai

preemption provision. Shaw, 463 U.S. at 99 quoting g.

Rec. 29197 (1974) (remarks of Representative Dent).

CONCLUSION

For the reasons stated above, this Court should reverse

the Ninth Circuit and remand with instructions to affirm the

summary judgment in favor of UNUM and the Plan.

7. Even assuming that the employer were the agent of the insurer

for the tasks the Ninth Circuit identified, the employer would not

automatically become the agent of the insurer for the purpose of

receiving a participant’s notice of claim. Restatement (Second) of

Agency § 1, illus. 3.

19

Michael E.

Counsel of Record

Loretta M. Smith

New England Legal Foundation

150 Lincoln Street

Boston, MA 02111

(617) 695-3660

Counsel for Amici Curiae

1331 Pennsylvania Avenue, N.W.

Washington, D. C. 20004-1790

(202) 637-3000

Stephen A. Bokat

Sussan Mahallati Kysela Association of Private Pension

National Chamber and Welfare Plans

Litigation Center, Inc. 1212 New York Avenue, N.W.

1615 H Street, N.W. Suite 1250

Washington, D.C. 20062 Washingon, D.C. 20005

(202) 463-5337 (202) 289-6700