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

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No. 97-1868

In the ICE OF THE CLERK |

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 der oan Circuit

BRIEF OF THE STATES OF TEXAS, ALABAMA,

ARIZONA, ARKANSAS, CALIFORNIA.

COLORADO, CONNECTICUT, DELAWARE

FLORIDA, GEORGIA, HAWAII, IDAHO, ILLINOIS,

INDIANA, IOWA, LOUISIANA, MAINE, MARYLAND,

MASSACHUSETTS, MICHIGAN, MINNESOTA

MISSOURI, MONTANA, NEVADA, NEW JERSEY,

NEW MEXICO, NEW YORK, NORTH CAROLINA

NORTH DAKOTA, OHIO, OKLAHOMA, OREGON,

PENNSYLVANIA, RHODE ISLAND, SOUTH

CAROLINA, TENNESSEE, UTAH, VERMONT

WASHINGTON, WEST VIRGINIA, WYOMING AND

THE TERRITORY OF PUERTO RICO

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

ELIOT SPITZER JOHN CORNYN

Attorney General of New York Attorney General of Texas

PETER SCHIFF * DAVID C. MATTAX

Acting Solicitor General Chief, Financial Litigation Div.

PATRICIA SMITH P.O. Box 12548

Assistant Attorney General Austin, TX 78711-2548

120 song (512) 463-0150

New York, NY 10271

(212) 416-8050 * Counsel of Record

Of Counsel:

Dan Schweitzer

National Assn. of Attorneys General

750 First St., N.E. #1100

Washington, D.C. 20002 rn

[additional counsel listed on inside cover]

BILL PRYOR

A General of Alabama

11 Sout Union St.

Montgomery, AL 36130

JANET ee,

Attorney General of Arizona

1275 West Washi

Phoenix, AZ -2926

WINSTON BRYANT

Attorney General of Arkansas

200 Tower Building

323 Center Street

Little Rock, AR 72201-2610

Nice General of Calif

rs) ornia

1300 I Street

Sacramento, CA 95814

GALE A. NORTON

Attorney General of Colorado

1525 Sherman St., 5° Floor

Denver, CO 80203

RICHARD BLUMENTHAL

Attorney General of Connecticut

55 Elm St.

Hartford, CT 06106-1774

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Atlanta, GA 30334-1300

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JENNIFER M. GRANHOLM

Attorney General of Michigan

P.O. Box 30212

Lansing, MI 48909

MIKE HATCH

Attorney General of Minnesota

445 Minnesota Street, #1200

St. Paul, MN 55101-2130

JEREMIAH W. (JAY) NIXON

Attorney General of Missouri

P.O. Box 899

Jefferson City, MO 65102

JOSEPH P. MAZUREK

A General of Montana

Justice Buildi

P.O. Box 201401

Helena, MT 59620-1401

FRANKIE SUE DEL PAPA

Attorney General of Nevada

Carson City, NV 89710

P.O. Drawer 1508

General

of North Carolina

of Justice

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Herp! HEITKAMP

Attorney General

of North Dakota

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Bismarck, ND 58505-0040

Betty D. MONTGOMERY

Attorney General of Ohio

State Office Tower

30 East Broad St.

Columbus, OH 43215-3428

W. A. DREw EDMONDSON

Attorney General of Oklahoma

State Capitol, Room 112

Oklahoma City, OK 73105-3498

HARDY MYERS

Attorney General of Oregon

100 Justice Building

Salem, OR 97310

MIKE FISHER

Attorney General

of Pennsylvania

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Harrisburg, PA 17120

JOSE FUENTES-AGOSTINI

Attorney General of Puerto Rico

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SHELDON WHITEHOUSE

Attorney General

Columbia, SC 29211-1549

TABLE OF CONTENTS

Page

INTEREST OF THE AMICI CURIAE ................ l

SUMMARY OF ARGUMENT ................-55:. l

I hi eilhE Mich ect odbavescedeaises 5

I. THE NOTICE-PREJUDICE RULE “REGULATES

EXPRESS PREEMPTION UNDER ERISA’S SAVING

A. The ERISA Saving Clause Saves from Preemption

State Laws That, as a Matter of “Common Sense,”

Regulate Insurance Such as Laws That Regulate

Insurance Relationships, Types of Insurance Policies,

and the Interpretation and Enforcement of Insurance

2. This Court has never required that the three Pireno

factors be met for a law to “regulate insurance” and

has used them only as a secondary analysis ... 8

B. UNUM’s analysis of the individual Pireno factors

erroneously narrows them to such a degree that few

insurance laws would satisfy any of them ...... 12

C. Applying the Analysis Set Forth in Metropolitan Life,

the Notice-Prejudice Rule is a Law that “Regulates

Insurance” for Purposes of the ERISA Saving Clause

videdbvasetbubauhshedincechiadsbéocuere 14

D. Application of the Saving Clause to the Notice-

Prejudice Rule Does Not Conflict with the Deemer

ll. NEITHER THE NOTICE-PREJUDICE RULE NOR THE

ELFSTROM RULE CONFLICTS WITH ANY

SUBSTANTIVE PROVISION OF ERISA ........ 19

- SE eee i ee 23

A. ERISA Does Not Preempt Generally Applicable State

Law That Does Not Dictate Or Restrict The

Administrative Or Benefit Choices Plans Make . . 23

B. The Elfstrom Rule Does Not “Relate to” ERISA Plans

Because it Does Not Dictate or Restrict the

Administrative Choices that an ERISA Plan Makes

p comtihwe wba 6k be CEPA eens ibe te sene 26

iii

TABLE OF AUTHORITIES

Page

CASES:

Boggs v. Boggs,

POURED wcdvbNocdoubsdbaddeccscnce 19, 24

Brewer v. Lincoln Nat'l Life Ins. Co.,

0 ROG Ie ED Cw detec hae i Tiveccnescs 11

peg = er of Labor Standards Enforcement

Constr., N.A.

S19 US. PE Con cde cevedvaccescesetves passim

Cellilli v. Cellilli,

939 F. Supp. 72 (D. Mass. 1996) ........ 06... seen 12

Davies v. Centennial Life Ins. Co.,

128 F.3d 934 (6 Cir. 1997) . 2.2... ccc cece eee e eee 12

De Buono v. NYSA-ILA Medical & Clinical Serv. Fund,

To) 2.9) | | ero oe 7, 24, 25

DeBruyne v. Life Assurance Soc.,

ke of de 3.) ee eerie 11

v. New York Life Ins. Co.,

SEED «cn ccccdscceceessceddssouees 27

FMC Corp. v. Holliday,

Gs BO cede cc ccccccvostscccevcies 7, 9, 18

Fort Halifax Packing Co. v. Coyne,

GBB US. 1 CISST) 2.0 cc vcciccccvcvccccccsoscens 18, 28

iv

Franchise Tax Bd. v. Construction Laborers

Vacation Trust,

Le eerie meer eee 20

Gade v. National Solid Wastes Management Ass'n,

505 U.S. 88 (1992)

Massachusetts v. Morash,

Gp aes See GE b.dia' s BeASie eee lo ee 24

McCormick v. Sentinel Life Ins. Co.,

153 Cal. App. 3d 1030,

a es COO wri és eds o66b4 0 pee 27

McMahan v. New England Mut. Life Ins. Co.,

888 F.2d 426 (6* Cir. 1989), 0.0... . ccc ccc ccccucees 1

Metropolitan Life Ins. Co. v. Massachusetts,

STE WU. CORIO. ov vceveceécbinceiuaicunes passim

New York State Conference of Blue Cross & Blue Shield

v. Travelers Ins. Co.,

SURI is v's wccnccacumecrors vel passim

O Reilly v. Ceuleers,

re a Fo er ee 12

Pilot Life Ins. Co. v. Dedeaux,

481 U.S. 41 (1987)

Securities & Exchange Comm'n

v. National Securities, Inc.,

Se eS ME obtain és cesctsecudacvantin, passim

Tingle v. Pacific Mutual Ins. Co.,

Pe Dv nv boa vbkdvawsdacbacmas 12

Vv

PRI rere ncsen paar

United of Omaha v. Businessmen 's Assurance Co. of America,

104 F.3d 1034 (8 Cir. 1997) .. 0... cece eens 21

United States Dep't of Treasury v. Fabe,

S08 U.S. 491 (1993) ...... ccc cece ec eeeeeees 10, 13, 15

Tay Fad 1055 Cie 1998) ; rilssanea ib Spee 11

STATUTES AND REGULATIONS:

15 U.S.C. §1012(B) ... 1.6 ee eee eee renee 10

29 U.S.C. §1001(a)-(C) «6.6 eee ee eee eee eee ee enees 24

UI WI Scns scccetanscescndensets 21

SOUPOE MERRIE ob on cc cccessvscsccvsecees 21

y. BOs om) 00) 17

29 U.S.C. §1144(OM2MA) «.. ce eee eee ee 6

29 U.S.C. §1144(O) 2B)... . 6c cee 16

29 C.F.R §2560.501-1(c), (d) .. 6... 22

29 C.F.R. §2560.501-1(a) ... 5... cece eee ee ee eee ees 23

OTHER MATERIALS:

HLR. Rep. No. 93-533, at 1 (1973) «2... cece eee ees 24

INTEREST OF THE AMICI CURIAE

The 42 amici curiae states, through their attorneys general,

respectfully submit this brief in support of Respondent Ward.

The states have a vital interest in ensuring that the scope of

preemption by the Employee Retirement Income Security Act

of 1974 (ERISA) is not extended beyond Congress’s intent.

Prior to this Court’s ruling in New York State Conference of

Blue Cross & Blue Shield v. Travelers Insurance Co., 514 U.S.

645, 654 (1995), circuit courts took such an expansive view

that “we could scarcely see the end of ERISA’s preemptive

reach.” California Div. of Labor Standards Enforcement v.

Dillingham Constr., N.A., 519 U.S. 316, 331-32 (1997). Asa

result, this Court ruled in 7ravelers that absent the express

intent of Congress to preempt, traditional state powers can and

should coexist with federal regulation. Now, in response to

Petitioner UNUM’s claim of a right to conduct its insurance

business without regard for state law, this Court is needed once

again to ensure that Congress’s intent is fulfilled.

SUMMARY OF ARGUMENT

Congress enacted ERISA in 1974 for one paramount

purpose: to protect employees’ interests in pension and welfare

plans from employer abuse and mismanagement. It is therefore

ironic that insurers like UNUM now seek to use ERISA not as

a shield to protect employees, but as a sword to eviscerate the

protections of state law. States have long protected their

citizens through their insurance laws — laws which Congress

deferred to by expressly providing that “any” state law “which

regulates insurance” is saved from ERISA preemption. Yet

even as UNUM seeks to profit by selling and administering

state-licensed insurance products for ERISA plans, it invokes

ERISA to defeat virtually all state regulation of these products.

2

1. California’s notice-prejudice rule provides that an insurer

may not deny benefits on the ground that the insured’s claim

was untimely filed unless the insurer can demonstrate that it

was prejudiced by the untimeliness. Our ERISA analysis of

this rule starts with the broad language of the saving clause,

which preserves “any” state law “which regulates insurance.”

This Court has consistently held that whether a state law

“regulates insurance” is a matter of common sense. The road

map for this approach is set forth in Securities & Exchange

Commission v. National Securities, Inc., 393 U.S. 453, 460

(1969), which states that “(t]he relationship between insurer

and insured, the type of policy which could be issued, its

reliability, interpretation, and enforcement — these [are] the

‘core of the business of insurance.”” The notice-prejudice rule

goes to the heart of the insurance relationship — it determines

whether a disabled beneficiary under an insured group plan gets

any of the benefits for which the policy was purchased and its

premiums paid. Tams, as a matter of common sense, it

“regulates insurance.”

UNUM, however, argues that a state law does not ones

insurance unless it satisfies all three factors (the “Pireno

factors”) developed to determine whether a practice is exempt

from federal antitrust laws under the McCarran-Ferguson Act.

This is contrary to this Court’s decisions, which use the Pireno

factors to augment — not undermine — the common sense

approach. It is also inconsistent with the bases of the statutes,

as the ERISA saving clause and the McCarran-Ferguson

antitrust exemption serve entirely different purposes.

Moreover, UNUM’s argument would be directly contrary to

Congress’s intent to preserve essential state laws that regulate

insurance relationships, policies and the interpretation and

enforcement of insurance contracts.

3

UNUM compounds its misuse of the Pireno factors by

interpreting each of them so restrictively that few if any state

insurance laws could survive them. UNUM contends that no

state law regulating claims determination and the payment of

benefits spreads or transfers risk (the first Pireno factor).

UNUM could not be more wrong: laws governing whether

claims are honored and benefits are paid embody the extent and

allocation of the risk transferred. UNUM contends that a state

law regulating the administration of an insurance policy

somehow does not affect the insurance policy relationship (the

second Pireno factor), yet the saving clause makes no

distinction between laws regulating administration and those

regulating benefits. And UNUM contends that any insurance

law having its genesis in the common law is not a law aimed at

the insurance industry (the third Pireno factor) — as if to

suggest that state legislators and courts should regulate

insurance by first jettisoning any notion that such laws might

have roots or analogues in the common law. In short, a

reasonable application of the Pireno factors — unlike UNUM’s

— could only support a holding that the notice-prejudice rule

regulates insurance.

Finally, UNUM argues that when an insurer administers an

insurance policy for an ERISA plan, all state regulation of these

activities is barred by the deemer clause. The deemer clause,

however, merely bars states from certain regulation of

self-insured plans. Indeed, UNUM ignores the fundamental

distinction the deemer clause creates between self-insured plans

and insured plans like the one at issue here.

2. Contrary to UNUM’s argument, neither the

notice-prejudice rule nor the Elfstrom rule conflicts with any

substantive provision of ERISA. Ward’s suit against UNUM

states an ERISA cause of action for payment of benefits due

under the UNUM disability insurance policy that funds his

4

employer’s plan — a policy issued pursuant to California

insurance law, including the notice-prejudice and Elfstrom

rules. Thus, Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41

(1987), which involved a state law cause of action seeking

damages for wrongful denial of benefits, is readily

distinguishable.

UNUM’s second argument asserting substantive conflict

with ERISA is probably its most extreme: that California’s

insurance laws conflict with ERISA’s requirement that

fiduciaries administer plans “in accordance with” their written

terms and pay benefits only if they are “due” under those terms.

Thus, according to UNUM, ERISA gives insurance companies

a license to violate state insurance law at will, simply by

inserting contrary .anguage in policies sold to ERISA plans.

Surely Congress did not intend ERISA to empower insurers to

write their own laws. Finally, the notice-prejudice and

Elfstrom rules do not conflict with ERISA provisions regarding

plan compliance with claims regulations promulgated by the

Secretary of Labor.

3. The Ninth Circuit correctly held that the Elfstrom rule

does not “relate to” ERISA plans and thus is not preempted.

Elfstrom applies ordinary state common law agency principles

in the insurance context, including the relationship between

insurers and any third parties involved in policy administration.

Because it is indifferent to the identity of those third parties,

Elfstrom does not refer to or depend on the existence of ERISA

plans. Elfstrom does not dictate or restrict any administrative

or benefit choice that ERISA plans may make - it neither

compels nor prohibits their choices concerning involvement in

insurance policy administration. Elfstrom does not even

indirectly dictate ERISA plan choices, since it does not restrict

insurers’ options in this regard either.

5

Elfstrom does result in the imposition of legal consequences

upon insurance companies like UNUM who choose to involve

others as their agents in policy administration, in that such

insurers may have to pay claims they would otherwise have

denied. This consequence, however, is not imposed on the

ERISA plan, but on the insurer as an entity which, by

contractually assuming the plan’s risk of loss, is engaged in the

business of insurance. Whatever indirect economic impact this

may have on ERISA plans is insufficient to “relate to” them for

preemption purposes.

ARGUMENT

I. THE NOTICE-PREJUDICE RULE “REGULATES

INSURANCE” AND IS THEREFORE SAVED FROM

EXPRESS PREEMPTION UNDER ERISA’S SAVING

CLAUSE

The Ninth Circuit correctly held that California’s notice-

prejudice rule is saved from preemption by ERISA’s saving

clause because it regulates insurance. UNUM levies three basic

arguments against the circuit court’s conclusion. First, UNUM

asserts that a state law does not regulate insurance unless it

satisfies all three factors developed to determine whether a

practice is exempt from federal antitrust laws under the

McCarran-Ferguson Act (the “Pireno factors”).' Pet. Br. 22.

Second, UNUM constructs exceedingly high hurdles that state

laws must meet to satisfy each of the three Pireno factors. Few

state insurance laws could clear them, and none that pertain to

' These factors were described in Union Labor Life Insurance Co. v.

Pireno, 458 U.S. 119, 128 (1982), and are commonly referred to as the

Pireno factors.

6

the determination and payment of insurance claims. /d. at 23-

29. Third, UNUM asserts that even if the notice-prejudice rule

“regulates insurance,” it is not saved from preemption because

the “deemer clause” bars state regulation of the administration

of ERISA plans even when undertaken by outside insurance

companies. Jd. at 36-38.

Adopting any of UNUM’s positions would conflict with

Congress’s express intent by dramatically reducing the scope

of ERISA’s saving clause, and removing vast portions of the

insurance industry from traditional state regulation. Applying

the proper analysis, the ERISA saving clause plainly applies to

the notice-prejudice rule.

A. The ERISA Saving Clause Saves from Preemption State

Laws That, as a Matter of “Common Sense,” Regulate

Insurance Such as Laws That Regulate Insurance

Relationships, Types of Insurance Policies, and the

Interpretation and Enforcement of Insurance Contracts

1. A “common sense” reading of the ERISA saving

clause is consistent with congressional intent and

has been adopted by this Court

Congress expressly saved state insurance laws in ERISA.

Although Congress preempted state laws that “relate to”

employee benefit plans (ERISA plans), Congress provided in

ERISA’s saving clause that “[e]xcept as provided in [the

deemer clause], nothing in this subchapter shall be construed to

exempt or relieve any person from any law of any State which

regulates insurance, banking, or securities.” 29 U.S.C.

§1144(6)(2)(A) (emphasis added). Through this provision,

Congress expressed its intent that states continue to exercise

their traditional powers in the field of insurance. Regardless of

7

whether a state statute “relates to” an ERISA plan, the “ERISA

plan is . . . bound by state insurance regulations insofar as they

apply to the plan’s insurer.” FMC Corp. v. Holliday, 498 U.S.

52, 61 (1990). )

This Court has recently reaffirmed the starting presumption

that Congress did not intend to supplant state law, especially in

areas traditionally left to state regulation. Travelers, 514 U.S.

at 654; Dillingham, 519 U.S. at 331-32; De Buono v. NYSA-ILA

Medical & Clinical Serv. Fund, 520 U.S. 806, 814 (1997).

Where, as here, Congress expresses its intent to save from

preemption state laws that regulate insurance, there isno basis _

to impose a restrictive interpretation of the clause. Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724, 745 (1985). A

narrow, artificial reading of the term “regulates insurance”

would be inconsistent with that intent, and finds no support in

the language of the saving clause or ERISA generally.

This Court has effectuated Congress's intent by consistently

holding that whether a state law “regulates insurance” under

ERISA is a matter of “common-sense.” Pilot Life Ins. Co. v.

Dedeaux, 481 U.S. 41, 50 (1987); Metropolitan Life, 471 U.S.

at 740. The amici states submit that this Court’s opinion in

Securities & Exchange Commission v. National Securities, Inc.,

393 U.S. 453, 460 (1969), which the Court quoted in

Metropolitan Life, 471 U.S. at 743-44, provides the road map

as to what types of laws regulate insurance as a matter of

common sense: “The relationship between insurer and insured,

the type of policy which could be issued, its reliability,

interpretation, and enforcement — these were the ‘core of the

business of insurance.” Laws regulating an insurance

relationship, types of insurance policies and the interpretation

and enforcement of insurance contracts address the “core of the

business of insurance,” and are, therefore, laws that “regulate

insurance” under the ERISA saving clause.

Accordingly, in Metropolitan Life, this Court held that a

state law mandating that insurance companies provide certain

coverages “regulates insurance” as a matter of common sense

and was thus saved from preemption. 471 U.S. at 740. The

Court reasoned that the mandated-benefit law regulated the

terms of insurance contracts and that Congress expressly

reserved the regulation of insurance contracts to the state. The

Court observed that, “[b]y exempting from the saving clause

laws regulating insurance contracts that apply directly to

benefit plans, the deemer clause makes explicit Congress’

intention to include laws that regulate insurance contracts

within the scope of the insurance laws preserved by the saving

clause.” /d. at 741. That general reading of the ERISA saving

clause — that it saves laws that “regulate insurance contracts” —

encompasses those types of insurance regulation that address

“the core of the business of insurance” as described in National

Securities. There is no basis in the words of ERISA, or any

legal or policy reason, that a state regulation of an underlying

insurance transaction must meet any additional test.

2. This Court has never required that the three Pireno

factors be met for a law to “regulate insurance,”

and has used them only as a secondary analysis

a. Only after first concluding that the mandated-benefit law

was a law regulating insurance saved from preemption did the

Court in Metropolitan Life consider cases analyzing the

antitrust exemption clause in the McCarran-Ferguson Act. The

insurance company in Metropolitan Life sought to evade

application of a state insurance law by claiming that the

holding that the saving clause is not limited to traditional

insurance laws, but includes innovative laws, the Court

9

nevertheless went on to use analysis applicable to the antitrust

clause of the McCarran-Ferguson Act to find the mandated-

benefit law to be traditional insurance regulation. 471 U.S. at

742-43. Specifically, the Court supported its conclusion by

applying the three factors outlined in Union Labor Life

Insurance Co. v. Pireno, 458 U.S. 119, 128 (1982), a case

involving whether a health insurer’s use of a pecr review

committee was exempt from federal antitrust laws.’

This Court, however, has never held that a state law is

saved from ERISA preemption only if it meets both the

common-sense definition of regulating insurance and all or

some of the three Pireno criteria. Indeed, in Pireno itself, this

Court noted that all three criteria need not be met for “the

business of insurance” to be exempt from the federal antitrust

laws, expressly stating that “none of these criteria is necessarily

dispositive in itself.” 458 U.S. at 128. Moreover, after the

decisions in Metropolitan Life and Pilot Life, the Court held

that the Pennsylvania antisubrogation law, a law regulating an

considering the Pireno factors. FMC Corp., 498 U.S. at 60-61.

UNUM, and the several lower court decisions upon which it

relies, are therefore mistaken in contending that this Court has

required that all three Pireno factors be met before a state

insurance regulation may be saved from preemption.

b. More fundamentally, the ERISA saving clause and the

antitrust exemption of the McCarran-Ferguson Act are worded

of the ERISA saving clause to conform to limits on the

application of the McCarran-Ferguson antitrust exemption

? Those factors are whether the law spreads risk, is an integral part of the

policy relanonship, and is limited to entines within the insurance industry.

Pireno, 458 U.S. at 129.

10

mistakenly equates the two provisions. Pireno addressed the

second clause of 15 U.S.C. §1012(b), which exempts from the

antitrust laws “the business of insurance.” The goal of that

provision of the McCarran-Ferguson Act was not to grant the

states broad regulatory authority over the field of insurance; it

was to protect the insurance business itself by “carv[ing] out

only a narrow exemption . . . from the federal antitrust laws.”

United States Dep't of Treasury v. Fabe, 508 U.S. 491, 505

(1993). By contrast, the ERISA saving clause preserves state

authority to regulate the insurance industry free of preemption.

There is no logical or policy reason why determining whether

a state statute “regulates insurance,” and thus is not preempted

by ERISA, should be resolved by applying criteria used to

determine whether a business practice is in the “business of

insurance” such that it is not subject to the federal antitrust

laws.

To the extent analysis of the McCarran-Ferguson Act is

appropriate, the first clause of §1012(b), not the second, is the

relevant provision. The first clause of §1012(b) reserves to the

states the power to regulate insurance and provides that federal

law shall not “supersede any law enacted by any state for the

purpose of regulating the business of insurance.” This

provision’s purpose — like the purpose of the ERISA saving

clause — is to preserve state power. It follows that this Court’s

interpretation of the first clause of the McCarran-Ferguson Act

— undertaken in National Securities, supra — is more useful in

analyzing the ERISA saving clause.

In Fabe, the Court held that the analysis in Pireno (which

addressed the second clause of §1012(b)) does not resolve

whether a state statute “regulat[es] the business of insurance”

and thus may not be superseded by federal law under the first

clause. 508 U.S. at 504-505. Just as the three Pireno criteria

do not control the first clause of the McCarran-Ferguson Act,

11

those three criteria should not control the ERISA saving clause.

The proper view is that the Pireno factors “are simply relevant

considerations or guideposts, not essential elements of a three-

part test that must each be satisfied for a law to escape

preemption.” Washington Physicians Serv. Ass'n v. Gregoire,

147 F.3d 1039, 1047 (9th Cir. 1998).

c. A rule requiring that all three Pireno factors be met

before a state statute is found to “regulate insurance” could —

contrary to Metropolitan Life and National Securities — prevent

the ERISA saving clause from saving myriad state laws that

regulate insurance relationships, types of insurance policies and

the interpretation and enforcement of insurance contracts. A

number of lower courts, however, have rigidly applied the

Pireno factors to erroneously find that state insurance laws that

regulate insurance relationships and contracts do not regulate

insurance for purposes of the ERISA saving clause. Examples

of state laws mistakenly found not to regulate insurance are

laws that address the reliability of policies by prohibiting

insurance company misrepresentations,’ the fundamental rule

of insurance contract construction that an ambiguous policy is

construed against the insurer,‘ laws regarding when insurance

policies may be enforced (e.g., when an insurance company

> See DeBruyne v. Equitable Life Assurance Soc., 920 F.2d 457, 468-70

(7* Cir. 1990) (reasoning that laws prohibiting misrepresentations do not

spread risk).

* See Brewer v. Lincoln Nat'l Life Ins. Co., 921 F.2d 150, 153 (8* Cir.

1990) (citing McMahan v. New England Mut. Life Ins. Co., 888 F. 2d 426,

429 (6* Cir. 1989)) (the rule “does not effect a spreading or transferring of

policyholders’ insurance risk, but rather forces the insurer to bear the legal

risks associated with ambiguous policy language”), cert. denied, 501 U.S.

1238 (1991).

12

may rescind a policy),’ and laws regulating Health Maintenance

Organizations (HMOs).* Most lawyers, legislators and lay

persons would consider each of those laws to be laws

regulating insurance. Each squarely regulates an insurance

relationship, and addresses the “core of the business of

insurance” as described in National Securities.

B. UNUM’s analysis of the individual Pireno factors

erroneously narrows them to such a degree that few

insurance laws would satisfy any of them

Although the Pireno factors are not dispositive of whether

a state insurance law is saved from preemption under the

ERISA saving clause, those factors are used to support what

common sense reveals. Metropolitan Life, 471 U.S. at 742-43.

Moreover, misapplication of the Pireno factors has led to many

of the erroneous decisions by the lower courts. For these

reasons, it is necessary to respond to UNUM’s proposed

mE py eet ge yeynee

Spreading of risk. UNUM relies upon this Court’s

Fh rae 458 U.S. at 130, that the “transfer of risk

from insurer to insured is effected by means of the contract

between the parties . . ., and . . . is complete at the time that the

contract is entered.” Pet. Br. 24. Taken to its literal extreme,

as UNUM and some lower courts have, that statement means

* See Davies v. Centennial Life Ins. Co., 128 F.3d 934, 941 (6* Cir.

1997) (holding they do not shift policyholder risk, but merely spread the

nsk of innocent misrepresentation); Tingle v. Pacific Mutual Ins. Co., 996

F.2d 105, 108 (5* Cir. 1993) (same).

* See, e.g., O'Reilly v. Ceuleers, 912 F.2d 1383, 1389 (11% Cir. 1990)

(holding that HMOs do not spread risk); but see Cellilli v. Ceililli, 939 F.

Supp. 72, 77 (D. Mass. 1996) (holding that HMOs spread risk).

13

that no state insurance law regulating the performance of an

insurance contract affects the spreading of risk. But such laws

obviously do affect the transfer of risk; indeed, the performance

of an insurance contract is the embodiment of the kind and

amount of risk being transferred. For this reason, this Court in

Fabe clarified that the statement in Pireno “presumes that the

insurance contract in fact will be enforced.” 508 U.S. at 504.

If the contract is not performed, “there is no risk transfer at all”

— which most definitely affects the transfer of risk (to the

insured’s detriment). Jd. Indeed, UNUM would not be fighting

so hard to be exempted from the notice-prejudice rule if that

rule did not affect a transfer of risk. The notice-prejudice rule,

like other state laws affecting claims determination and

payments, has a direct impact on whether beneficiaries will be

paid and thus an immediate effect on whether any risk has been

spread.

2. Integral part of the policy relationship. UNUM appears

to be arguing that a state law regulating the administration of

an insurance policy does not affect the insurance policy

relationship. Pet. Br. 28. This is part of UNUM’s broad-

ranging effort to limit the ERISA saving clause exclusively to

state laws regulating substantive policy benefits. We address

this mistaken notion is Part (I)(D), infra. Suffice it to say, the

saving clause makes no distinction between state insurance

BEY oP wn cr

cota le enue pnnenquntittey tee quectent Gesat to Congpess's

intent in enacting the saving clause. According to UNUM, any

insurance law that has its genesis in general common law is not

a law aimed specifically at the insurance industry and therefore

cannot meet the common-sense definition of insurance. Pet.

Br. 22-23. Not only does that position mistakenly conflate the

14

common-sense inquiry with the third Pireno factor, it would

have the ERISA saving clause save little besides laws dictating

policy benefits.

A great many insurance laws have some roots or analogues

in the common law, as one would expect. Although insurance

contracts pose special concerns that lead to special rules, those

rules were rarely created out of whole cloth. Rather, courts and

legislators commonly look to existing rules and principles and

determine how they should be modified to address the

insurance setting. To contend, as UNUM does, that Pilot Life

compels its position is to contend that Pilot Life effectively

overturned Metropolitan Life because many insurance laws

embody principles that may also be found elsewhere in the

common law. Pilot Life, however, expressly stated that it was

not overturning Metropolitan Life. 481 U.S. at 57.

C. Applying the Analysis Set Forth in Metropolitan Life,

the Notice-Prejudice Rule is a Law that “Regulates

Insurance” for Purposes of the ERISA Saving Clause

As a matter of common sense, the notice-prejudice rule

regulates insurance. The rule governs when insurance

policyholders who have filed late notices or submissions of

proof have lost their claims. It affects the ultimate issue in any

insurance contract — whether the policyholder’s claim is paid.

If the notice-prejudice rule does not regulate insurance, what

does it regulate? Though it might be considered a consumer

protection statute — protecting consumers from losing their

rights for, as a practical matter, no good reason — the field in

which it is operating is the insurance business. Turning to the

National Securities description, the notice-prejudice rule is

both a rule affecting the insurance relationship between Ward

and UNUM, as well as a rule affecting the enforcement of an

15

insurance contract. It is, therefore, plainly a rule addressing the

“core of the business of insurance” and, as such, regulates

insurance as a matter of common sense.

The Pireno factors support that conclusion, for many of the

reasons discussed in Part (I)(B), supra. The notice-prejudice

rule spreads risk because it determines whether the insurance

contract will be enforced at all. If the contract is not

performed, the insured has not transferred his risk and must,

accordingly, bear the full financial brunt of the insured event.

As to the second Pireno factor, the “performance of an

insurance contract . . . is central to the policy relationship

between insurer and insured.” Fabe, 508 U.S. at 503.

Unquestionably, the notice-prejudice rule regulates the

performance of the insurance contract. Finally, the notice-

prejudice rule is confined to entities within the insurance

industry. UNUM cites no cases applying the notice-prejudice

rule outside the insurance context. That one or two

Restatement provisions embody principles similar to the

notice-prejudice rule does not change that fact.

Thus, although amici agree with the Ninth Circuit that (1)

the notice-prejudice rule regulates insurance as a matter of

common sense, (2) the notice-prejudice rule satisfies the second

and third Pireno factors, and (3) that is enough to establish that

the ERISA saving clause applies to the rule, we disagree with

one aspect of the Ninth Circuit’s holding. The amici states

submit that, to the extent the Pireno factors are relevant, the

notice-prejudice rule also satisfies the first Pireno factor.’

” If the Court agrees that all three Pireno factors are met, it does not

have to determine whether they always must be examined and, if so,

whether they all must be met. We believe, however, that the better course

is to answer that question. That is the issue on which certiorari was granted,

the lower courts need-guidance, and it is an independent ground for

16

D. Application of the Saving Clause f6 the Notice-Prejudice

Rule Does Not Conflict with the Deemer Clause

UNUM argues that when an insurance company administers

an insurance policy for an ERISA plan all state regulation of

administration of the policy is direct regulation of the plan

barred by the deemer clause. Pet_Br. 37.* This argument

glosses over the distinction Congress has drawn, for

preemption purposes, between insured and self-insured plans.

It expands the deemer clause beyond its role of protecting self-

insured plans and, correspondingly, eviscerates the insurance

saving clause by removing from it a whole body of traditional

state insurance law that regulates the insurer’s administration

of insurance policies. An insurance company is still an insurer

for purposes of the saving clause even when it administers an

insurance policy sold to an ERISA plan.

UNUM’s argument is that if an activity is covered by

ERISA, it is not insurance for purposes of the saving clause.

An insurer’s action granting or denying claims, however, is the

core of the business of insurance for it is the mechanism by

which the risk transfer is effectuated. Thus, in order to have

any meaning at all, insurance laws must include laws that

control ERISA covered activities. An ERISA plan’s choice to

purchase insurance renders the plan subject to state insurance

* The deemer clause provides that “neither an employee benefit plan . .

nor any such trust established under such a plan, shall be deemed to be an

insurance company or other insurer, bank, trust company, or investment

company or to be engaged in the business of insurance or banking for

purposes of the law of any State purporting to regulate insurance companies

[or] insurance contracts.” 29 U.S.C. §1144(6\(2\(B).

17

laws through the regulation of the insurance company. That is

the whole point of the saving clause.’

UNUM justifies its extraordinarily broad reading of the

deemer clause by reference to congressional concern for plan

uniformity. Congress never intended uniformity to be more

than a means to an end — to provide protection to employees.

Moreover, that concern was addressed by Congress in the

enactment of the preemption provision, 29 U.S.C. §1144. By

including in that preemption provision a clause saving state

laws that regulate insurance, Congress explicitly tempered its

concern for plan uniformity to the extent plans choose to

become insured. As the Court has previously recognized,

“disuniformities . . . are the inevitable result of the

congressional decision to ‘save’ local insurance regulation.”

Metropolitan Life, 471 U.S. at 747.

UNUM draws a distinction between laws regulating

insurance benefits (which supposedly can be saved) and laws

regulating insurance administration (which supposedly cannot

be saved). Nothing in the language or legislative history of

ERISA, however, indicates that in structuring the complex

express preemption provisions of ERISA, Congress was more

* Moreover, the notice-prejudice rule does not even regulate UNUM in

its capacity as an ERISA fiduciary. The notice-prejudice rule regulates plan

administration by prohibiting insurance companies from imserting into

insurance policies a provision that allow claims to be denied as untimely

without a showing of prejudice to the insurer. An insurer is not acting as an

ERISA plan, or as a plan fiduciary, when it designs the terms of the

insurance contracts it sells. When UNUM administers a policy it sells to an

ERISA plan, it has a fiduciary duty to administer the policy in accord with

its written terms. However, those terms include, as a matter of law, all

terms that are mandated or amended by state insurance law. The notice-

prejudice rule implicates UNUM’s fiduciary duty in this case only because

UNUM inserted into the policy a term that is inconsistent with California’s

insurance law.

18

concerned with uniform plan administration than uniform

benefit structure. Congress’s failure to make any distinction

between the two in either the saving clause or the deemer

clause defeats UNUM’s argument. This Court’s decisions

interpreting the scope of the saving clause and the deemer

clause further refute the benefit-administration distinction that

UNUM tries to draw.

In Metropolitan Life, this Court noted that the language of

the deemer clause “makes explicit Congress’ intention to

include laws that regulate insurance contracts within the scope

of the insurance laws preserved by the savings clause.” 471

U.S. at 741. No distinction was made between laws that

regulate the administrative terms of insurance contracts and

laws that regulate benefits to be included in those contracts.

While Metropolitan Life involved a state mandated-benefit law,

FMC Corp., 498 U.S. 52, involved Pennsylvania’s anti-

subrogation law, a state law affecting plan administration.

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

this Court held that the law related to plans because it interfered

with a uniform administrative scheme. FMC Corp., 498 U.S.

at 60. However, the law fell within the insurance saving clause

because it “directly controls the terms of insurance contracts by

invalidating any subrogation provisions they contain.” Jd. at

60-61. The Court then concluded that the deemer clause

exempts self-funded, but not insured, plans from state laws

regulating insurance. “An insurance company that insures a

plan remains an insurer for purposes of state laws ‘purporting

to regulate insurance’ after application of the deemer clause.

The insurance company is therefore not relieved from state

insurance regulation. The ERISA plan is consequently bound

by state insurance regulations insofar as they apply to the

plan’s insurer.” Jd. at 61. Thus, so long as a state law regulates

an insurer, it is excluded from the scope of the deemer clause.

19

Because the notice-prejudice rule applies to UNUM, the plan’s

insurer, it falls within the scope of the saving clause, unaffected

by the deemer clause.

Il. NEITHER THE NOTICE-PREJUDICE RULE NOR

THE ELFSTROM RULE CONFLICTS WITH ANY

SUBSTANTIVE PROVISION OF ERISA

UNUM argues that the notice-prejudice and Elfstrom rules

are, in any event, preempted by conflict preemption principles

because they are in conflict with various substantive provisions

of ERISA. Pet. Br. 18; see Boggs v. Boggs, 520 U.S. 833, 841

(1997). UNUM makes three conflict preemption arguments.

First, that this Court’s decision in Pilot Life precludes Ward’s

claim; second, that application of the state laws at issue will

conflict with ERISA’s provisions by requiring the payment of

claims *’\at would not otherwise be “due” under the terms of the

insurance policy “as written”; and third, application of the state

laws may reverse the insurance company’s “claims review”

decision to deny benefits. None of these arguments has merit.

1. Pilot Life, upon which UNUM principally relies, is

readily distinguishable. In Pilot Life, an ERISA plan member

sought to recover compensatory and punitive damages for

failure to pay benefits under the plan through assertion of a

state common-iaw cause of action. This Court found that suit

preempted, holding that Congress expressed a clear intent that

suits to recover plan benefits must be brought exclusively under

federal law; suits under state common law causes of action

conflicted with that intent. 481 U.S. at 52-56. Ward’s cause of

action, by contrast, is for benefits due under his plan — which

purchased an insurance policy subject to the notice-prejudice

and Elfstrom rules. Claims for plan benefits are specifically

20

provided for in ERISA’s civil enforcement scheme. Because

Ward’s claim is brought under ERISA, not state law, Pilot Life

is no impediment to such a claim.

UNUM’s unduly broad reading of Pilot Life effectively

abrogates this Court’s decision in Metropolitan Life. It is true

that the success of Ward’s suit depends, in part, on whether the

insurance contract includes, by virtue of state law, a notice-

prejudice provision (or whether the disavowal of an agency

relationship contained in the insurance contract may be ignored

if the facts show otherwise). In terms of conflict preemption,

however, his suit is no different than a suit under ERISA to

recover a benefit mandated by state law in a situation where the

insurance policy terms omit the benefit or specifically indicate

that the benefit is not provided. Both suits are brought under

ERISA to recover benefits, but rely, in part, on state laws that

modify or contradict the terms of the plan. Even though this

Court held in Metropolitan Life that state mandated-benefit

laws are not preempted by ERISA’s express preemption clause,

UNUM’s reasoning would prevent any attempt to recover

mandated benefits from an insurer of an ERISA plan who

ignores the law on the theory that the law is in conflict with the

plan’s terms and the attempt to collect benefits not due under

the terms of the plan is in conflict with ERISA’s enforcement

provisions. Pilot Life cannot be read to support such, a result.

Finally, ERISA’s civil enforcement provision (§502) does

not operate to preempt state insurance laws that are saved from

preemption by the saving clause, even if the state insurance law

creates a remedy or cause of action. In this regard, the states

agree with the position of the Solicitor General. See U.S. Br.

20-25. This Court has previously noted that “Congress did not

intend to pre-empt entirely every state cause of action relating

to such [ERISA] plans.” Franchise Tax Bd. v. Construction

Laborers Vacation Trust, 463 U.S. 1, 25 (1983). Laws which

21

fact that a state insurance law may also provide a state law

cause of action or remedy does not change its basic character

as a law that regulates insurance.

2. UNUM further argues that the notice-prejudice rule and

the Elfstrom rule conflict with ERISA’s substantive provisions

that require fiduciaries to administer plans “in accordance with”

their written terms, and to provide benefits only if they are

“due” under those terms. Pet. Br. 20, 32-33; 29 U.S.C. §§

1104(a)(1)(D), 1132(a){(1)(B). UNUM reasons that application

of these state laws will alter contrary terms it inserted into the

insurance policy, which in this case constitute the terms of the

plan, thereby creating a conflict with these provisions of

ERISA. This reasoning allows plans to preempt any state

regulation simply by inserting contrary terms in the plan

documents. ERISA’s requirements that plans be administered

according to their written terms and benefits be paid only when

due under those terms does not give ERISA plans carte

blanche to overnde otherwise applicable law, federal or state.

As the Eighth Circuit correctly recognized in United of Omaha

v. Businessmen's Assurance Co. of America, 104 F.3d 1034,

1041 (8" Cir. 1997), accepting UNUM'’s position “would be to

open the door for insurance companies to avoid any state

insurance law simply by including a contrary provision in their

group ERISA welfare plans.” UNUM’s proposed rule would

permit ERISA plans and all entities providing services to such

plans to evade virtually any state or federal regulation they

desired. Congress never intended such a result, and this Court

has never approved of such a result.

Adoption of UNUM’s argument would render this Court’s

decisions in Travelers and its progeny meaningless Those

cases recognize that ERISA operates against a backg, ound of

traditional state laws that are presumptively not preempted.

22

Just as a hospital cannot evade state quality control standards

by contracting with an ERISA plan to operate under lower

standards, an insurance company cannot evade a state insurance

regulation by contracting with an ERISA plan to operate in a

manner contrary to state insurance laws.'® Indeed, the

application of the state law to the ERISA plan in Dillingham

would have been preempted by conflict preemption principles

were UNUM’s position correct. In that case an apprenticeship

training agreement, an “employee welfare benefit plan” within

the meaning of ERISA, contained a wage scale that conflicted

with California’s prevailing wage statute. 519 U.S. at 332.

Since the plan had not complied with the approval requirements

of the prevailing wage law, application of the state law to the

plan in that case required the plan to ignore its own plan terms

(its wage scale), and pay benefits not due under the plan (the

higher wages required under state law).

3. UNUM also claims (Pet. Br. 20, 35) that both the notice-

prejudice and the Elfstrom rules conflict with the provision of

ERISA that requires every employee benefit plan to comply

with the benefit claims regulations issued by the Secretary of

conflict with those parts of the regulations which provide that

a plan’s claims procedures may provide for the filing of claims

with an insurance company and that “a claim is filed when the

requirements of a reasonable claim filing procedure . . . have

been met.” 29 C.F.R §2560.501-1(c), (d). This argument does

not withstand scrutiny; neither the notice-prejudice rule nor the

Elfstrom rule is in conflict with either of these provisions.

© It may be that, although a state quality control standard does not

“relate to” ERISA plans, a particular insurance regulation will “relate to”

ERISA plans. But the conflicts preemption analysis is the same. Neither

type of law conflicts with ERISA merely because it might conflict with the

terms of a particular ERISA plan.

’

23

The procedures noted in the regulations are not intended to

be exclusive. To the contrary, they specifically provide that

they are the minimum requirements for employee benefit

procedures. 29 C.F.R. §2560.501-1(a). Therefore, state law

doctrines that supplement or impose more stringent

requirements are not in conflict with the regulation. In Pilot

Life, this Court found that ERISA’s civil enforcement

procedures were intended to be exclusive; UNIM’s reliance

upon Pilot Life is therefore misplaced.

regulations’ definition of when a claim is filed. It simply

defines the consequences of untimeliness, whenever the claim

is filed. Elfstrom does not conflict with that part of the

regulation that allows for the filing of claims with am insurance

accomplishment and execution of the full purposes and

objectives of Congress,” Gade v. National Solid Wastes

Management Ass'n, 505 U.S. 88, 98 (1992), these laws are not

Ill. THE ELFSTROM RULE DOES NOT “RELATE

TO” ERISA PLANS

A. ERISA Does Not Preempt Generally Applicable State

Law That Does Not Dictate Or Restrict The

Administrative Or Benefit Choices Plans Make

In recent years, this Court has expressly held that ERISA

did not alter the starting presumption in preemption cases that

24

“Congress does not intend to supplant state law.” Travelers,

514 US. at 654; Dillingham, 519 U.S. at 331-32; De Buono,

520 US. at 814. Thus, a party seeking to demonstrate that

rene aeolian

been traditionally occupied by the States . . . bear(s) the

considerable burden of overcoming” that presumption.

De Buono, 520 U.S. at 814 (internal quotations omitted). In

Travelers, this Court concluded that the ERISA preemption

analysis must “go beyond the unhelpful text” and “look instead

to the objectives of the ERISA statute as a guide to the scope

of the state law that Congress understood would survive.” 514

U.S. at 656 (internal quotations omitted).

Since its very inception, ERISA’s principal object has been

to protect plan participants and beneficiaries from employer

abuse and mismanagement. H.R. Rep. No. 93-533, at 1 (1973),

reprinted in 1974 U.S.C.C.A.N. 4639, 4639; Boggs, 520 U.S.

at 844. As this Court has stated:

in enacting ERISA, Congress’s primary concern was

with the mismanagement of funds accumulated to

finance employee benefits and the failure to pay

employee benefits from accumulated funds.

Dillingham, 519 U.S. at 326-27 (citing Massachusetts v.

Morash, 490 U.S. 107, 115 (1989)). Section after section of

ERISA either explicitly or implicitly provides protections for

employees. 29 U.S.C. §1001(a)-(c). As the United States has

argued, “it would be extraordinary if a Congress that was intent

on protecting the rights of plan participants and beneficiaries,

see 29 U.S.C. 1001, in fact deprived those parties of the

protection of traditional state regulation merely because the

services ordinarily subject to that regulation were provided by

ERISA plans.” Brief for the United States as Amicus Curiae

Supporting Petitioners, De Buono v. NYSA-ILA Medical and

Clinical Services Fund at 20 (November 1996).

25

In Dillingham the Court set out the two-pronged “relate to”

analysis as follows: First, a law which makes reference to an

ERISA plan is preempted. “Where a State’s law acts

immediately and exclusively upon ERISA plans, as in Mackey,

or where the existence of ERISA plans is essential to the law’s

operation, as in Greater Washington Bd. of Trade and

Ingersoll-Rand, that ‘reference’ will result in preemption.” 519

US. at 325.

Second, state laws which have a connection to ERISA plans

are preempted. To determine whether a law has a connection to

an ERISA plan, this Court looks both to ERISA’s objectives as

a guide to the scope of the state law that Congress understood

would survive, and to the nature of the law’s effect on ERISA

plans. Travelers, 514 U.S. at 656; Dillingham, 519 U.S. at 325.

Even assuming the basic purpose of ERISA’s preemption

clause is to “avoid a multiplicity of regulations in order to

permit nationally uniform administration of employee benefit

plans,” Travelers, 514 U.S. at 657, a state law does not have a

prohibited connection to plans if it “does not bind plan

administrators to any particular choices,” does not function as

a regulation of the plan itself or interfere with uniform plan

administration. Jd. at 659. Thus, a state law of general

application in an area of traditional state regulation that only

influences plan administrative or benefit choices, Travelers,

514 U.S. at 662, merely imposes some burdens on the

administration of ERISA plans, De Buono, 520 U.S. at 815, or

simply “alters the incentives” without “dictat[ing] the choices

facing ERISA plans” does not relate to plans within the

meaning of the statute. Dillingham, 519 U.S. at 334. This new

paradigm not only reflects a respect for traditional state powers,

but also countenances a significant cabining of ERISA’s

preemptive effect.

26

This Court has recognized a wide range of state laws of

general application, withun the states’ traditional authority, that

are not preempted even though they may have some effect upon

ERISA plans. For example, state health laws, tort laws,

all have an effect on ERISA plans. Each is a traditional state

responsibility and each represents concerns that extend well

beyond ERISA issues. Congress could never have intended to

*=———-preempt such laws.

B. The Elfstrom Rule Does Not “Relate to” ERISA Plans

Because it Does Not Dictate or Restrict the

Administrative Choices that an ERISA Plan Makes

The Elfstrom rule does not relateto ERISA plans. Elfstrom

is merely the straightforward application of ordinary state

common law agency principles to insurance companies. In

fact, it is probably a misnomer to refer to the agency rule at

issue as the “Elfstrom rule.” The rule whose preemption is

being reviewed is simply ordinary agency law; the expression

“Elfstrom rule” was merely used by the Ninth Circuit as a

shorthand expression for that agency law. (For convenience,

we will also use that expression.) £lfstrom defines the legal

consequences to insurance companies of involving others in

policy administration by defining an agency relationship

between them and other parties with whom they may do

business. Because some ERISA plans purchase insurance,

Elfstrom may have an indirect impact on those plans. Elfstrom

may influence either the options available to ERISA plans in

the insurance marketplace or the choices ERISA plans make

27

among those options.'' However, it does not dictate or restrict

the substantive or administrative choices ERISA plans make or

impose any obligations upon plans. The Elfstrom rule is,

therefore, one of many common laws regulating insurance

company conduct that “do not ‘relate to’ benefit plans in the

first instance.” Metropolitan Life, 471 U.S. at 741.

Elfstrom does not refer to or depend upon the existence of

ERISA plans. It applies to the relationship between insurers

and any other party who may assist in policy administration.

See McCormick v. Sentinel Life Ins. Co., 153 Cal. App. 3d

1030, 200 Cal. Rptr. 732 (1984) (applying Elfstrom to the

relationship between an insurer and a credit union). Because

the Elfstrom rule is indifferent to the identity of the other party

whom insurance companies may involve in policy

administration and the other party’s relationship, if any, to

ERISA plans, the law makes no reference to plans. See

Dillingham, 519 U.S. at 325.

Nor does the Elfstrom rule have a connection to plans even

when, as in this case, it applies to the relationship between an

insurance plan and an employer who purchased the insurance

policy that funds the ERISA plan. Eflstrom applies generally

applicable common law agency principles to insurance

companies. Agency law is not an area with which ERISA is

concemed. It is not part of a plan’s administrative scheme such

as a claims determination or benefits disbursement procedure.

As the California Supreme Court recognized in Elfstrom

tavetvemantefethenputiosiniasumnsepdiiey ebeniataaatentequauty

motivated by economic concerns, specifically reduced premium costs, that

are advantageous to both the insurer and the policyholder. Elfstrom v New

York Life Ins. Co., 67 Cal.2d4 503, 509 (1967). Theseeconomic benefits may

well be affected by the Elfstrom rule, resulting in insurance companies

limiting the options they give policyholders to become involved in

administration, or affecting the costs of those options.

28

See Fort Halifax Packing Co., 482 U.S. at 9. Itis rather one of

the “myriad state laws in areas traditionally subject to local

regulation.” Travelers, 514 U.S. at 668.

Elfstrom does not have a direct impact upon plans. It does

not compel ERISA plans or plan sponsors to involve

themselves in policy administration, nor does it prohibit such

a choice. It does not impose any additional obligations upon

employers who choose to become involved in policy

administration. Unlike a mandated benefits law, which

compels insured plans to “purchase the . . . benefits specified

in the statute when they purchased a certain kind of common

insurance policy,” Metropolitan Life, 471 U.S. at 739, Elfstrom

does not even indirectly dictate or restrict an ERISA plan’s

conduct. It does not tell insurers how to structure policies or

policy administration. Nor does it dictate or restrict an

insurance company’s choices concerning who may be involved

in the administration of insurance policies. Because Elfstrom

does not mandate either an insurer’s or an ERISA plan’s

choices concerning plan administration or benefit structure, it

does not impede the uniform inter-state operation of plans.

Assuming such options are available in the insurance

marketplace, a plan which operates in numerous states may

make uniform choices as to what parties will be involved in the

administration of insurance policies it purchases. Application

of the Elfstrom rule in this case will not require the plan or the

employer to do anything differently in the future or to vary its

conduct from state to state.

While Elfstrom does not impose legal obligations on

insurers or plans, it does result in the imposition of legal

consequences upon insurance companies who choose to

involve others in the administration of the insurance policies

they sell. By charging insurers with knowledge of those who

are determined to be their agents, Elfstrom renders insurers

29

liable for the conduct of their agents. By charging UNUM, the

insurer, with knowledge of MAC, the employer (assuming the

facts establish an agency relationship under E/fstrom), UNUM

may have to pay a claim it would have otherw‘se denied as

untimely. However, that consequence is not imposed upon

UNUM in its capacity as an ERISA fiduciary, but as an

insurance company engaged in the business of insurance.

Because the plan sponsor transferred the plan’s risk of loss by

insuring the plan, payment of that claim has no direct impact

upon the plan. If UNUM has to pay more claims because of

Elfstrom, it may raise its premiums in certain states. If it

decides to supervise the entities who are involved in policy

administration more closely, this may increase premiums.

However, all kinds of non-preempted state laws that apply to

insurance companies have a similar indirect economic i:npact

upon plans.

To be sure, the indirect economic impact of El/fstrom may

influence plan administrative choices. But a state law does not

relate to plans simply because it imposes consequences on

certain plan choices and therefore alters the incentives for plan

choice. In Dillingham, this Court had little difficulty

concluding that, because a statute merely altered the incentives

facing ERISA plans, it did not “relate to” such plans. This was

with full recognition that the incentives resulted from the

consequences the state law imposed on certain choices: “The

statute does not bind the plan to anything .... If a contractor

chooses to hire apprentices for a public works project, it need

not hire them from an approved program (although if it does,

it must pay those apprentices journeymen wages).”

Dillingham, 519 U.S. at 332 (emphasis added). Similarly,

Elfstrom does not bind insurers, and therefore plans that buy

insurance policies, to any particular administrative choice.

However, if an insurer chooses to involve other parties in

30

policy administration, it will be charged with the knowledge of

those who are determined to be its agents.

Nor, finally, does the Elfstrom rule “relate to” the ERISA

plan because UNUM chose to include in the insurance policy

terms that atteinpt to override it. Plans cannot avoid a state law

by including terms in their employee benefit plan that

contradict those laws. As discussed in Part II above,

Dillingham could not have come out as it did if state law were

preempted when the terms of an ERISA plan conflict with the

law. Since the Elfstrom rule is a traditional state law that

defines an agency relationship between an insurance company

and other parties, and does not dictate or restrict plan structure,

it has too tenuous an impact on plans to have a connection to

them within the meaning of ERISA.”

CONCLUSION

For the foregoing reasons, the decision below should be

affirmed.

'2 If, however, this Court concludes that Elfstrom does relate to plans,

the states agree with the position of the United States that the case should

be remanded to the Ninth Circuit to consider whether Elfstrom should be

adopted as a rule of federal common law. U.S. Br. 28.

Respectfully submitted,

JOHN CORNYN

Attorney General of Texas

* DAVID C. MATTAX

Chief, Financial Litigation Div.

P.O. Box 12548

Austin, TX 78711-2548

(512) 463-0150

Counsel for Amici States

ELIOT SPITZER

Attorney General of New York

PETER SCHIFF

Acting Solicitor General

PATRICIA SMITH

Assistant Attorney General

120 Broadway

New York, NY 10271

(212) 416-8050

Of Counsel:

Dan Schweitzer

National Association of

Attorneys General

750 First Street, N.E.

Suite 1100

Washington, D.C. 20002

* Counsel of Record

January 8, 1999