Opposition Brief — Hayes v. Prudential Insurance Co. of America

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dl Supreme Court, U.S,

JAN 22 1988

In the Supreme Courf,....- seavo. sr

United States

OCTOBER TERM, 1987

Kip HAYEs,

Petitioner,

VS.

PRUDENTIAL INSURANCE COMPANY OF AMERICA,

NATIONAL LEAGUE OF POSTMASTERS

OF THE UNITED STATES, et ai.,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF IN OPPOSITION BY RESPONDENT

THE PRUDENTIAL INSURANCE COMPANY

OF AMERICA

JAMES S. CLINE*

ANGEL GOMEZ, III

ADAMS, DUQUE & HAZELTINE

523 West Sixth Street

Los Angeles, California 90014

(213) 620-1240

Attorneys for Respondent

The Prudential Insurance

Company of America

* Counsel of record

Bowne of Los Angeles, Inc., Law Printers. (213) 742-6600

QUESTIONS PRESENTED

This case does not involve insurance in the traditional

sense. This case involves a “Health Benefits Plan” for

federal employees, created by the Federal Employees

Health Benefits Act of 1959 (“FEHBA’’). 5 U.S.C.

§§ 8901-8913. Respondent National League of Postmas-

ters of the United States (‘“‘Postmasters”’) is an associa-

tion of federal employees and is a “carrier” under

FEHBA. Postmasters, as a carrier, provides health care

benefits to federal employees through a Health Benefits

Plan (“Plan’’).

Respondent The Prudential Insurance Company of

America (“Prudential”) administered claims presented

to Postmasters for payment and, in effect, guaranteed

Postmasters’ solvency to pay valid claims. Prudential did

not insure the federal employees who enrolled in the

Postmasters’ Health Benefits Plan.

The questions presented are:

1. Where FEHBA Health Benefits Plans come into

existence through a federal contract, are subject to direct

oversight by a federal agency, are funded by the federal

treasury for the benefit of federal employees pursuant to

a federal statute, and, where FEHBA itself contains an

express preemption clause, whether disputes concerning

FEHBA Health Benefits Plan benefits and administra-

tion shall be governed exclusively by federal law and all

state law claims be preempted?

2. Whether Prudential is a proper party defendant in

this matter and whether any claim is cognizable at all

against Prudential under either federal or state law?

LIST OF PARTIES

The parties to the proceedings below were petitioner

Kip Hayes, respondent National League of Postmasters

of the United States, the Office of Personnel Manage-

ment, an agency of the United States (“OPM”), Nobel

Hayes, and respondent The Prudential Insurance Com-

pany of America.*

*A list of Prudential’s subsidiaries and affiliates pursuant to Rule

28.1 is contained in Appendix “G,” attached hereto.

iii

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED.................... i

ed css h ayes csesavchccieace ii

SE oka cee cccccscassescusces 1

id bv ee ees a vasavicscecesdss 2

STATUTE AND REGULATIONS INVOLVED ... 3

STATEMENT OF THE CASE .................. 3

REASONS TO DENY THE PETITION.......... 3

SUMMARY OF ARGUMENT ................... 3

Il.

THE NINTH CIRCUIT CORRECTLY DECIDED

THAT CALIFORNIA INSURANCE LAW IS

PREEMPTED BY FEDERAL LAW AND CAN-

NOT THEREFORE APPLY .................. 5

A. Under Applicable Preemption Doctrine, State

Insurer Torts Would Defeat the Full Purpose

and Objective of Congress .................. 5

B. State Claims Processing Torts Directly Conflict

With Federal Contractual, Statutory and Regu-

ed ae 6 Unk a ph adw he «se © 8

C. FEHBA Plans Are Federal Procurement Con-

Ne ake wueclacdeuce 11

D. Petitioner’s Remaining Arguments Regarding

Preemption Are Inapposite or Unpersuasive... 12

TIL.

PETITIONER COMES BEFORE THIS COURT

REQUESTING AN ADVISORY OPINION. .... 13

TABLE OF CONTENTS

IV.

PRUDENTIAL AS AN “UNDERWRITER” AND

AGENT IS NOT A PROPER PARTY AMEN-

ABLE TO SUIT UNDER FEDERAL OR STATE

THE DECISION IN HOWARD V. GROUP HOSPI-

TAL SERVICE IS NOT IN CONFLICT AND IS

Rear ener See mg er nee

Se RS ar aol pre Fee Un

APPENDICES

Appendix A

Order Granting Defendant’s Motion for Sum-

mary Judgment, United States District Court,

Southern District of California

Appendix B

Opinion, United States Court of Appeals for the

Ninth Circuit

Appendix C

Order, United States Court of Appeals for the

Ninth Cireuit

Appendix D

Code of Federal Regulations 29 C.F.R.

Appendix E

Order Granting Plaintiff's Motion for Summary

Judgment, United States District Court, Central

District of California

TABLE OF CONTENTS

Appendix F

Memorandum, United States District Court for

the Middle District of Pennsylvania

Order, United States District Court for the

Middle District of Pennsylvania

Appendix G

List of companies supplied pursuant to

Rule 28.1

TABLE OF AUTHORITIES

Cases

Page

Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 105

S.Ct. 1904, 85 L.Ed.2d 206 (1985) ........ 8, 9, 13,18

Atlas Pallet, Inc. v. Gallagher, 725 F.2d 131, (1st

| PTE rr es eee er eer 6

Austero v. Nat. Cas. Co., 62 Cal. App. 3d 511,

4 re mre ar ra hoa pee 15, 16

Blue Cross & Blue Shield v. Dept. of Banking, 791

F.2d 1601 (Lith Cir. 1906)... cccccccccess 13

Clearfield Trust Co. v. United States, 318 U.S. 363,

65 S.Ct. 573, 87 L.Ed. 838 (1941) .......... 12

Delancy v. Nat. Post Office Mail Handlers, No.

SO eee Caan By BEEN 6.k6bs beset cceunecs 9,12

Director, Edward Meyer Hospital v. Stetz, 433 F.

We, TED: CW ss BOOED ok s06ccdnsncsces 15

Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809

(1979), cert. denied and appeal dismissed, 455

ie % #> A er ee 15

Fields v. Blue Shield of California, 163 Cal. App.

i By er errs se 12

Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566 (1973) 15,16

Hartenstine v. Superior Court, 196 Cal. App. 3d

8): ft Ry erent A 4,9, 10, 12, 13, 17, 18

Hayes v. Prudential, 819 F.2d 921 (9th Cir. 1987) 10,13

Howard v. Group Hospital Service, 739 F.2d 1508

Ss GG SOOED Kescoineddsccgvesctaussetés 17, 18

Iverson v. Superior Court, 57 Cal. App. 3d 168

TTD 6 66 6 64550656544060560000065n 55490060 16

Vii

TABLE OF AUTHORITIES

CASES

Page

Massachusetts Mut. Life Ins. Co. v. Russell, 473

U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985)

rev'g on other grounds, 722 F.2d 482 (9th Cir.

DRE LEUEUc cases dceedakethiésedcdncen ss 8,18

Metropolitan Life Ins. Co. v. Curtis, No. CV-83-167 7

Eo cc nccsecescescccece 6

Metropolitan Life Ins. Co. v. McSheen, 577 F.

Mam. BES Cite CE, BOGS) 2 ccc cccccccccccs 6

Pilot Life v. Dedeauz, ___. U.S. —__, 107 S.Ct.

1549, 95 L.Ed.2d 39 (1987) ............. 8, 11, 13, 18

Ridgway v. Ridgway, 454 U.S. 46, 102 S.Ct. 49, 75

a ccge bc tp cadence evens 6

Shaw v. Delta Airlines, 463 U.S. 85, 103 S.Ct.

2896, 77 L.Ed.2d 490 (1983) ............... .

Suydam v. United States, 404 F.2d 1329 (D.C. Cir.

Pr rer ne ee ee eee 6

United States v. Allegheny County, 322 U.S. 174, 64

S.Ct. 908, 88 L.Ed. 209 (1944) ............. 12

Federal Regulations

Code of Federal Regulations, Title 5, Part 890

90s cebe' ws 6-e 8 Cee eee an eNeundéwenees 3, 10, 14

Miscellaneous

House of Representatives Report No. 282, 95th

Cong., Ist Sess. 5 (May 10, 1977)........... 7

Senate Report No. 95-903, 95th Cong., 2d Sess.,

reprinted in 1978 U.S. Code Cong. & Ad.

SOE Ss cukcwcceusescPoue de teretacun ss 7, 11,12

Vili

TABLE OF AUTHORITIES

MISCELLANEOUS

Testimony of Thomas Tinsley, Dir., Bureau of

Retirement, Insurance, and Occupational

Health, U.S. Civil Service Commission before

Senate Subcommittee on Civil Service and

General Services (September 14, 1977) ......

Statutes

Employee Retirement Income Security Act (29

ee as éee aun censeb ans saewenseéees

Federal Employees Health Benefits Act of 1959

SPREE d.aenedescucevesszoszesces

Labor Management Relations Act of 1947 (29

Se 2s sen addauehshaawedeecne

McCarran-Ferguson Act (15 U.S.C. $1011) ....

United States Code, Title 5, see. 8701 .........

United States Code, Title 5, sec. 8709 .........

United States Code, Title 5, see. 8902 .........

United States Code, Title 5, see. 8902(e) ......

United States Code, Title 5, see. 8902(m)(1)...

United States Code, Title 28, see. 1254(1) .....

United States Code, Title 28, sec. 1331 ........

United States Code, Title 28, see. 1441(b) .....

United States Code, Title 29, see. 8902(m)(1)..

United States Code, Title 38, sec. 801 .........

United States Code, Title 38, sec. 765 .........

5D, 6, 8

CASE No. 87-818

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1987

Kip HAYES,

Petitioner,

vs.

PRUDENTIAL INSURANCE COMPANY OF AMERICA,

NATIONAL LEAGUE OF POSTMASTERS

OF THE UNITED STATES, et al.,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF IN OPPOSITION BY RESPONDENT

THE PRUDENTIAL INSURANCE COMPANY

OF AMERICA

OPINIONS BELOW

The Order of the United States District Court, South-

ern District of California (Nielson, L.C.), granting re-

spondents’ motion for summary judgment has not been

reported. It is re-printed in Appendix “A”, attached

hereto.

The opinion of the United States Court of Appeals for

the Ninth Circuit affirming the district court’s order

granting respondents’ motion for summary judgment is

reported at 819 F.2d 921 (9th Cir. 1987), and is re-

printed in Appendix “B”, attached hereto.

The order of the United States Court of Appeals for the

Ninth Cireuit denying petitioner’s petition for rehearing

in the Ninth Cireuit Court of Appeals, is reprinted in

Appendix “C”’, attached hereto.

JURISDICTION

Petitioner originally brought this action in the Superior

Court of California, County of San Diego, on April 16,

1984. Respondent Postmasters removed the action to the

United States District Court for the Southern District of

California, alleging federal jurisdiction pursuant to 28

U.S.C. §§ 1381, 13832(a) and 1441.

Respondents brought a motion for summary judgment.

This motion was granted by the District Court on January

14, 1985.

Petitioner filed a timely appeal to the Ninth Circuit

Court of Appeals. On June 15, 1987, the Ninth Circuit

Court of Appeals issued an order affirming the District

Court’s order. The petition for rehearing was timely

sought and subsequently denied on July 21, 1987.

On October 2, 1987, Justice O’Connor ordered that the

time for filing the petition for a writ of certiorari be

extended through November 18, 1987. The jurisdiction of

this Court to review the judgment of the Ninth Circuit is

sought pursuant to 28 U.S.C. § 1254(1). The Petition was

timely filed.

On December 4, 1987, permission was granted by this

Court to respondents that the Briefs in Opposition to the

Petition may be filed on or before January 22, 1988.

STATUTE AND REGULATIONS INVOLVED

The Federal Employees Health Benefits Act of 1959, 5

U.S.C. $§ 8901-8913. Pertinent sections of FEHBA are re-

printed in petitioner’s Appendix at D-1 through D-56.

Title 5 C.F.R. Part 890. These regulations, in pertinent

part, are reprinted in Appendix “D”, attached hereto.

STATEMENT OF THE CASE

Prudential hereby adopts and incorporates by refer-

ence as though set forth in full herein the Statement of

the Case in the Opinion below by the United States Court

of Appeals for the Ninth Circuit, 819 F.2d 921 (9th Cir.

1987) (Appendix “B’’). Further, Prudential hereby

adopts and incorporates by reference as though set forth

in full the Statement of the Case set forth in the Brief in

Opposition, and appendices thereto, filed in this matter by

respondent Postmasters.

REASONS TO DENY THE PETITION

SUMMARY OF ARGUMENT

Petitioner seeks to take an unusual set of facts, and

insert a unique reading of a state law into federal con-

tracts affecting federal employees. Moreover, this result

is sought in a procedural context that renders this Court’s

opinion strictly advisory.

Petitioner wishes to use the California state law cove-

nant of good faith and fair dealing to regulate the rela-

tionship between OPM and Postmasters, and to alter the

federal contracts between all the parties here. This Peti-

tion does not meet the standards of this Court for the

granting of a Petition for Writ of Certiorari.

First, based on express statutory and regulatory provi-

sions, legislative history, and relevant case law, the deci-

sion below by the Ninth Circuit is correctly decided.

Second, there is no bona fide conflict among the Courts of

Appeals for the Circuits. The only Court of Appeals case

cited by petitioner as “in conflict” is not apposite, and is

not in conflict. Third, petitioner has adopted a highly

strained and incorrect view of California state law. Even

if California state law were applied, petitioner could not

prevail.

Although petitioner attempts to garb himself under the

broad theoretical cloak of “preemption,” in fact, his main

argument is very limited and almost outlandish. Peti-

tioner proposes that under the facts of this case, Califor-

nia state law be inserted into the relationship between

OPM, a federal agency, and Postmasters, a federal con-

tractor, to contradict rights expressly given by federal

statute to Postmasters. (Petition, p. 14 n.13). This type of

intrusion by state law into the federal province was

expressly prohibited by Congress with the passage of

FEHBA.

A recent California Court of Appeal case has recog-

nized these dangers and has held that FEHBA preempts

all California state law claims for relief. Hartenstine v.

Superior Court, 196 Cal. App. 3d 206 (1987).

Finally, no effective appeal was taken from a decision

below and the action sought from this Court is only an

advisory opinion.

5 “

Il.

THE NINTH CIRCUIT CORRECTLY DECIDED

THAT CALIFORNIA INSURANCE LAW IS PRE-

EMPTED BY FEDERAL LAW AND THEREFORE

CANNOT APPLY.

Petitioner presents to this Court the proposition that a

federal employee Health Benefits Plan created by federal

statute for federal employees and paid for in major part

by the federal treasury should be subject to overriding

state regulation.

Express congressional intent and an obvious federal

interest in uniformity of benefits and procedures out-

weigh the interests of individual states which seek to

impose differing standards on these federal employee

Health Benefits Plans.

A. Under Applicable Preemption Doctrine, State In-

surer Torts Would Defeat the Full Purpose and

Objective of Congress.

State tort actions are expressly preempted by FEHBA.

Congressional intent to preempt state law is apparent

from 5 U.S.C. § 8902(m) (1), which provides:

The provisions of any contract under this chapter

which relate to the nature or extent of coverage or

benefits (including payments with respect to benefits)

shall supersede and preempt any state or local law, or

any regulation issued thereunder, which relates to

health insurance or plans to the extent that such law

or regulation is inconsistent with such contractual

provisions. (Emphasis added.)

The Ninth Cireuit correctly relied upon this clear lan-

guage in its decision below that California state laws

Pe eee

purporting to add additional procedures and remedies are

preempted.’

The Ninth Circuit also cited a portion of the legislative

history to support its conclusion. Indeed, a more detailed

view of the legislative history of § 8902(m) (1) establishes

firmly that Congress intended to supersede the applica-

tion of all state claims-processing laws.

Alan Campbell, Chairman of the Civil Service Commis-

sion, then responsible for oversight of federal Health

Benefits Plans, proposed and urged the passage of

§ 8902(m)(1). A letter from Mr. Campbell to Senator

Abraham A. Ribicoff, Chairman of the Committee on

Governmental Affairs articulated the problem of inconsis-

tency within the fifty states in regard to FEHBA:

In terms of contracting with the carrier, it was

reaching a point where unless we were to negotiate

contracts that included all the requirements of the

various State laws and applied them nationwide, we

'This Court, and other courts, have recognized that parallel pre-

emption provisions under similar federal statutes have conclusive

preemptive effect. An example is Metropolitan Life Ins. Co. v. Mc-

Sheen, 577 F. Supp. 165 (N.D. Cal. 1983) which held that federal law

will be used to interpret the terms of a group life insurance policy

offered as a fringe benefit to federal employees pursuant to the

Federal Employees Group Life Insurance Act, 5 U.S.C. § 8701 et seq.

See also, e.g., Servicemens Group Life Insurance Act, 38 U.S.C. § 765

et seq., given preemptive effect in Ridgway v. Ridgway, 454 U.S. 46,

102 S.Ct. 49, 75 L.Ed.2d 39 (1981); Federal Employee’s Group Life

Ins. Act, 5 U.S.C. § 8709, given preemptive effect in Metropolitan Life

Ins. Co. v. Curtis, No. CV-83-167 MML (C.D. Cal. 1983) (reprinted in

Appendix “E”, attached hereto). Accord Atlas Pallet, Inc. v. Gal-

lagher, 725 F.2d 131, 135 (1st Cir. 1984) (federal law governs

policies issued pursuant to National Flood Insurance Program);

Suydam v. United States, 404 F.2d 1329, 1331 (D.C. Cir. 1968)

(federal law governs policies issued by National Service Life Insur-

ance, 38 U.S.C. § 801 et seq.

would continue to place our carriers in a position

where they would not be in compliance with some

State law. In addition, many of the State laws were

in conflict with each other.

S. Rep. No. 95-908, 95th Cong., 2d Sess. (“S. Rep. No. 95-

903”) reprinted in 1978 U.S. Code Cong. & Ad. News

1413, 1419.

As FEHBA moved through the passage process, addi-

tional legislative history set out a broad interpretation of

the preemption provision in Section 8902(m) (1). Senate

Report No. 95-903 concludes that only state laws dealing

with technical matters such as “the payment of premium

taxes and requirements for statutory reserves” are to

survive the effects of Section 8902(m)(1). (S. Rep. 95-

903, reprinted in 1978 U.S. Code Cong. & Ad. News 1413,

1415.)” Petitioner’s state law causes of action relating to

claims administration do not fall within this category.

A fair reading of the entire legislative history indicates

that Congress and the Civil Service Commission (prede-

cessor to OPM) were extremely concerned about displac-

ing all state regulation of federal employee Health

Benefits Plans. Congress intended that federal employee

Health Benefits Plans have national uniformity of bene-

fits and procedures.”

*The parallel House Report containing FEHBA legislative history,

H. R. Rep. No. 282, 95th Cong., Ist. Sess. 5 (May 10, 1977) also

makes clear that the only state regulations to be permitted were taxes

and technical rules such as those involving maintenance of reserves.

The content of plan coverage and matters “relating to health bene-

fits” were expressly preempted.

3 See, e.g., Testimony of Thomas Tinsley, Dir., Bureau of Retire-

ment, Insurance, and Occupational Health, U.S. Civil Service Com-

mission before Senate Subcommittee on Civil Service and General

Services (September 14, 1977), (Commission needed preemption in

areas “where...our administrative practices are in conflict with

B. State Claims Processing Torts Directly Conflict

With Federal Contractual, Statutory and Regula-

tory Remedies. -

Preemption is further indicated by the broad language

of § 8902(m) (1) stating that any state law “which relates

to health insurance or plans,” 29 U.S.C. § 8902(m) (1),

will be superceded and preempted. This same wording in

§ 514 of the Employee Retirement Income Security Act

(“ERISA”), 29 U.S.C. §1144 was construed by this

Court in Shaw v. Delta Airlines, 463 U.S. 85, 103 S.Ct.

2890, 77 L.Ed.2d 490 (1983):*

A law “relates to” an employee benfit plan, in the

normal sense of the phrase, if it has a connection

with or reference to such a plan.

463 U.S. at 96-97, 103.S.Ct. at 2900, 77 L.Ed.2d at 501.

Petitioner argues that FEHBA does not preempt state

tort causes of action relating to the handling or process-

ing of claims because they do not directly appear to

contradict federal law.’ (Petition, p. 21 n.17.) This same

State laws’) p. 3; (“...in terms of administrative matters ... State

laws would not be controlling in these areas.) p. 6; (preemption

“would preserve the principle of uniformity of benefits and adminis-

tration for enrollees in each FEHB Plan.”) p. 5. (Emphasis added).

*Accord Massachusetts Mut. LiféIns. Co. v. Russell, 473 U.S. 134, 105

S.Ct. 3085, 87 L.Ed.2d 96 (1985) rev’g on other grounds, 722 F.2d 482

(9th Cir. 1983) (see fn.4), and Pilot Life v. Dedeauz, US.

—__—.,, 107 S.. Ct. 1549, 95 L.Ed.2d 39 (1987).

Petitioner's argument that § 8902(m) (1) “does not conflict” with

the state tort actions misses another obvious point. Petitioner's

argument avoids any conflict simply by having state law interpret the

underlying contraet — the state tort would not conflict with the

contract because state law would interpret the contract.

This cireular argument cannot stand. The issue is which law

provides the contract interpretation. Congress has made clear that

only federal law will provide the necessary national uniformity.

iti sane

point was rejected by this Court in Allis-Chalmers Corp. v.

Ineck, 471 U.S. 202, 105 S.Ct. 1904, 85 L.Ed.2d 206

(1985) and by the California Court of Appeal in Harten-

stine v. Superior Court, 196 Cal. App. 3d, 206, 217 (1987).°

In Lueck, a union-represented employee sought to bring

state insurer tort actions against the insurance company

engaged by his employer to provide disability insurance

under a private employee benefits plan. The question

arose whether § 301 of the Labor Management Relations

Act of 1947, 29 U.S.C. § 185(a), preempted state tort law.

This Court found preemption, rejecting an argument iden-

tical to the one raised by petitioner here.

In Lweck, the plaintiff asserted that state tort claims

were “independent” of any contract claim, for example,

the state tort of “unreasonably delaying payment”. This

Court said:

[I]t is a question of federal contract interpretation

whether there was an obligation under this labor

contract to provide payments in a timely manner,

and, if so, whether [the employer’s] conduct

breached that implied contract provision.

471 U.S. at 215, 105 S.Ct. at 1913, 85 L.Ed.2d at 218.’

*Accord Delancy v. Nat. Post Office Mail Handlers, No 84-0495

(M.D. Pa. June 25, 1985), reprinted in Appendix “F,” attached

hereto.

'This Court continued in Lueck:

The duties imposed and rights established through the state tort

thus derive fom the rights and obligations established by the

contract. ... That being so, this tort claim is firmly rooted in the

expectations of the parties that must be evaiuated by federal

contract law. * * *

Because the right asserted not only derives from the contract,

but is defined by the contractual obligation of good faith, any

The identical reasoning has been adopted by the Cali-

fornia Court of Appeal in a dispute concerning a FEHBA

Health Benefits Plan. In Hartenstine, supra at 218, the

California Court of Appeal, citing favorably and quoting

the Ninth Cireuit’s opinion below, held:

“Tort claims arising out of the manner in which a

benefit claim is handled are not separable from the

terms of the contract.”

Id. (quoting Hayes v. Prudential, 819 F.2d 921, 936 (9th

Cir. 1987)).

Petitioner’s further argumen? that there is no federal

comprehensive civil enforcement mechanism under

FEHBA (Petition, p. 27) is ineorrect. FEHBA, and

regulations issued pursuant to it, have a complete claims

review procedure, 5 C.F.R. § 890.105, a hearing proce-

dure, 5 C.F.R. § 890.106, and bases for legal causes of

action against a carrier or OPM, 5 C.F.R. § 890.107. In

addition, OPM has the authority to prescribe minimum

standards of conduct and to withdraw approval from

plans. 5 U.S.C. § 8902(e). Approval may be withdrawn

from plans which unreasonably fail to pay claims. 5

C.F.R. § 890.205. All of these statutes and regulations are

incorporated into the contract negotiated between OPM

and Postmasters (‘‘Contract’’); state laws which set forth

additional remedies are therefore in conflict with the

attempt to assess liability here {under a tort theory] inevitably

will involve contract interpretation.

*** These quéStions of contract interpretation, therefore, un-

derlie any finding of tort liability, regardless of the fact that the

state court may choose to define the tort as “independent” of any

contract question. Congress has mandated that federal law

govern the meaning given contract terms. Since the state tort

purports to give life to these terms in a different environment, it

is preempted.

471 U.S. at 218-19, 105 S.Ct. at 1914-15, 85 L.Ed.2d at 219-20.

Contract and the incorporated statutes and regulations

and are preempted.

Congress did not create a “claims processing tort” in

this statutory and regulatory scheme. A state-created

claims processing tort plainly conflicts with the fact that

Congress did not create a claims processing tort under

FEHBA. Congress created the remedies it thought fit and

any additional remedies must therefore conflict with that

decision.

The presence of this civil enforcement system in

FEHBA provides the same reliable indicia of congres-

sional intent as this Court found in ERISA. Pilot Life v.

Dedeauz, supra. In FEHBA, not only did Congress ex-

pressly preempt state laws, it also created the sole reme-

dial scheme. As in ERISA, this combination of actions

unmistakably demonstrates congressional intent.®

C. FEHBA Plans Are Federal Procurement Contracts,

Not Insurance.

FEHBA is a program heavily subsidized by the govern-

ment for federal employees. The federal government, and

hence the taxpayers, provides more than 60% of the

necessary funding for the program.’ There is a strong

*Petitioner’s argument that a “comprehensive civil enforcement

scheme”, as found in Pilot Life v. Dedeauz, if a, os |

Ct. 1549, 95 L.Ed.2d 39 (1987), is a sine qua non for preemption is

incorrect. (Petition, pp. 21-27). This Court’s discussion on that point

in Pilot Life was occasioned by the “savings clause” contained in

ERISA, 29 U.S.C. § 1144(c), and came only after there had been a

finding of preemption even without such a “comprehensive civil

enforcement scheme.” The absence of such a “scheme” does not

defeat preemption, and its presence, as in FEHBA, strongly rein-

forces preemption.

*For example, in 1976 the federal government paid $1.4 billion of

the total program cost of $2.2 billion. S. Rep. No. 95-903, reprinted in

1978 U.S. Code Cong. & Ad. News 1413, 1414.

federal interest, therefore, to assure that federal law

control the administration of the program so the govern-

ment may control the scope and costs of the program

necessary to maintain its existence.’° Imposition of liabil-

ity for bad faith and punitive damages will severely

restrict the federal purposes underlying the act.

The court in Delancy v. Nat. Post Office Mail Handlers,

No. 84-0695 (M.D. Pa. 1985) (Appendix “F”’) specifically

found that FEHBA Health Benefits Plans are not insur-

ance, and are a “government procurement contract.”

D. Petitioner's Remaining Arguments Regarding Pre-

emption Are Inapposite or Unpersuasive.

Petitioner’s argument concerning the case of Fields v.

Blue Shield of California, 163 Cal. App. 3d 570 (1985),

must be viewed in light of the very recent Hartenstine

case, supra.

In Hartenstine, the child of a federal employee, a

FEHBA Health Benefits Plan enrollee, was admitted to a

hospital for psychiatric treatment. The carrier in that

‘This impact on the federal treasury alone should result in a very

strong federal interest. See, e.g., Clearfield Trust Co. v. United States,

318 U.S. 363, 367, 65 S.Ct. 573, 87 L.Ed. 838 (1941).

Moreover, it is a commonplace that only federal law will control

contract interpretation of federal procurement contracts. United

States v. Allegheny County, 322 U.S. 174, 183, 64 S. Ct. 908, 88 L.Ed.

209 (1944).

"While technically not insurance, FEHBA does “relate to the

business of insurance” as that phrase is used in the MeCarran-

Ferguson Act, 15 U.S.C. §$§ 1011-15, and is therefore not in conflict

with that Act. 15 U.S.C. § 1012(b). Moreover, the FEHBA legislative

history specifically states that MeCarran-Ferguson would not affect

FEHBA’s goal of federal preemption. (See S. Rep. No. 95-903 at 8

(1978), Statement of Alan Campbell, Chairman of the Civil Service

Commission).

se he I Deal each bee

ease declined to pay for certain hospital days because the

days had not been “medically necessary” as that term was

defined under the Plan. The federal employee brought

suit alleging state law-based causes of action, including

breach of contract and breach of a covenant of good faith

and fair dealing.

The California Court of Appeal held that all state law

causes of action were preempted by FEHBA. The Court

of Appeal, citing federal law,’* held that state claims

processing torts invariably conflict with federal obliga-

tions and are therefore preempted. Hartenstine, supra at

221.

Il.

PETITIONER COMES BEFORE THIS COURT RE-

QUESTING AN ADVISORY OPINION.

No effective Notice of Appeal was in fact filed from the

district court’s binding decision below. The district court

issued two summary judgment orders in two related, but

not consolidated, matters before it. An effective Notice of

Appeal was taken only from one of those two orders.

Nobel Hayes, a federal enrollee in the Postmasters’

Pian and the father of Kip Hayes, petitioner here, was a

defendant in the declaratory judgment action, Civil Ac-

tion No. 84-0341(M). In the declaratory judgment action,

the district court ruled that benefits were properly re-

duced to $10,000 per year. Nobel Hayes did not file a

Notice of Appeal from this Order against him. The son, as

a dependent beneficiary, cannot have greater rights than

those of his father —the district court’s order is as

"Pilot Life v. Dedeaux, supra; Allis-Chalmers v. Lueck, supra; Blue

Cross & Blue Shield v. Dept. of Banking, 791 F.2d 1501 (11th Cir.

1986); Hayes v. Prudential Ins. Co., supra.

binding on the son, as it is on the father. At the same

time, however, Kip Hayes could not take an appeal from

the declaratory relief action to which he was not a party.

The declaratory relief action order conclusively showed

that no contract right was breached by respondents, and

that state law causes of action were preempted. These

conclusions are binding on Kip Hayes through the unap-

pealed order binding on his father. Kip Hayes cannot now

collaterally challenge these conclusions. Therefore, the

instant Petition must be viewed as an advisory opinion.

This is, of course, not an appropriate basis upon which to

grant a petition for writ of certiorari.

Petitioner compounds this problem by not challenging

in his Petition that portion of the opinion of the Ninth

Cireuit below holding that there has been no contract

breach. Petitioner does not challenge in this Petition that

the benefit level was properly reduced under applicable

contract language and federal law.

This failure to appeal to the Ninth Cireuit and failure

to challenge herein the declaratory relief action order

renders this Petition strictly advisory.

IV.

PRUDENTIAL AS AN “UNDERWRITER” AND

AGENT IS NOT A PROPER PARTY AMENABLE TO

SUIT UNDER FEDERAL OR STATE LAW.

Section 890.107 of the Code of Federal Regulations

provides in pertinent part:

An action to recover on a claim for health benefits

should be brought against the carrier of the health

benefits plan. An action to review the legality of

OPM’s regulation or a decision made by OPM should

ieee ail oe a

+ CS Ma. nate eels LI RA ke LF wl

be brought against the Office of Personnel Manage-

ment, Washington, D.C., 20415.

(Emphasis supplied.)

Article 2, Section 2.1 of the Contract between OPM and

Postmasters establishes that Postmasters is the “carrier”

and Prudential is the “underwriter.” Since the regulation

allows suits for benefits only against the “carrier” of the

plan, Prudential, as the “underwriter,” is not amenable to

suit.

Moreover, even if state law were to apply, petitioner

may not maintain any claim for relief against Prudential.

The Contract between OPM and Postmasters is the

source of Petitioner’s claims for health benefits. Pruden-

tial, however, is not a party to that Contract: Prudential is

an agent. As an agent, and not a party to the underlying

contract, Prudential cannot be liable under California

state law for a breach of a state law covenant of good faith

and fair dealing in a contract it does not sign. Egan v.

Mutual of Omaha Ins. Co., 24 Cal.3d 809, 824 (1979), cert.

denied and appeal dismissed, 455 U.S. 912 (1980);

Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973);

Austero v. Nat. Cas. Co., 62 Cal. App. 3d 511, 515 (1976);

In Director, Edward Meyer Hospital v. Stetz, 433 F. Supp. 323

(W.D.N.Y. 1977), a claim for hospital services filed by Stetz, a

federal employee, had been denied. Stetz brought an action against

the carrier, the United States Civil Service Commission (““Commis-

sion”) (now OPM) and the United States to obtain reimbursement

for the cost of Stetz’ hospitalization. The court dismissed claims

against the Commission and the United States, holding:

Under the regulations promulgated by the Commission [now

OPM], actions such as this suit are specifically authorized only

against the carrier.

Id. at 325.

Iverson v. Superior Court, 57 Cal. App. 3d 168, 171

(1976)."*

In addition, petitioner’s suggested use of a state law

covenant of good faith and fair dealing to regulate the

relationship between OPM and Postmasters is almost

surrealistic. (Petition, p. 14 n.13) Under FEHBA, OPM

and Postmasters negotiate on an annual basis the terms

of the following year’s Plan. The statute is clear that the

independent concurrence of both parties is necessary to

reach agreement or amend a contract. OPM has no au-

thority unilaterally to direct that Postmasters agree to

any particular benefit. 5 U.S.C. § 8902.

Petitioner’s argument that a state law can override this

express federal statute between a federal agency and

federal contractor has no support in case law or logic. In

effect, petitioner argues that state law should preeempt

federal law.

Moreover, even if viewed strictly as a matter of state

law, petitioner’s argument is meaningless because a fed-

eral employee Health Benefits Plan is not insurance;

hence, California doctrines concerning insurance policies

In Austero, the California Court of Appeal held that the duty of

good faith and fair dealing “derives from and exists solely because

of’ the contractual relationship between the parties, and that one who

is not a “party to the underlying contract” may not be held liable for

breach of an implied covenant, because “as to him no such econvenant

exists.” Id. at 515. Iverson also holds that one who is not party to the

insurance contract “is not bound by the implied covenant [of good

faith and fair dealing] and owes no duty to the insured not to breach

it.” Id. at 171. In Gruenberg, the California Supreme Court ruled that

agents and employees are “not parties to the agreements for insur-

ance,” and therefore “are not subject to an implied duty of good faith

and fair dealing.” It held that an action may not lie against an agent

for breach of armimplied covenant of good faith and fair dealing. Jd.

at 576. Egan expressly reaffirms Gruenberg, holding that agents are

“not subject to the implied covenant.” Jd. at 824.

“os,

7 —

Sibi

are inapplicable. Second, in any event, no California case

has ever suggested that a good faith covenant requires a

contract between an insurance company and a third party

must be amended to provide an extension of non-vested

coverage to an insured.

Finally, among other problems, there can be no breach

of a covenant of good faith and fair dealing without a

breach of the underlying contract. Petitioner acknowl-

edges that there has been no breach of contract by his

failure to challenge that portion of the Ninth Circuit’s

opinion below.

In summary, even if state law were to apply, petitioner

could not prevail on any state-law based claim for relief.

¥.

THE DECISION IN HOWARD V. GROUP HOSPITAL

SERVICE IS NOT IN CONFLICT AND IS

INAPPOSITE.

The California Court of Appeal in Hartenstine, supra,

accurately analyzed Howard v. Group Hospital Service,

739 F.2d 1508 (10th Cir. 1984), when it stated:

es [In Howard,] the Court held that a suit in an

Oklahoma state court for damages in contract and

tort resulting from Blue Cross’ failure to pay claims

under an FEHBA plan should not have been re-

moved to the United States District Court on the

basis of federal question jurisdiction (28 U.S.C.

§ 1441(b)). However, the analysis in Howard was

limited to the contract claim; there was no reference

to preemption in the majority opinion, and, as the

concurring opinion stated, the existence of a federal

preemption defense would be insufficient to invoke

the exercise of removal jurisdiction. Accordingly, the

holding on Howard is irrelevant to the preemption

issue in the case here.

Further, if we were to apply the reasoning in

Howard on the jurisdiction issue to Hartenstine’s

tort claims in the case here, the result would be

contrary to section 8902(m)(1)’s purpose, supra, of

promoting uniformity in the administration of

FEHBA’s benefits.

Hartenstine, supra at 218-19.

The Tenth Circuit in Howard did not need to reach the

issues upon which the Petition in this case relies. The

discussion in Howard cited by petitioner is strictly dic-

tum. Purported conflict with dictum in another Court of

Appeals decision is not a sufficient ground upon which to

grant a Petition for Writ of Certiorari.’”

CONCLUSION

For the reasons set forth above, the Petition for Writ of

Certiorari shceuld be denied.

January 22, 1988.

Respectfully submitted,

JAMES S. CLINE

ANGEL GOMEZ, III

ADAMS, DUQUE & HAZELTINE

Tn any event, this Court’s analysis in Massachusetts Mutual Life

Ins. Co. v. Russell, supra, Allis-Chalmers v. Lueck, supra, and Pilot

Life v. Dedeauz, supra, discussed in Section II, supra, leaves the

reasoning in Howard in serious question.

APPENDIX A

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

Kip HAYES,

Plaintiff,

Vv.

PRUDENTIAL INSURANCE COMPANY,

NATIONAL LEAGUE OF POSTMASTERS

OF THE UNITED STATES,

and NOBEL A. HAYES,

Defendants.

Civil No. 84-1245-N (M)

ORDER GRANTING DEFENDANT’S MOTION FOR

SUMMARY JUDGMENT

FILED, JAN. 22, 1985

ENTERED, JAN. 23, 1985

Clerk, U.S. District Court Southern District of

California

By S. Miller, Deputy

This matter came before this Court on January 14,

1985, for hearing on the motion for summary judgment of

defendants Prudential Insurance Company and National

League of Postmasters. Plaintiff Kip Hayes appeared by

Harvey R. Levine of Shernoff & Levine. Defendant Pru-

dential Insurance Company appeared by James S. Cline

of Adams, Duque & Hazeltine, and defendant National

League of Postmasters appeared by John T. Kotelly of

Dickstein, Shapiro & Morin. Upon consideration of the

arguments of counsel and the moving and opposing

papers:

IT IS HEREBY ORDERED that defendants’ motion

for summary judgment is granted as to all counts of the

plaintiff's complaint. This Court concludes as to counts

one and two of the complaint that benefits for private

duty nursing care have been lawfully reduced to $10,000

per person per year in the 1984 Postmasters Benefit Plan

and that defendants are not obligated to pay claims for

private duty nursing benefits in excess of this amount

during 1984 nor during any year thereafter so long as the

limitation remains. As to the remaining counts in plain-

tiffs complaint, this Court concludes that these claims

under California state laws are preempted under Title V,

United States Code section 8902(m) (1).

IT IS SO ORDERED.

Dated: January 22, 1985.

LELAND C. NIELSEN,

United States District Judge

Copies to:

John T. Kotelly

DICKSTEIN, SHAPIRO & MORIN

2101 L Street, N.W.

Washington, D.C. 20037

Marcia Hughes

CASEY, GERRY, CASEY,

WESTBROOK, REED & HUGHES

110 Laurel Street

San Diego, CA 92101

Harvey R. Levine

Rick L. Bove.

SHERNOFF & LEVINE

1200 Third Avenue, Ste. 1400

San Diego, CA 92101-4157

John J. Robinson,

Assistant U. S. Attorney

Raymond J. Coughlan, Jr.

LILLICK, MCHOsE & CHARLES

110 West A St., Ste. 1260

San Diego, CA 92101

James S. Cline

ADAMS, DUQUE & HAZELTINE

523 W. Sixth Street

Los Angeles, CA 90014

APPENDIX B

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Kip Hayes,

Plaintiff-Appellant, Nos. 85-5527;

y. 85-5528

PRUDENTIAL INSURANCE COMPANY q D.C. Nos.

OF AMERICA, NATIONAL LEAGUE OF CV-84-1245-LCN

POSTMASTERS OF THE UNITED CV-84-0341-LCN

STATES, et al., OPINION

Defendants-Appellees.

Argued and Submitted

November 4, 1985—San Diego, California

Filed June 15, i987

Before: James R. Browning, Charles Wiggins and

Melvin Brunetti, Circuit Judges.

Opinion by Judge Brunetti

Appeal from the United States District Court

for the Southern District of California

Leland C. Nielsen, District Judge, Presiding

SUMMARY

a Public Employees

Appeal from two summary judgments. Affirmed.

Appellant Kip Hayes (Kip) is the son of Nobel Hayes

(Hayes). a retired federal emplovee. Kip was injured in a high

2 HAYES v. PRUDENTIAL INSURANCE COMPANY

school football game and became a respirator-dependent

quadriplegic requiring 24-hour private duty nursing care. At

the time of the injury Kip was covered as a family member on

his father’s plan issued under the FEHBA. The plan, adminis-

tered by Aetna Life Insurance Company, placed no monetary

limit on the benefits for private duty nursing care. When the

Aetna plan was modified to eliminate such benefits, Hayes

enrolled in another FEHBA plan during an open season

enrollment period during which changes were permitted. In

1982 Hayes switched to a plan offered by the National League

of Postmasters (NLP). In 1983 the NLP was formulated to

place a $10,000 limit on benefits for private duty nursing

care. The limit was lifted for 1983, but instituted for 1984 and

future years.

In February 1984, NLP filed a declaratory relief action in

district court naming the Office of Personnel Management

(OPM) [which negotiated with NLP regarding the scope of

coverage of the plan] and Hayes as defendants. The district

court granted summary judgment in favor of NLP on the

ground that benefits for private duty nursing care lawfully

had been reduced to $10,000 in the 1984 plan. In April 1984

Kip brought an action against NLP in state court arguing that

his enrollment in the 1982 plan gave him a vested contractual

right to receive, indefinitely, unlimited private duty nursing

care benefits. The action was removed to federal district court

where the court granted summary judgment in favor of the

defendants on the grounds that the benefits lawfully had been

reduced, and that the state law claims were preempted under

FEHBA.

{1] Although neither Hayes or the OPM appealed the

declaratory judgment action in favor of NLP, Kip requested

that he be joined as a defendant in that action and the court

consolidated the two cases. Kip therefore effectively appealed

from the summary judgment in the declaratory relief suit.

{2] An FEHBA provision requiring that a carrier agree to

pay in an individual case if OPM finds the family member is

HAYES v. PRUDENTIAL INSURANCE COMPANY 3

entitled to payment under the terms of the contract does not

grant OPM authority unilaterally to alter the terms of the

plan, but only requires that the carrier comply with the

OPM’s interpretation of the plan. OPM’s consistently held

view is that appellant is not entitled to unlimited benefits

under the plan. [3] Appellant also urges that an FEHBA provi-

sion providing for a contingency reserve grants OPM author-

ity to compel a carrier to provide benefits beyond those in the

negotiated plan. But the OPM’s interpretation of the provi-

sion as requiring the carrier’s concurrence before contingency

reserve funds may be used is entitled to substantial deference.

[4] Consistent with this view the OPM never invoked author-

ity to direct payment of the additional benefits, and appellant

has not challenged OPM’s interpretation of its authority. [5}

Appellant also contends that the Catastrophic Protection pro-

vision of the plan allows the benefits, [6] but this provision

only requires payment of 100% of eligible expenses (as

opposed to 80%) in some circumstances and does not operate

independent of the $10,000 limitation on private nursing

care. [7] The limitation on private duty nursing care restricts

the eligible expenses subject to the Catastrophic Protection

provision.

[8] Appellant’s contention that his state law tort and con-

tract claims are not preempted by FEHBA because the claims

relate to the manner in which the claim was processed, not to

the nature or extent of coverage or benefits, draws a distinc-

tion that cannot be made. Tort claims arising out of the man-

ner in which a benefit claim is handled are not separable from

the terms of the contract. [9] Because the state law claims

invariably expand obligations under the terms of the plan, the

claims are inconsistent with the plan and preempted by

FEHBA. This holding is supported by the Supreme Court’s

decision that the Employee Retirement Income Security Act

preempts state common law tort and contract claims for ben-

efits. To the extent the state law claims are predicated on an

alleged obligation to provide benefits in excess of the $10,000

limit the claims are moot.

4 HAYES v. PRUDENTIAL INSURANCE COMPANY

COUNSEL

Harvey R. Levine, Rick L. Bove, and Janet Lewis, San Diego,

California, for the plaintiff-appellant.

Edward R. Cohen, John T. Kotelly, Ira Mitzner and Elaine

Metlin, Washington, D.C.; James S. Cline, Los Angeles, Cali-

fornia; R. J. Coughlin, Jr., San Diego, California, for the

defendants-appellees.

Phillip S. Neal, Washington, D.C.; James R. Barnett, Wash-

ington, D.C., for the amicus curiae.

OPINION

BRUNETTI, Circuit Judge:

This is an appeal from summary judgments granted in two

consolidated cases, Kip Hayes v. Prudential Insurance Co.,

No. 85-5527 (D.C. No. 84-1245), and National League of

Postmasters of the United States v. United States Office of Per-

sonnel Management and Nobel Haves, No. 85-5528 (D.C. No.

84-0341). We are asked to review the district court’s rulings

that federal employee health benefits lawfully may be reduced

from year to year, and that the Federal Employee Health Ben-

efits Act preempts state law tort and contract actions.

Though we are moved by the compelling circumstances

surrounding Kip Hayes and his family, we find that the stat-

ute and health benefits plan we are called upon to construe

require an unmistakable-result. Until Congress acts to ensure

continued coverage for federal enrollees who require long-

term care, this court will be powerless to provide appellant

with the remedy he seeks.

We affirm the district court.

————

HAYES v. PRUDENTIAL INSURANCE COMPANY 5

I. THE FEDERAL EMPLOYEE HEALTH BENEFITS

ACT

The Federal Employee Health Benefits Act (FEHBA) estab-

lished a comprehensive program to provide federal employ-

ees and retirees with subsidized health care benefits. 5 U.S.C.

§§ 8901-8913 (1982 & Supp. 1987). Under the Act, the

United States does not act as an insurer, but, through the

Office of Personnel Management (OPM), contracts with vari-

ous private carriers to develop health care plans with varying

coverages and costs. The plans are for a term of one year, and

are renegotiated annually.

After OPM negotiates changes with the carriers all federal

enrollees are permitted to switch enrollment from one plan to

another, regardless of their state of health, during a period

called “open season.” Each enrollee thus may obtain the most

beneficial plan but is not guaranteed the same coverage in

future years that had been available the preceding year.

The National League of Postmasters (NLP or Postmasters)

is a nonprofit corporation and a carrier under FEHBA. Each

year, OPM and Postmasters negotiate a contract that deter-

mines the benefits Postmasters will provide that year to

enrollees in the Postmasters Health Benefits Plan (Plan). The

contract between OPM and Postmasters sets forth the precise

terms of coverage under the Plan. OPM then issues a Post-

masters Benefit Brochure (Brochure) which provides a com-

plete description of the benefits available to enrollees that

year.

For several years, Prudential Insurance Company of Amer-

ica (Prudential) has entered into agreements with Postmas-

ters whereby Prudential issues an annual policy to

Postmasters which incorporates the terms and conditions of

the Brochure as negotiated by Postmasters and OPM for the

vear. Pursuant to the policy. Prudential administers certain

claims presented to Postmasters for payment and. in effect.

6 HAYES v. PRUDENTIAL INSURANCE COMPANY

guarantees that Postmasters can pay the benefits due enroll-

ees under the Plan.

II. FACTS AND PROCEEDINGS

Appellant Kip Hayes is the son of Nobel Hayes, a retired

federal employee. Appellant was injured in a high school foot-

ball game in November 1976, and was rendered a respirator-

dependent quadriplegic requiring 24-hour private duty nurs-

ing care. At the time of his injury, appellant was covered as a

family member under a FEHBA plan in which his father was

enrolled. This plan, administered by Aetna Life Insurance

Company, placed no monetary limit on the benefits for pri-

vate duty nursing care. When the Aetna plan later was modi-

fied to eliminate private duty nursing care benefits, Nobel

Hayes enrolled during open season in another FEHBA plan

that did provide unlimited benefits for private duty nursing

care. By 1982, Nobel Hayes again had switched coverage, and

enrolled in the plan offered by Postmasters, which at the time

had no limits on benefits for private duty nursing care.

In October 1982, following negotiations between OPM and

Postmasters, the 1983 Postmasters Plan was formulated to

place a $10,000 limit on benefits for private duty nursing

care. By subsequent agreement between OPM and Postmas-

ters, the 1983 Plan was amended to remove the $10,000 limit.

The Postmasters Plans for 1984 and 1985 again contained

a $10,000 limit on benefits for private duty nursing care. The

1984 and 1985 Plans were not amended and, through the date

of the summary judgments in both cases, contained the

$10,000 limitation.

In February 1984, Postmasters filed in district court a

declaratory relief action naming OPM and Nobel Hayes as

defendants. NLP v. OPM, D.C. No. CV-84-0341-LCN. Post-

masters sought a declaration that private duty nursing care

benefits provided under its 1982 Plan could be reduced in

HAYES v. PRUDENTIAL INSURANCE COMPANY 7

subsequent policy contract years and that under its 1984 Plan

Postmasters was not obligated to provide Kip Hayes with pri-

vate nursing benefits in excess of $10,000.

In April 1984, appellant brought an action against Pruden-

tial and Postmasters in the Superior Court for the State of

California. The action was removed to federal district court.

Hayes v. Prudential, D.C. No. CV-84-1245-LCN. Appellant

alleged that his enrollment in the 1982 Plan gave him a vested

contractual right to receive, indefinitely, unlimited private

duty nursing care benefits, and that Postmasters and Pruden-

tial had breached the contract by refusing to provide unlim-

ited benefits in 1984. Based on this theory of his rights under

the Plan, appellant sought damages alleging various state law »

causes of action including breach of a duty of good faith and

fair dealing, and breach of Cal. Ins. Code § 790.03 (West

1982).

The district court granted summary judgment in favor of

Postmasters in NLP v. OPM on the ground that benefits for

private duty nursing care lawfully had been reduced ta

$10,000 in the 1984 Postmasters Plan and that Postmasters

accordingly was not required to pay claims in excess of that

amount.

In Haves v. Prudential, the court granted summary judg-

ment in favor of defendants on the grounds that the benefits

lawfully had been reduced, and that the state law claims were

preempted under FEHBA, 5 U.S.C. § 8902(m)(1).

III. DISCUSSION

1. Effective Appeal.

Postmasters and OPM contend that there has been no

effective appeal from VLP vy. OPM. The basis for this conten-

tion is that neither OPM nor Nobel Hayes. the named defen-

8 HAYES v. PRUDENTIAL INSURANCE COMPANY

dants, have appealed, and the appeal by Kip Hayes is not

effective because he was not a party to the action.

{1] A motions panel of this court, however, has determined

that Kip Hayes’ appeal in NLP v. OPM was effective. In his

Memorandum of Points and Authorities in Opposition to

Motion for Summary Judgment in the NLP v. OPM action,

appellant requested that the district court join him as a defen-

dant pursuant to Fed. R. Civ. P. 19. The district court treated

appellant’s request as a motion for consolidation with Hayes

v. Prudential, and consolidated the cases. Consolidation by

the district court led the motions panel to conclude that Kip

Hayes effectively appealed from the summary judgment in

NLP v. OPM.

2. Standard of Review.

We review de novo the district court’s decision regarding

the $10,000 limit on benefits and the preemption of state law

claims. See Darring v. Kincheloe, 783 F.2d 874, 876, (9th Cir.

1986) (grant of summary judgment is reviewed de novo).

Summary judgment is appropriate when there are no genuine

issues of material fact and the moving party is entitled to

judgment as a matter of law. Fed. R. Civ. P. 56(c).

3. $10,000 Limit on Nursing Care Benefits.

Appellant contends that the district court erred in granting

summary judgment for appellees because (1) Postmasters and

Prudential were required to comply with an OPM directive to

provide him unlimited private duty nursing care benefits, and

(2) the Plan’s Catastrophic Protection provision requires

Postmasters and Prudential to provide nursing care benefits

without regard to the $10,000 limitation stated elsewhere in

the policy.

a) OPM Directive.

Appellant cites two sections of FEHBA which he contends

grant OPM the authority to require Postmasters and Pruden-

tial to provide him with unlimited nursing care benefits.

HAYES v. PRUDENTIAL INSURANCE COMPANY 4

[2] 5 U.S.C. § 8902(j) provides that “[eJach contract under

this chapter shall require the carrier to agree to pay for or pro-

vide a health service . . . in an individual case if [OPM] finds

that the ... family member . .. is entitled thereto under the

terms of the contract.” This provision does not grant OPM

authority unilaterally to alter or amend the terms of the Plan;

it requires only that the carrier comply with OPM’s interpre-

tation of the Plan. OPM’s consistently held view is that,

under the Plan’s terms, appellant is not entitled to unlimited

benefits. As a result, Postmasters and Prudential were not

required, under section 8902(j), to provide appellant benefits

in excess of the $10,000 limit.

Appellant also cites as support 5 U.S.C. § 8909(b)(2). That

section states that OPM shall set aside not more than three

percent of the payments to each FEHBA plan as a contin-

gency reserve which may be used, among other purposes, to

increase the benefits in the plan from which the reserves are

derived. The contingency reserve is a resource OPM can use

in negotiations with a carrier to expand plan benefits. The

availability of such funds was central to the agreement

between OPM and Postmasters to remove the $10,000 limit

from the 1983 Plan.

{3] Appellant urges that section 8909(b)(2) grants OPM

authority to compel a carrier to provide benefits beyond those

in the negotiated plan. The provision apparently has not been

construed by the courts. OPM interprets the provision as

requiring the carrier’s concurrence before contingency

reserve funds may be used to extend benefits beyond those

within the express terms of the Plan. OPM’s interpretation of

the provision is entitled to substantial deference, and will be

upheld unless unreasonable. See Filiberti v. Merit Sys. Protec-

tion Bd., 804 F.2d 1504, 1508 (9th Cir. 1986)

[4] We do not decide the nature or extent of OPM’s author-

ity under section 8909(b)(2). Consistent with its view that the

carrier's concurrence was necessary, OPM never invoked

10 HAYES v. PRUDENTIAL INSURANCE COMPANY

authority under the section to direct Postmasters to provide

additional benefits. Appellant has not challenged OPM’s

interpretation of its authority under section 8909(b)(2), nor

has he alleged that OPM had a duty to ensure that contin-

gency reserve funds be used to provide him with increased

benefits. OPM, in fact, was never named as a defendant in

appellant’s suit to obtain nursing care benefits.

Contrary to appellant’s repeated assertions, the record

indicates only that OPM unsuccessfully sought Postmasters’

voluntary agreement to amend the 1984 contract. We find no

legal or factual bases for appellant’s claim that Postmasters or

Prudential violated a binding OPM directive.

b) Catastrophic Protection.

[5] Appellant next contends that the Catastrophic Protec-

tion provision of the Plan ensures him unlimited private duty

nursing care benefits. The provision, at page 20 of the Bro-

- chure, states:

CATASTROPHIC PROTECTION

Under the High Option, if, in a calendar year, the

out-of-pocket expenses for coinsured eligible

expenses exceed $1,000 for a person under Self Only

($2,000 per family under Self and Family) the Plan

will pay 100% of the eligible expenses during the

remainder of that calendar year.

Expenses incurred for the treatment of mental, psy-

choneurotic and personality disorders are not

included under the Catastrophic Protection Benefit.

{6] This provision requires Postmasters to pay 100% of eli-

gible expenses (when out-of-pocket expenses exceed a certain

amount) as opposed to 80% of such expenses it would pay in

other situations. The provision does not. however. operate

HAYES v. PRUDENTIAL INSURANCE COMPANY 11

independent of the $10,000 limitation on private nursing

care.

[7] The operative language here is the phrase “eligible

expenses.” The eligible expenses for nursing care are set out

immediately above the Catastrophic Protection provision:

PRIVATE DUTY NURSING CARE BENEFIT

Benefits for private duty nursing care by a profes-

sional registered nurse (R.N.), licensed practical

nurse (L.P.N.), or a licensed vocational nurse

(L.V.N.) are limited to a maximum of $10,000 per

person per calendar year.

Appellant’s contention that the Catastrophic Protection pro-

vision requires Postmasters to provide unlimited private

nursing care benefits renders meaningless the phrase “eligible

expenses” and ignores the $10,000 limitation stated plainly

on the same page of the Brochure and again on page 27. See

Garvey v. Prudential Ins. Co. of America, 596 F. Supp. 1119,

1126 (E.D. Pa. 1984) (Catastrophic Protection provision is

subject to the $10,000 limitation on benefits for private duty

nursing care). We find no merit in appellant’s alternative

argument that the Brochure language is ambiguous and

should be construed in his favor. See Id. at 1125-26.

4. State Law Claims.

The final issue before us concerns the extent to which

FEHBA preempts state law. The district court granted sum-

mary judgment for appellees in Hayes v. Prudential on this

issue on the ground that FEHBA’s section 8902(m)(1) pre-

empted appellant’s state law claims.

This section reads:

The provisions of any contract under this chapter

which relate to the nature or extent of coverage or

12 HAYES v. PRUDENTIAL INSURANCE COMPANY

benefits (including payments with respect to bene-

fits) shall supersede and p.eempt any State or local

law, or any regulation issued thereunder, which

relates to health insurance or plans to the extent that

such law or regulation is inconsistent with such con-

tractual provisions.

5 U.S.C. §8902(m)(1). The policy underlying section

8902(m)(1) is to ensure uniformity in the administration of

FEHBA benefits. See H.R. Rep. No. 282, 95th Cong.. Ist

Sess. 1, 4 (1977).

The parties advance differing views concerning the extent

of federal preemption under FEHBA. Appellees contend that

the preemption provision is extremely broad, while appellant

characterizes the provision as one of “limited preemption”

which precludes only those state claims that apply to the

“benefit structure” of the plan. The courts are not in agree-

ment on this question. Compare Blue Cross & Blue Shield of

Florida, Inc. v. Department of Banking and Fin., 791 F.2d

1501 (11th Cir. 1986)(Florida’s Unclaimed Property Act pre-

empted to the extent it conflicts with federal employee benefit

plan); Myers v. United States, 767 F.2d 1072, 1074 (4th Cir.

1985) (state law which purports to allow recovery of addi-

tional benefits not contemplated by a federal insurance con-

tract must be deemed inconsistent with and preempted by

FEHBA); and Tackitt v. Prudential Ins. Co., 758 F.2d 1572.

1575 (11th Cir. 1985)(“the interpretation of health insurance

contracts is controlled by federal, not state, law”) with How-

ard v. Group Hosp. Serv., 739 F.2d 1508, 1510-12 (10th Cir.

1984) (approving state law interpretation of FEHBA Plan

provisions).

[8] Appellant contends that his state law claims’ are not

‘Appellant alleged the following state law causes of action: (1) breach of

contract, (2) breach of the implied covenant of good faith and fair dealing.

(3) breach of duties under Cal. Ins. Code § 790.03 (West 1982). (4) civil

conspiracy to breach the implied covenant of good faith and fair dealing

and to violate Cal. Ins. Code § 790.03 (West 1982). (5) common law fraud.

and (6) breach of fiduciary duty.

HAYES v. PRUDENTIAL INSURANCE COMPANY 13

preempted under section 8902(m)(1), because the claims

relate to the manner in which Postmasters and Prudential

processed his benefits, and not to the “nature or extent of cov-

erage or benefits.” No such distinction can be made. Tort

claims arising out of the manner in which a benefit claim is

handled are not separable from the terms of the contract. Sve

Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 213-20 (1985)

(state tort claim stemming from manner in which a Labor

Management Relations Act insurance benefit claim was han-

died is not independent of insurance contract and therefore is

preempted by federal law). Moreover, the claims “relate to”

the plan under section 8902(m)1) as long as they have a con-

nection with or refer to the plan. Blue Cross, 791 F.2d at

1504. All appellants’ state law claims refer to the plan, and

therefore fall under the preemption clause.

[9] Because the state law claims invariably expand appel-

lees’ obligations under the terms of the Plan, the claims are

_ inconsistent with the Plan and, hence, preempted under

§ 8902(m)(1). Our holding is supported by the Supreme

Court’s recent decision that the Employee Retirement

Income Security Act (ERISA) preempts state common law

tort and contract claims for benefits under an ERISA-

regulated plan. Pilot Life Ins. Co. v. Dedeaux, 55 U.S.L.W.

4471 (U.S. Apr. 6, 1987)(/No. 85-1043). ERISA’s preemption

clause is similar to section 8902(m)(1) of the FEHBA.* And

the Court held that the state claims were preempted despite

a saving clause, 29 U.S.C. § 1144(b)(2)(A), which has no

counterpart in the FEHBA. Thus, we hold Hayes’ state law

claims are preempted by the FEHBA. We note that, to the

extent the state law claims are predicated on an alleged obli-

gation of appellees to provide benefits in excess of the

$10,000 limit stated in the Plan, the claims are moot in light

of our ruling that no such obligation existed.

2ERISA’s preemption clause states that “the provisions of this subchap-

ter ... shall supersede any and all state laws insofar as they may now or

hereafter relate to any employee benefit plan. . . .~ 29 U.S.C. § 1144(a).

A ET

a ae

ee —

14 HAYES Vv. PRUDENTIAL INSURANCE COMPANY

IV. CONCLUSION

Appellant has brought an effective appeal from the sum-

mary judgment in NLP v. OPM. Postmasters lawfully reduced

private duty nursing care benefits to $10,000 in the 1984 and

1985 Plans, and was not required by OPM or the Cata-

strophic Protection provision to provide appellant with bene-

fits in excess of that amount. Appellant's state law claims are

preempted under 5 U.S.C. § 8902(m)(!). The judgment of the

district court is AFFIRMED.

APPENDIX C

Wat Stee wie Beal pa te %

—

—————————

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Kip HayEs,

Plaintiff-Appellant,

Vs.

PRUDENTIAL INSURANCE COMPANY OF AMERICA,

NATIONAL LEAGUE OF POSTMASTERS

OF THE UNITED STATES, et al.,

Defendants-A ppellees.

CA Nos. 85-5527

85-5528

DC Nos. CV-84-1245-LCN

CV-84-0341-LCN

ORDER

FILED, JUL 21, 1987

Cathy A. Catterson, Clerk

U.S. Court of Appeals

Before: BROWNING, WIGGINS and BRUNETTI, Cir-

cuit Judges.

Appellant’s petition for rehearing is denied.

TA Se ee Pees — ak AT TT ey er

APPENDIX D

CODE OF FEDERAL REGULATIONS 29 C.F.R.

§ 890.104 Initial decision and reconsideration.

(a) Who may file. An employee or annuitant may re-

quest OPM to reconsider a decision of an employing office

or an initial decision of OPM refusing to permit registra-

tion for or change of enrollment or refusing to permit

enroliment of an individual as a family member.

(b) Agency decision. A request for reconsideration of —

an agency decision must be filed within 30 calendar days

from the date of the written decision stating the right to

reconsideration by OPM. The time limit may be extended

as provided in paragraph (e) of this section.

(ec) Initial decision. An OPM decision shall be consid-

ered an inital decision as used in § 890.104(a) above when

rendered by OPM in writing and stating the right to

reconsideration. However, a decision initially rendered at

the highest level of review available within OPM will not

be subject to reconsideration.

(d) Reconsideration. A request for reconsideration

must be made in writing, must include the claimant’s

name, address, date of birth, claim number, if appropri-

ate, name of carrier and reasons for the request.

(e) Tine limit. A request for reconsideration of an

initial OPM decision must be filed within 30 calendar

days from the date of OPM’s initial decision. OPM may

extent the time limit on filing when the individual shows

that he/she was not notified of the time limit and was not

otherwise aware of it, or that he/she was prevented by

cireumstances beyond his/her control from making the

request within the time limit.

(f) Final decision. After reconsideration, OPM shall

issue a final decision which shall be in writing, and shall

fully set forth the findings and conclusions of OPM.

§ 890.105 Review of claim for payment or service.

(a) OPM does not adjudicate individual claims for

payment or service under health benefits plans. Individual

claims for payment or service are adjudicated by the

health benefits plan in which the employee or annuitant is

enrolled.

(b) If a claim (or portion of a claim) or a service is

initially denied by a health benefits plan, the plan will

reconsider its denial upon receipt within one year of the

denial of written request for reconsideration from the

employee or annuitant. Such written request should set

forth the reasons why the employee or annuitant believes

that the denied claim or service should have been paid or

provided. The plan must affirm the denial in writing to the

employee or annuitant, setting out in detail the reasons

therefor, within 30 days after receipt of the request for

reconsideration, or pay or provide the claim or service

within such time, unless it requests additional informa-

tion reasonably necessary to a determination. Such re-

quests by the plan must specifically identify the

additional information required and the reason or reasons

therefor. If the information requested is not supplied

within 60 days of the request therefor, the plan shall make

its determination and notify the employee or annuitant as

provided elsewhere in this section.

to respond to a written request for reconsideration within

30 days of the request, the employee or annuitant may

make a written request to OPM’s Associate Director for

Compensation for a review to determine whether the

plan’s denial is in accord with the terms of OPM’s

contract with the carrier of the plan. The plan shall

provide written notice to the employee or annuitant of the

right to request such a review when it affirms a denial

after reconsideration. A request for review will not be

honored if received by OPM more than 90 days from the

date of the plan’s affirmation of the denial. Nor will a

request for review be honored if, upon request by the

Associate Director, the employee or annuitant does not

furnish authorization signed by the patient (or person

eapable of acting for the patient) for the release of

medical evidence to the Associate Director.

(d) In reviewing a claim denied by a plan, the Associ-

ate Director will review copies of all original evidence and

findings upon which the plan denied the claim and any

additional evidence submitted to the Associate Director

or otherwise obtained by the plan or Associate Director.

Plans will release such evidence and findings to the

Associate Director within 30 days of request therefor.

Any evidence obtained by the Associate Director in con-

nection with a review of the denied claim will be held

privileged and confidential and will be reviewed only by

persons having official need to see it.

(e) In reviewing a claim denied by a plan, the Associate

Director may request the employee or annuitant to obtain

and submit additional medical or hospital reeords. The

Associate Director may also reques+t a confidential advi-

sory opinion from an independent physician, or such other

information or evidence as may in the Associate Direc-

tor’s judgment be required to evaluate the claim denial.

An Associate Director's request for an advisory opinion

shall not disclose the identity of the claimant or patient,

the plan, or any medical institutions or physicians in-

volved in the claim.

(f) Within 30 days after all evidence requested by the

Associate Director has been received, it shall notify the

employee and the plan of its findings on review.

§ 890.107 Legal actions.

An action to compel enrollment of an employee or

annuitant not excluded by § 890.102(c) should be brought

against the employing office. An action to recover on a

claim for health benefits should be brought against the

carrier of the health benefits plan. An action to review the

legality of OPM’s regulations or a decision made by OPM

should be brought against the Office of Personnel Man-

agement, Washington, D.C. 20415.

§ 890.203 Initial decision and reconsideration.

(a)(1) Application for approval of comprehensive

medical plans may be made by letter to the Office of

Personnel Management, Washington, D.C. 20415. This

letter application is to be accompanied by such descrip-

tive material, financial data and documentations as OPM

may require in its review process and in the format

specified by OPM. Participation of an approved plan

becomes effective on the first day of the contract period

which is: (i) At least nine months after OPM receives the

application, and (ii) at least seven months after OPM

receives benefit and rate proposals and all evidence to

demonstrate that the plan has met all requirements for

approval. At any time, OPM may make a counter-proposal

or propose changes on its own motion.

(2) Application for approval of employee organization

plans may be made by letter to the Office of Personnel

Management, Washington, D.C. 20415, after Decem-

ber 31, 1978, and before January 1, 1980. This letter

application is to be accompanied by such descriptive |

material, financial data and documentations as OPM may |

require in its review process and in the format specified |

by OPM. Participation of an approved plan becomes

effective on the January 1 which is (i) at least 9 months

after OPM receives the application and (ii) at least 6 )

months after OPM receives all evidence to demonstrate

that the plan has met all requirements for approval.

(b) Changes in rates and benefits for approved health

benefits plans shall be considered at the discretion of the

Director of OPM. If the Director of OPM determines that

it is beneficial to enrollees and the Federal Employees

Health Benefits Program to invite health plan benefit

and/or rate changes for a given contract period, a “call

letter” shall be issued to the carrier approximately 9

months prior to the expiration of the current contract

period. Any proposal for change shall be in writing,

specifically describe the change proposed, and be signed

by an authorized official of the earrier. OPM will review

any requested proposal for change and will notify the

earrier of its decision to accept or reject the change. OPM |

may make a counter proposal or at any time propose |

changes on its own motion. Benefits changes and rate |

proposals, when requested by OPM shall be submitted not

less than 7 months before the expiration of the then

current contract period, unless the Director of OPM

determines that a later date is acceptable. The negotiation

period shall begin approximately 7 months before the

expiration of the current contract period, and OPM shall

seek to complete all benefit and rate negotiations no later

than 3 months preceding the contract period to which

they will apply.

eee

§ 890.205 Withdrawal of approval of health benefits

plans.

(a) The Director may withdraw his or her approval of

a health benefit plan or carrier.

(b) Before withdrawing approval, the Director shall

cause to be sent, by certified mail, a notice of the carrier

stating that he or she intends to withdraw OPM approval

of a health benefits plan therefor. The carrier is entitled

to reply in writing within 15 days of its receipt of the

notice, stating the reasons why approval should not be

withdrawn.

(ec) On receipt of the reply, or in the absence of a

timely reply, the Director shall set a time and place for

hearing. The Director shall conduct the hearing or desig-

nate a representative to do so, unless the carrier waives

hearing. The carrier shall be given notice thereof, by

certified mail, at least 15 days in advance of the hearing.

The carrier is entitled to appear by representative and

present oral and written evidence and argument in oppo-

sition to the proposed action.

(d) The Director shall make his or her decision on the

record and communicate it to the carrier by certified mail.

The Director may set a future effective date for with-

drawal of his or her approval.

(e) The Director, in his or her discretion, may rein-

state approval on a finding that the reasons for withdraw-

ing approval no longer exist.

APPENDIX E

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APPENDIX E

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

METROPOLITAN LIFE INSURANCE COMPANY,

Plainttff,

VS.

JACQUELINE G. CURTIS,

Defendant.

AND RELATED CROSS-CLAIM.

Case No. CV-83-167-MML

ORDER GRANTING PLAINTIFF’S

MOTION FOR SUMMARY JUDGMENT

Plaintiff brought this action for declaratory judgment.

It asserts that it is not obligated to pay to defendant

death benefits under the insurance policy issued to Alfred

M. Curtis, Sr., defendant’s husband. Defendant counter-

claimed for money had and received, damages for bad

faith, unfair and deceptive business practices and inten-

tional infliction of emotional distress. Plaintiff moved for

summary judgment. The motion was argued to the Court

on July 11, 1983, and taken under submission. The Court

now grants plaintiff's motion for summary judgment.

Plaintiff was the carrier of insurance for Alfred M.

Curtis, Sr., under the Federal Employees’ Group Life

Insurance (FEGLI) Program. The insured designated

his children as beneficiaries under the FEGLI policy in

accordance with 5 U.S.C. $8705(a) and 5 C.F.R.

§ 870.901. Thereafter, Curtis married defendant but did

not change the designation of beneficiary under the

FEGLI policy. When Curtis died, both the defendant and

the children, designated beneficiaries of record, submit-

ted claims for death benefits with plaintiff. Plaintiff paid

the benefits to the children of Curtis.

Defendant argues that the premiums on the FEGLI

policy were paid out of Curtis’s wages, community prop-

erty under California law. Therefore, the insurance pro-

ceeds should be community property and Curtis’s

designation of his children as beneficiaries is ineffective

to deprive defendant of her rights in the community

property. Defendant relies on Carlson v. Carlson, 113 Cal.

Rptr. 722 (1974), which awarded to the spouse half of the

FEGLI policy proceeds and points to the Uniformed

Services Former Spouses’ Protection Act, 10 U.S.C.

§ 1408, as Congress’ response to McCarty v. McCarty, 453

U.S. 210 (1981), expressing the legislative intent that

state courts should be able to consider military retired

pay as marital property according to the state’s own

domestic relations law. Defendant contends that a similar

congressional intent should be found as to the FEGLIA,

that state domestic relations law should also apply, be-

cause the preemption provisions of 5 U.S.C. § 8709 were

to be effective only as to employees who died, were

separated or retired after the date of enactment of § 8709.

In other words, defendant argues that there was no

federal preemption of state domestic relations law in the

FEGLIA before October 10, 1980.

Defendant’s reading of § 8709 to imply a prior congres-

sional intent that community property law should apply to

FEGLI cases is not supported by the language of the

FEGLIA and related regulations nor by case law. Section

8705 unequivocally states that death benefits would be

paid first to designated beneficiaries and then in the

absence of designation to the spouse. Moreover, there

were specific regulations for designating and changing

beneficiaries, 5 C.F.R. § 870.901, and the insured’s right

to change the beneficiaries at any time might not be

waived nor restricted. Congressional intent in the FEG-

LIA has every appearance of being to allow the insured

federal employee complete control over the planning of

how to provide for his family by designating his benefi-

ciaries. The provisions regarding designation of benefi-

ciaries in the FEGLIA are similar to those in the

Servicemen’s Group Life Insurance Act, and it is clear

that the federal statutory order of precedence of payment

preempts state domestic relations law and that strict

compliance with the federal requirements in designating

beneficiaries was contemplated. Ridgway v. Ridgway, 454

U.S. 46 (1981), Stribling v. U.S., 419 F.2d 1350 (8th Cir.

1969).

Defendant’s suggestion that the Uniformed Services

Former Spouses’ Protection Act, 10 U.S.C. § 1408, should

affect the instant case is not persuasive. The policies

affecting military retirement pay are not necessarily gov-

erned by the same considerations as those governing

death benefits.

Moreover, it is likely that any concern to let state

domestic relations law have effect in cases like McCarty,

supra, Yiatchos v. Yiatchos, 376 U.S. 306 (1964), and

Carlson, supra, which involved federal programs and reg-

ulations, derives from a factor which is not relevant here.

The courts in the last two cited cases were reluctant to

allow federal regulations to be exploited in order to work

a fraud upon the spouse’s rights in community property.

As to the congressional response to McCarty, 10 U.S.C.

§ 1408, directing that state domestic relations law should

apply, conceivably, a serviceman might be less than enthu-

siastic about paying alimony and support to a former

spouse and might take advantage of anti-attachment pro-

visions in his military pension to avoid such payments.

But fraud is not to be presumed if an insured does not

designate his spouse but his children as beneficiaries, and

the purpose of the federal group life insurance programs

is to allow the insured to choose how he will provide for

his family.

The Court need not decide whether Ridgway, supra, has

implicitly overruled Carlson, supra, since Carlson is not

really apposite here, no fraud by the husband having been

alleged. Nevertheless, even if fraud by the husband has

been alleged, the defendant should not be able to prevail

in a claim against plaintiff in this case. In Carlson, the

spouse sought to recover from the children (designated

beneficiaries) half of the proceeds of the FEGLI policy.

In short, the duty of the carrier is clear under the federal

statute: to pay the benefits to the beneficiaries designated

according to federal regulation. If there were any fraud,

the spouse’s claim would be against the beneficiaries, not

against the carrier.

Since the plaintiff, in paying benefits to the designated

beneficiaries, has acted in accordance with its duty under

federal law, defendant can have no claim against plaintiff

arising from the latter’s actions. The Court therefore

grants plaintiff's motion for summary judgment and de-

clares that it is not obligated to pay death benefits to the

defendant under the FEGLI policy issued to Alfred M.

Curtis, Sr.

IT IS SO ORDERED.

IT IS FURTHER ORDERED that the clerk shall

serve, by United States mail, copies of this order on

counsel for the parties in this matter.

Dated: July 29, 1983

/s/ MALCOM M. LUCAS

Maleom M. Lucas

United States District Judge

APPENDIX F

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF

PENNSYLVANIA

GARRY DELANCY AND DELORES DELANCY,

Plaintiffs,

NATIONAL Post OFFICE MAIL HANDLERS, WATCHMEN,

MESSENGERS AND Group LEADERS, A Division of

Liuna; AFL-CIO; Mai HANDLERS BENEFIT PLAN; and

CONTINENTAL ASSURANCE Co. OF CHICAGO, ILL.,

Defendants.

Civil Action No. 84-0695

MEMORANDUM

This case is now before the court on defendants’ Motion

to Remand and for Partial Judgment on the Pleadings,

or, in the alternative, for Summary Judgment.

Plaintiffs Garry and Delores Delancey brought suit to

hold defendants National Post Office Mail Handlers

Union, Mail Handlers Benefit Plan (MHBP or Plan) and

Continental Assurance Co. of Chicago, Illinois (CAC)

liable for compensatory and punitive damages on the

basis of two separate but inter-related, claims for relief.

In the first count, plaintiffs assert a breach of contract by

defendants’ failure to reimburse plaintiffs for certain

medical expenses which Mrs. Delancey incurred while

covered as a dependent by the Plan. In the second count,

plaintiffs allege that defendants’ conduct was intentional

and in bad faith, thereby causing plaintiffs’ emotional

distress and giving rise to a right to recover compensa-

tory and punitive damages.

The case was filed initially in the Court of Common

Pleas of Cumberland County, Pennsylvania. It was re-

moved to this court pursuant to 28 U.S.C. $§ 1441 and

1446 on the grounds that (1) the breach of contract claim

arises under federal law, and (2) the separate and inde-

pendent state law claim falls within the doctrine of

pendent jurisdiction (United Mine Workers v. Gibbs, 383

U.S. 715 (1966)); 28 U.S.C. § 1441(c). See Verified Peti-

tion for Removal, { 6.

Defendants thereafter answered the Complaint and

asserted a counterclaim which seeks restitution of certain

health benefit payments which the Plan contends was

made in error to Travacare Laboratories on plaintiff's

behalf. Defendants further moved to stay discovery pend-

ing adjudication of this potentially dispositive motion. By

order dated August 14, 1984, this court granted defend-

ants’ motion and stayed all discovery except that which

plaintiffs deemed necessary to respond to this motion.

Defendants now move the court for an order remanding

plaintiffs’ claim that MHBP failed to pay benefits owed

them, and defendants’ counterclaim for benefits errone-

ously paid to plaintiffs to the United States Office of

Personnel Management for its decision on review pursu-

ant to 5 C.F.R. § 890.105. Alternatively, defendants move,

pursuant to Rule 56(b) of the Federal Rules of Civil

Procedure, that the court grant summary judgment in

their favor.

Defendants further move pursuant to Rules 12(c) and

56(b), Federal Rules of Civil Procedure, for judgment on

the pleadings, or, in the alternative, summary judgment

on the second count of plaintiffs’ Complaint because

federal law preempts the claim raised therein.

Factual History

During 1982 and 1983, Garry Delancey, as a federal

employee, and his wife Delores, as an eligible dependent,

were enrolled in MHBP. In the first count of their

Complaint, the Delancys assert that the Plan failed to pay

a valid claim for health benefits incurred in 1982 at the

Chambersburg Hospital, Chambersburg, Pennsylvania.

Chambersburg Hospital filed with the Plan a claim

assigned by the Delancys for $8,638.25 for services to

Mrs. Delancey during a stay from September 29, 1982 to

October 20, 1982. The hospital records indicate a diagno-

sis of “factitious illness.” Prior to the adjudication of this

claim, however, the Plan processed an earlier-filed claim

from Hershey Medical Center in the amount of $3,089.25

for inpatient psychiatric care rendered to Mrs. Delancy

upon her transfer there from Chambersburg Hospital on

October 20, 1982.

In 1982, the Plan’s hospital benefits for mental and

nervous conditions were limited to $2,500.00 or the cost of

fifty (50) days of hospitalization, whichever was less,

during any six month period. Accordingly, the $2,393.50

paid by the Plan on the Hershey Medical Center claim

was applied toward the $2,500.00 ceiling on hospital

benefits for mental and nervous conditions for the six

month period beginning September 29, 1982.

The documentation forwarded to the Plan by the Cham-

bersburg Hospital disclosed that Mrs. Delancey had been

hospitalized for the treatment of a “factitious illness.”

According to the Plan, “factitious illness” is listed by the

International Classification of Diseases (ICD) under the

heading “Neurotic Disorders, Personality Disorders, and

Other Nonpsychotie Disorders.” Because the Plan defines

“mental and nervous conditions” as those “listed in the

[ICD] as psychoses, neuroses, personality disorders, and

other non-psychotic mental disorders,’ the Plan sub-

jected the Chambersburg Hospital claim to the $2,500.00

hospital benefit limitation for mental and nervous condi-

tions. Therefore, because the Chambersburg Hospital

claim had been incurred in the same six month period as

the Hershey Medical Center claim, and because the Plan

had already paid $2,393.50 to Hershey Medical Center,

only $106.50 in hospital benefits was available to be

applied toward the Chambersburg Hospital claim. How-

ever, rather than make a payment of that amount to the

Chambersburg Hospital, the Plan set off this amount

against an erroneous $2,023.46 overpayment which it

made to Travacare Laboratories on the Delancy’s behalf.

Defendants’ counterclaim arises out of its alleged over-

payment to Travacare Laboratories. During the period

September 1983 through February 1983, Travacare Labo-

ratories submitted to the Plan claims for certain equip-

ment and supplies delivered to the Delancy’s residence, in

the amount of $5,343.88. The Plan said Travacare the

entire claim and alleges that it did so in the mistaken

belief that it was all for durable medical equipment, an

allowable expenditure under the Plan. Now the Plan

argues that certain of the claimed expenses were for

liquid nutrition which Mrs. Delancy consumed in her

home. In 1982 and 1983, the Plan did not cover such

supplies when not furnished during a hospital stay. The

Plan asserts that it should not have paid Travacare

$2,023.46 on the Delancy’s account for the liquid nutrition

supplies.

Discussion

Defendant MHBP is a health benefits plan sponsored

by an employee organization carrier pursuant to the

Federal Employees Health Benefits Act (FEHBA or the

Act), 5 U.S.C. § 8901/8913. Thus, the MHBP is the

product of a federal procurement contract negotiated

between the sponsoring employee organization carrier,

the Mail Handlers Union, and-the United States Office o:

Personnel Management (OPM). See 5 U.S.C. § 8902.

FEHBA is a comprehensive statutory scheme regulat-

ing all aspects of federal employee health benefits plans,

including eligibility for coverage, 5 U.S.C. §§ 8902(f),

8905, 8908, standards for termination of coverage,

§§ 8902(g) and (h), and benefit types, levels and rates,

$§ 8902(d) and (i), 8904. In addition, FEHBA mandates

that OPM has the authority to require carriers to pay

benefits in any individual case if OPM finds the enrollee

entitled to such under the contract with the carrier,

§ 8902(j), places general supervisory authority of the

employee health benefits program established by statute

in the hands of OPM and empowers OPM to issue regula-

tions necessary to carry out the purpose of the Act,

§ 8913.

The Request for Remand

The Plan’s contract with OPM, in accordance with

statutory requirements found at 5 U.S.C. § 8902(j) and

8913, establishes a disputed claims review and resolution

procedure which provides for OPM review of a FEHBA

plan’s decision to deny an individual claim for benefits.

See 5 C.F.R. § 890.105. If, upon conducting such a review,

OPM “finds that the [enrollee] is entitled [to the claimed

benefit] under the terms of the contract” the Plan must

pay the claim, notwithstanding its objection. 5 U.S.C.

§ 8902(j). Defendant argues that OPM has not had the

oecasion to review the benefit claim disputes which are

now before the court for adjudication and that, as a

matter of sound judicial policy, this court should remand

the claims to OPM for administrative review.

Plaintiffs argue that their claim was not denied until

after this lawsuit was commenced. In fact, plaintiffs aver

that they have never been notified of the denial of their

claim, although they have been informed by the hospital

that the claim was denied. Absent a denial from the Plan,

plaint*ffs were without an administrative remedy and the

exhaustion requirement should be waived.

Except where mandated by statute, the “exhaustion of

administrative remedies is not an inexorable command,

but is a matter of sound judicial discretion.” Cerro Metal

Products v. Marshall, 620 F.2d 964, 970 (3rd Cir. 1981).

In exercising that discretion, the court must look to a

number of factors, see Susquehanna Valley Alliance v.

Three Mile Island Nuclear Reactor, 619 F.2d 231, 246 (3rd

Cir. 1980), and is generally guided by the rationales

advanced for this judicially created doctrine. Those pur-

poses include: (1) the promotion of administrative effi-

ciency by avoiding premature interference with agency

processes; (2) respect for executive autonomy by allowing

an agency to correct its own errors; (3) facilitating

judicial review by giving the court the benefit of the

agency's expertise; and (4) serving judicial economy by

having the administrative tribunal compile the factual

record. Cerro Metal Products, 620 F.2d at 970. The re-

quirement also shows deference to another branch of

government; when Congress has provided an administra-

tive remedy which is capable of resolving a controversy,

such a remedy should be utilized. Jd. at 71; American Fed.

of Gov. Emp. Local 1994 v. Resor, 442 F.2d 993, 994 (3rd

Cir. 1971).

The Third Cireuit has recognized only three exceptions

to the exhaustion doctrine: (1) when the nonjudicial

remedy is clearly shown to be inadequate to prevent

irreparable injury; (2) when resort to the nonjudicial

remedy would clearly violate statutory or constitutional

rights; and (3) when exhaustion would be futile. Republic

Industnes v. Central Pa. Teamsters, 693 F.2d 290, 293 (3rd

Cir. 1982). The « urt has also stated that “these excep-

tions apply only in ‘extraordinary circumstances, when

the remedy to be exhausted, though supported by the

underlying policy justifications of the doctrine, should not

be compelled beeause of some countervailing justifica-

tions of the doctrine, should not be compelled because of

some countervailing consideration.” 693 F.2d at 294.

The court does not find any of the recognized excep-

tions applicable to the instant case and, indeed, finds that

a remand would serve important interests. Congress, in

enacting the statute, clearly intended that a governmental

agency should be the initial forum for dispute resolution.

The agency’s procurement of this contract demonstrates a

peculiar expertise in interpreting the contract provisions.

Finally, the agency can assist the court in compiling a

factual record should further judicial intervention be

necessary.

Because no formal notice had been given at the time

suit was commenced, plaintiffs could not exhaust adminis-

trative remedies and therefore, should not be penalized by

dismissal of the suit. The court will remand plaintiffs’

claim as well as defendants’ counterclaim for administra-

tive review, but will retain jurisdiction so that the parties

may return to this court if the administrative remedy to

resolve the dispute.

The Preemption Claim

In the second count of the Complaint, plaintiffs allege

that MHBP’s refusal to pay the Chambersburg Hospital

claim in issue here is “without explanation” and “without

basis.” Plaintiffs assert that the refusal was “an inten-

tional act of bad faith” and “negligent.” (Complaint,

€€ 12-15). As a result of these actions, plaintiffs are

alleged to have suffered severe emotional distress, fear,

humiliation, embarrassment and mental anguish and de-

mand compensatory and punitive damages.

It appears that plaintiffs allege a cause of action for

insurer bad faith, a tort which has been recognized in

some, but by no means all, jurisdictions. Compare, e.g.,

Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 574, 510 P. 2d

1032, 1037, 108 Cal. Rptr. 480, 485 (1973), and

D’Ambrosio v. Pennsylvania National Mutual Casualty Ins.

Co., 494 Pa. 501, 431 A.2d 966, 970 (1981). The MHBP is

not an insurance contract governed by state law. As a

creature of FEHBA, 5 U.S.C. § 8901 et seg., the MHBP is

a government procurement negotiated between the spon-

soring employee organization carrier and OPM pursuant

to 5 U.S.C. § 8902, to enable the Federal Government to

offer to its employees health benefits as a term and

condition of employment. As a federal procurement con-

tract, it is governed by federal, not state, law. Tackitt v.

Prudential Insurance Co., et al., 758 F.2d 1572 (11th

Cir. 1985).

Plaintiffs seek to impose common law tort liability on

the government contractor. However, this court finds that

the FEHBA, because of its comprehensive nature and

special subject matter preempts application of state laws

to the MHBP.

It is well established that within constitutional limits

Congress may preempt state law by enacting a

scheme of federal regulation so pervasive as to make

reasonable the inference that Congress left no room

to supplement it, because the Act of Congress may

touch a field in which the federal interest is so

dominant that the federal system will be assumed to

preclude enforcement of state laws on the same

subject

Pacific Gas & Electric v. State Energy Resources

Conservation Devel. Comm’n, ag

S.Ct. 1717, 1744 (1983); see also Chicago N.W. Trans-

portation Co. v. Kalo Brick & Tile Co., 450 U.S. 311,

317 (1981).

The nature of the subject matter regulated by the

FEHBA — the provision of health benefits insurance for

federal employees as a benefit of their employment — is

one uniquely of federal concern.

In a recent decision which offers some assistance here,

the Supreme Court has held that federal labor law

preempts the same state law based insurer bad faith tort

claim which plaintiffs here allege. Allis Chalmers Corp. v.

Lueck, U.S. —_, 53 U.S.L.W. 4463 (April 16, 1985).

The specific issue in Lueck was whether section 301 of the

Labor Management Relations Act, 29 U.S.C. § 185(a),

preempted the Wisconsin state law tort action for bad

faith delay in making disability payments due under a

collectively bargained plan. 53 U.S.L.W. at 4464. In

resolving that issue in favor of preemption, the Court

noted that section 301 reflects a congressional policy that

federal uniformity was to prevail over inconsistent local

rules, 53 U.S.L.W. at 4465. Therefore,

questions relating to...what legal consequences

were intended to flow from breaches of that [federal

law governed] agreement, must be resolved by refer-

ence to uniform federal law, whether such questions

arise in the context of a suit for breach of contract or

in a suit alleging liability in tort.

53 U.S.L.W. at 4465.

In order to accommodate these policies, the court found

that the analysis must focus on whether the tort at issue

eonfers state law rights independent of any right estab-

lished by the federal law contract, or whether evaluation

of the tort claim is inextricably intertwined with consider-

ation of the terms of that contract. Thus, the Court held

that “/1]f the state tort law purports to define the meaning

of the contract relationship, that law is preempted.” 53

U.S.L.W. at 4466 (emphasis supplied).

10f

Lueck seems particularly instructive in this ease. Here

the federal interest underlying FEHBA is dominant,

thereby precluding state regulation, from two viewpoints:

first, the cost of the program to the government and

employees; and second, the necessity of uniform adminis-

tration and decision-making in plans such as MHBP,

which have enrollees in many states. If state laws and

remedies were permitted to impose special requirements

on FEHBA plans, the cost of business would increase

over that of a uniformly regulated federal program. The

need for uniform administration is particularly important

when enrollees have multi-state contacts. See, LaBeile v.

Blue Cross & Blue Shield United of Wisconsin, 548 F.Supp.

251, 253 (W.D. Wise. 1982). Finally, the scheme of

federal regulation here is so pervasive as to clearly indi-

eate that Congress has precluded state regulation.’

To be sure, the holding in Lueck is not binding here

and, indeed, is a narrow one. “We pass no judgment on

whether this suit also would have been pre-empted by

other federal laws governing employment or benefit

plans.” U.S.L.W. at 4468. However, the analysis is

persuasive.

In addition, OPM interprets 5 U.S.C. § 8902(m) (1), the

section which forms the basis for the Delancys’ claim, to

preempt state insurer bad faith tort claims. (Declaration

of Kevin J. Burns, OPM Assistant Director for Insurance

Programs, Exh. A to Barnett Declaration filed Feb. 8,

1985.) It is settled that the interpretation of a statute by

an agency which is charged with administering that stat-

ute, shall be shown “great deference” by the courts,

'The seope of FEHBA’s coverage includes conditions of eligibility

for coverage, benefits, contributions and required reserves; qualifica-

tions of carriers, disclosure to employees, vesting of supervisory

authority in a federal ageney and original jurisdiction in the federal

courts. 5 U.S.C. §$§ 8902, 8903, 8904, 8906, 8909, 8912, 8913.

lif

provided that the interpretation is a reasonable one. Udall

v. Tallman, 380 U.S. 1, 6 (1965).

For the reasons already discussed, the court finds the

agency’s interpretation to be reasonable and is supported

by the legislative history, as cited in the Burns

declaration.

Accordingly, the court will grant judgment in favor of

the defendants on the second count of the Complaint.

/s/_ SYLVIA H. RAMBO

Sylvia H. Rambo

United States District Judge

Dated: June 25, 1985

12f

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF

PENNSYLVANIA

GARRY DELANCY and DELORES DELANCY,

Plaintiffs,

Vv. pe

NATIONAL Post OFFICE MAIL HANDLERS,

WATCHMEN, MESSENGERS AND GROUP LEADERS,

A Division of Liuana; AFL-CIO;

MAIL HANDLERS BENEFIT PLAN; and

CONTINENTAL ASSURANCE Co. OF CHICAGO, ILL.,

Defendants.

Civil Action No. 84-0695

ORDER

In accordance with the accompanying memorandum, IT

IS HEREBY ORDERED THAT:

1. The first count of the plaintiffs’ Complaint and the

defendants’ counterclaim are remanded to the United

States Office of Personnel Management for its review

pursuant to 5 C.F.R. 890.105.

2. The defendants are to inform the court of the

agency's disposition of these claims within ten (10) days

of that decision, but in any event, shall report back to the

court within ninety (90) days of the date of this order.

3. Judgment is granted in favor of the defendants and

against the plaintiffs on the second count of the Com-

plaint. The Clerk of the Court is directed to enter the

judgment.

/s/ SYLVIA H. RAMBO

Sylvia H. Rambo

United States District Judge

Dated: June 25, 1985

APPENDIX G

List of Companies supplied pursuant to Rule 28.1

Prudential has no parent corporation. Prudential has

no subsidiaries or affiliates which have outstanding any

equity securities which are publicly traded. Set forth

below is a list of corporations in which Prudential has, or

has the right to acquire, more than 10% of a class of

equity security which is publicly traded. These invest-

ments were acquired in the normal course of Prudential’s

investment operations and not for the purpose of acquir-

ing control of these corporations.

Air Express International Corp.

BRNF Liquidating Trust

Communications Transmission, Ine.

C.P. National Corporation

DMI Furniture

Foodmaker, Ine.

Global Natural Resources

Grubb & Ellis

Intermet Corporation

Manufactured Homes

Maxus Energy

Miller Shoe Industries

Publie Service Company of New Hampshire

Sean-Opties

Specialty Equipment Companies, Ine.

Tom Brown

Vista Chemical Co.

Wellman

Western Union Telegraph Co.

Prudential Special Equity Fund

United States High Yield Fund

PROOF OF SERVICE BY MAIL

I am a citizen of the United States and a resident of the

City and County of Los Angeles; I am over the age of

eighteen years and not a party to the within action; my

business address is: 1706 Maple Avenue, Los Angeles,

California.

On January 22, 1988, I served the within Brief in Opposi-

tion in re: “Kip Hayes vs. Prudential Insurance Co.” in

the United States Supreme Court, October Term 1987,

No. 87-818;

On the Parties in said action, by placing Three copies

thereof enclosed in a sealed envelope with postage fully

prepaid, in the United States post office mail box at Los

Angeles, California, addressed as follows:

Robert S. Greeuspan, Esq.

Edward R. Cohen, Esq.

Appellate Staff, Civil Division

Room 3127

Department of Justice

Washington, D.C. 20530

Marcia Hughes, Esq.

Casey, Gerry, Casey, Westbrook,

Reed & Hughes

110 Laurel Street

San Diego, CA 92101

Harvey R. Levine, Esq.

Shernoff & Levine

1200 Third Avenue, Suite 1400

San Diego, CA 92101-4157

John T. Kotelly, Esq.

Dickstein, Shapiro & Morin

2101 L Street, N.W.

Washington, D.C. 20037

DUPE a RI IRR OBA Been BO mane A A

Raymond J. Coughlan, Jr., Esq.

Lillick, McHose & Charles

110 West A Street, Suite 1260

San Diego, CA 92101

All Parties required to be served have been served.

I certify (or declare), under penalty of perjury, that the

foregoing is true and correct.

Executed on — 22, 1988, at Los Angeles, California

CE CE MEDINA

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.