Petition for Writ of Certiorari — Kidneigh v. UNUM Life Insurance Co. of America

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No, 037987 DEC 29 2003

In The

Supreme Court of the Gnited States

JON F. KIDNEIGH

and

BARBARA KIDNEIGH,

Petitioners,

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Respondent.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Tenth Circuit

PETITION FOR A WRIT OF CERTIORARI

STEPHEN C. KAUFMAN

Counsel of Record for Petitioners

3801 East Florida Avenue, Suite 900

Denver, Colorado 80210

(303) 393-6666

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Whether a state bad faith law coming within ERISA’s

saving clause, 29 U.S.C. § 1144(b)(2)(a), is subject to

the doctrine of conflict preemption; and

2. Whether Colorado’s bad faith law satisfies the criteria,

newly established in Kentucky Ass’n of Health Plans,

Inc. v. Miller, 123 S. Ct. 1471 (2003), to come within

ERISA’s saving clause.

TABLE OF CONTENTS

Page

Cesenblated FOG ics iivsasscansinicisianiesniarennanein i

Tale oF At occ ecicsensieticcimeennserins iv

Celene UR aise cecceninasinciniesicticontaeiaupaehelanaantientaen 1

fe ne ETE Sidecar ania amaanioieaeases ib 1

Statutory Provisions Involved .................:cscceeceeseesees 1

- Seabement af Ge DAM ccc 2

Reasons this Petition Should Be Granted................. 5

I. Preemption of a State Law Bad Faith Claim

Does Not Make Sense in the Context of the

Rationale Supporting this Court’s Dicta for

Preemption of Such Laws under the Conflict

Preeamptiom DIOCRr IO sis cscsincscecsccesctasssasesewsssess 5

II. This Court’s Dicta in Support of Conflict

Preemption Has Harmed the Very Employees

ERISA Was Enacted to Protect ....................4 8

III. Application of Conflict Preemption to a State

Law Coming Within the Saving Clause Is

Inconsistent with Congress’s Intent............... 13

A. Conflict Preemption Conflicts with Rules

of Statutory Construction.....................06 13

B. Conflict Preemption Derives from Dis-

SDD TA scene sisieaesincnnetaininllesiisebinns 17

C. Congress Never Intended ERISA’s En-

forcement Scheme tc Preclude State

Regulation of Insurance Through Bad

PR SOW isenivicninieernnnasemnelvieds 18

ili

TABLE OF CONTENTS -— Continued

Page

IV. Colorado’s Bad Faith Law Satisfies the

Miller Test to Come Within ERISA’s Saving

i i alae hati 21

A. Colorado’s Bad Faith Law Is “Specifically

Directed Toward Entities Engaged in In-

IIIT so Cis ee aieicck Secure knaiiaaiarendaeuaibinnsinentes 22

B. Colorado’s Bad Faith Law “Substantially Af-

fect[s] the Risk Pooling Arrangement’ ......... 26

C. The Tenth Circuit Failed to Follow Miller...... 27

ve crus sccaunssvusenanccniennterkebusontobbnehavansdoe 29

Appendix

A. Opinion of the Tenth Circuit Court of Ap-

i iduscnckccsdeaiisasasnoncentesithnassvenpraskesdvebuenanannh App. 1

Be Re Se ID vis ieivesiccsccnssccnseieiocsasssoncss App. 36

C. Order on Petition for Rehearing.................... App. 42

TABLE OF AUTHORITIES

Page

CASES

Aetna Casualty & Surety Co. v. Kornbluth, 471 P.2d

SO A I OUND aiatsincis casiawisnerieniecasasiann nici: 22

Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo. 1995)......26, 28

Andrews-Clarke v. Travelers Ins. Co., 984 F.Supp.

BT, Ns BN tistcicicitsawsiniantiatenicsersuaanioninn 8, 10, 19

Bank of Louisiana v. Aetna U.S. Healthcare, Inc.,

2003 U.S. Dist. LEXIS 12001 (E.D. La.)...................... 22

Bates v. United States, 522 U.S. 23 (1997)............ccccseceeees 14

Cathey v. Metropolitan Life Ins. Co., 805 S.W.2d 387

RU IN cchsseckcipsiesseprne anisiasceksnoknasccheenuhdponsemuancaiiaensiaidianteea 8

Centennial Square, Ltd. v. Resolution Trust Co., 815

Fe Be I BI Ti tasnsccsincicasacniccnwinnsarteniacatvainis 25

Dale v. Guaranty National Insurance Company, 948

ee ee I: Si ia ciearntissacoutarthasiauicineaanninianaanssiniot 25

Decker v. Browning-Ferris Industries of Colorado,

Fine.,, SBA Fk GG CCGRO.. BBE) ia seccccccesecscssnscessuaronessasenes 25

Defelice v. Aetna U.S. Healthcare, 346 F.3d 442,

2003 U.S. App. LEXIS 20942 (3rd Cir.)................... 11, 12

Dishman v. Unum Life Ins. Co. of America, 1997

U.S. Dist. LEXIS 22676 (C.D. Cal. 1997) ........ ce eeceeeeee 9

Elliot v. Fortis Benefits Ins. Co., 337 F.3d 1138 (9th

Coe. NA as Rinses oanaenaameaaiasmanana 13

Farmers Group, Inc. v. Trimble, 691 P.2d 1138

DN NI ccsccissiciceashauaas chanspu onaen eeeulaceaaianaade Gained 23

Fink v. Dakotacare, 324 F.3d 685 (8th Cir. 2008).............. 13

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101

CR teiiciiisleanicicien, pislelsscaitdeielte das eiaa ane dasuane 16, 17

TABLE OF AUTHORITIES — Continued

Page

FMC Corp. v. Holliday, 498 U.S. 52 (1990)............ cc ceeeeee 6, 7

Franchise Tax Board of Cal. v. Construction Labor-

ers Vacation Trust for Southern Cal., 463 U.S. 1

CRE cscisinvescnsinsessicasicandssinnsatcinanhineniinlaesnalaannaaaenaimabion 18

Kelley v. Sears, Roebuck & Co., 882 F.2d 453 (10th

CR BO isi snnsiivccesnssiscccctotcnincvennaniecamenmnadabeaantaiaidaieeis 7

‘Kentucky Ass’n of Health Plans, Inc. v. Miller, 123 ;

FB RFT hs eticctesienscssssnsiaseiniacianniavionnioennaea passim

Kidneigh v. UNUM Life Ins. Co. of Am., 345 F.3d

RAGE CA Ce Bi cerciteenievsctrnicctintioeion saiatias 1

Leuthner v. Blue Cross and Blue Shield of North-

eastern Pennsylvania, 270 F.Supp. 2d 584

(BED F a. DOIG) vinsisviiniestsnrissniccseuiiaianmamnanmetian 22

Metropolitan Life Ins. Co. v. Massachusetts, 471

TI, Te CI ccccscitisertcccctbinael Dxinseedloin 15, 20, 21

New York State Conference of Blue Cross & Blue

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

(FI nis scntsscnsstinsssvarctmnssionmaialiiamamemmalion 15, 16

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

Rice v. Santa Fe Elevator Corp., 331 U.S. 218

CBIR cn cccntnininriccnaiuaiscnssctoncsnerccinaemiatasinenaaanaa 15

Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo.

BE kcisisectinmanen ayn vsitsuesesiinsiheshaiieiaaaeaniaeadanaa aaa 28

Rosenbaum v. UNUM Life Ins. Co. of Am., 2003

U.S. Diet. LEERES TRGGR GED. PGs) svisssierscsncescesxeaseevssacie 16

Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355

CI ion onsnsnsnccassanentencesesavennsiidetebeaanianate 5, 13, 16, 22

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983)....... 14, 18

2 POE DAFOE IY A BRET A PNA SEIU DOTA kA th RIN OI ‘ : - —

TABLE OF AUTHORITIES — Continued

Page

Suggs v. Pan Am. Life Ins. Co., 847 F.Supp. 1324

CER: RO. BIG nccsricvvenenisessssssraterssaansceensaapuacaiansia 10

Taggart Corp. v. Life and Health Benefits Admin.,

Inc., 617 F.2d 1208 (Sth Cir. 1980)...........sscccscscsssssssseeess 19

Travelers Insurance Co. v. Savio, 706 P.2d 1258

CED BID a scencsnicsenonssoicneoconmeaeaene aan 23

UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358

(BI aisncisersssinnysinencmisisciaanaaaaaaaaaamie 15

Vaughan v. McMinn, 945 P.2d 404 (Colo. 1997)................ 25

Wells Fargo Realty Advisors Funding, Inc. v. Uioli,

Inc. , 872 P.2d 1359 (Colo. App. 1994)...............sssccccssssees 28

STATUTES

SE TUBS. © LGBT) sissncissicnsciciennana 1

SEU SAS. § PRG initio ene eee 4

BD UB. 6 Bibi itsiaviinticncnmanaeanee 17

BE TTT S eB GE sv esiisiesiescistacticinininnmenaneanenaanme 17

BO TAS. 5 BG esinsiscicccscosiinttiacnaeanae 18

29 U.S.C. §§ 301-309 (repealed 1974)............ ccc eeeceeeeeeeees 20

BO TBC. § UW iiiinsininic ce aan 18

BP TEAS. © a iitikvctcieviicccscenisininnaamaaanalnn 18

SO TEC. 6 1IG0 wi sssssisicciocinericeneeeaeeeee 14

Be Oa. B EAR chic ncctontcciecmaienaemnee 2

I es OF AN nisinesivninicdaciihamtns auasltehmeansaneomeeaniaae nana 2

Be reels © Ti ie ciiasssinesstsssassattanceeeaetne males 1

SOU S.C. | LIGAND sisiicisincisrerinsssssvetenasncns 2, 13, 21, 29

Vii

TABLE OF AUTHORITIES - Continued

Page

89 TI S.C. B LIGNE) nccocerccsesscccessscoverscsniccovecnssssonevsescess 2

CT, BOB TEED eriecesascnsvccesssensvecenastnssernnenesnetendananeverivagn 24

‘C.R.S. 10-3-1104(1 KX DT)-CATV) ....0....0000ccccrorcrssrcreccsccsesecsees 24

CT, BE BB isiiccssncctecsopecciscsevconeesectanensssctnevsavensiepiniininns 23

CO, SIR ein ccsiscscsenicksonedncascnipennscnecornesdnscecinesionens 24

OTHER AUTHORITIES

Bogan, Protecting Patient Rights Despite ERISA:

Will the Supreme Court Allow States to Regulate

Managed Care? 74 Tul. L. Rev. 951

Ce sicisisicacnansnicnsteninintuhenentnuninticeatesinanciaias 9, 18, 19, 20, 21

wa Bids KO te db ttn rng oh ee Kenta tally’

‘

OPINIONS BELOW

The Tenth Circuit Court of Appeal’s opinion was

reported at 345 F.3d 1182 (2003), and is reprinted in

Appendix A, at App. 1. The May 1, 2002 Order of the

District Court for the District of Colorado is reprinted in

Appendix B, at App. 36. This Order was not reported.

JURISDICTION

The Tenth Circuit entered judgment on October 3,

2003, and entered its Order denying the Kidneighs’ Peti-

tion for Rehearing En Banc on October 28, 2003. This

Order is reprinted in Appendix C, at App. 42. This Court

has jurisdiction to review the Tenth Circuit’s judgment on

a writ of certiorari pursuant to 28 U.S.C. § 1254(1).

, %

STATUTORY PROVISIONS INVOLVED

This case involves the following statutory provisions

contained within the Employee Retirement Income Secu-

rity Act of 1974 (“ERISA”).

29 U.S.C. § 1144(a) - ERISA’s Preemption Clause

Except as provided in subsection (b) of this sec-

tion, the provisions of this title and title IV shall

supersede any and all State laws insofar as they

may now or hereafter relate to any employee

benefit plan described in section 4(a) of this title

and not exempt under section 4(b) of this title.

This section shall take effect on January 1, 1975.

29 U.S.C. § 1144(b)(2)(A) — ERISA’s Saving Clause

Except as provided in subparagraph (B), nothing

in this title shall be construed to exempt or re-

lieve any person from any law of any State which

regulates insurance, banking, or securities.

29 U.S.C. § 1144(b)(2)(B) — ERISA’s Deemer Clause

Neither an employee benefit plan described in

section 4(a), which is not exempt under section

4(b) (other than a plan established primarily for

the purpose of providing death benefits), nor any

trust established under such a plan, shall be

deemed to be an insurance company or other in-

surer, bank, trust company or investment com-

pany or to be engaged in the business of

insurance or banking for purposes of any law of

any State purporting to regulate insurance com-

panies, insurance contracts, banks, trust compa-

nies, or investment companies.

STATEMENT OF THE CASE

The facts as set forth in this Statement of the Case

are, unless otherwise noted, taken from the Tenth Circuit’s

opinion. App. 1-3.

Mr. Kidneigh was disabled from working as an attor-

ney and UNUM paid disability benefits through March 31,

1999 under an insurance policy governed by ERISA.

Thereafter, UNUM paid no benefits although Mr. Kidneigh

claimed continued disability to January 1, 2001. 1 Aplt.

App. at 10, 50. Mr. Kidneigh filed a complaint seeking

recovery as provided for by 29 U.S.C. §§ 1132(a)(1)(B) and

(g) of ERISA. He also asserted that UNUM, in not timely

making benefit payments and in denying benefits, had

acted in bad faith under Colorado law. Mrs. Kidneigh

claimed a loss of consortium due to UNUM’s bad faith

handling of her husband’s disability claim.

With respect to his bad faith claim, Mr. Kidneigh

contended that UNUM had terminated benefits, even

though he was indisputably disabled, because UNUM had

in place a comprehensive scheme to utilize ERISA to

unreasonably delay and deny disability benefits with

respect to its insureds nationwide, regardless of the merits

of any individual’s claim. 2 Aplt. App. at 455. In support,

Mr. Kidneigh referenced a company analysis which stated:

A task force has recently been established to

promote the identification of policies covered by

ERISA and to initiate active measures to get new

and existing policies covered by ERISA. The ad-

vantages of ERISA coverage in litigious situa-

tions are enormous: state law is preempted by

federal law, there are no jury trials, there are no

compensatory or punitive damages, relief is usu-

ally limited to the amount of benefit in question,

and claims administrators may receive a defer-

— ential standard of review. The economic impact

on Provident [UNUM’s sister company] from hav-

ing policies covered by ERISA could be signifi-

cant. As an example, Glenn Felton identified 12

claim situations where we settled for $7.8 million

in the aggregate. If these 12 cases had been cov-

ered by ERISA, our liability would have been be-

tween zero and $0.5 million.

2 Aplt. App. at 512-514.

Furthermore, a memo from UNUM’s head of claims to

its CEO estimated that changing “from a claim payment to

a claim management approach” will save $30-60 million

Si en

each year. 2 Aplt. App. at 515. To this end, UNUM’s

performance objectives targeted an 84-90% net termina-

tion of disability claims. Jd. at 516-517.

In applying this comprehensive scheme to his case,

Mr. Kidneigh noted that UNUM had considered him

disabled prior to two unsuccessful back surgeries, but had

concluded that somehow he had miraculously recovered

after undergoing what UNUM admitted to be an unsuc-

cessful second surgery, which in turn necessitated a third

surgery, more than a year after benefits had stopped,

involving a fusion and cage insertion for a collapsed disc. 2

Aplt. App. at 454-455.

UNUM moved to dismiss Mr. Kidneigh’s bad faith

claim and Mrs. Kidneigh’s loss of consortium claim on

grounds they were preempted by ERISA. The district court

denied the motion with respect to Mr. Kidneigh, yet

granted it as to Mrs. Kidneigh. The district court certified

the issue for interlocutory appeal and the Tenth Circuit

took jurisdiction under 28 U.S.C. § 1292(b). The court of

appeals ruled that regardless of whether Colorado’s bad

faith law came within ERISA’s saving clause, there was

preemption of both the bad faith and loss of consortium

claims under the doctrine of conflict preemption. By a 2 to

1 vote the court of appeal’s panel also held that Colorado’s

bad faith law did not come within ERISA’s saving clause to

avoid express preemption under ERISA’s preemption

clause. Accordingly, the court of appeals reversed the

district’s court’s decision as to Mr. Kidneigh and affirmed

as to Mrs. Kidneigh.

REASONS THIS PETITION

SHOULD BE GRANTED

This Court has never been called upon to decide

whether the doctrine of conflict preemption applies to

preempt a state bad faith law that actually fits within

ERISA’s saving clause. However, in dicta this Court has

offered that if a state law did come within the saving

clause, it would be subject to conflict preemption. Because

this result does not make sense in view of the rationale

this Court gave in justification for conflict preemption, and

because of the harm ERISA preemption has caused em-

ployee/insureds, it is submitted that there is a compelling

reason for the Court to grant this Petition for a Writ of

Certiorari. That the issues raised in this case impact

millions of employees whose insurance is governed by

ERISA, as well as call into question the extent to which

the states will be able to exercise their historic police

powers over insurance, further emphasize the compelling

necessity for the Court to hear this case.

I. Preemption of a State Law Bad Faith Claim

Does Not Make Sense in the Context of the

Rationale Supporting this Court’s Dicta for

Preemption of Such Laws under the Conflict

Preemption Doctrine

This Court has never held that a state bad faith law

coming within ERISA’s saving clause is subject to preemp-

tion under the conflict preemption doctrine because it

provides for an extra-ERISA remedy. Nevertheless, in

Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 377

(2002), this Court stated in dicta:

Although we have yet to encounter a forced

choice between the congressional policies of

exclusively federal remedies and the “reservation

of the business of insurance to the States,” [cite

omitted] we have anticipated such a conflict,

with the state insurance regulation losing

ous. ...

The rationale the Court gave in support for this dicta

follows:

Any such provision patently violates ERISA’s pol-

icy of inducing employers to offer benefits by as-

suring a predictable set of liabilities, under

uniform standards of primary conduct and a uni-

form regime of ultimate remedial orders and

awards when a violation has occurred.

Id. at 379.

Applying conflict preemption under this rationale to

Colorado’s bad faith law would be illogical because Colo-

rado’s law has absolutely no effect on whether employers

will provide and maintain benefits for employees. This is

because employers cannot be liable in bad faith under

ERISA. This Court held in FMC Corp. v. Holliday, 498

U.S. 52 (1990), that while state laws regulating insurance

are saved and can be applied against insurers, they cannot

be applied to employers of self-funded plans since employ-

ers are not insurers pursuant to ERISA’s deemer clause.

Thus, this Court observed:

The saving clause returns to the States the

power to enforce those state laws that “regulate

insurance,” except as provided in the deemer

clause. Under the deemer clause, an employee

benefit plan governed by ERISA shall not be

“deemed” an insurance company, an insurer, or

engaged in the business of insurance for pur-

poses of state laws “purporting to regulate” in-

surance companies or insurance contracts.

Id. at 58.

Therefore, holding insurers liable for the bad

faith handling of employee claims under Colorado

law will in no way discourage employers from

purchasing an employee benefit, or cause them to

discontinue a plan or reduce a benefit. This is

because employers bear no risk of liability for

insurer bad faith and cannot be liable for acting in

bad faith in their own right.

Nor will insurers pass on bad faith costs to their

employer customers resulting in employer unwillingness

to provide benefit plans, or the purchase of reduced bene-

fits. First, any argument to the contrary defies nearly two

decades of case law uniformly holding that bad faith laws

do not spread risk. See, e.g., Pilot Life Ins. Co. v. Dedeaux,

481 U.S. 41, 50 (1987); Kelley v. Sears, Roebuck & Co., 882

F.2d 453, 456 (10th Cir. 1989). Second, an insurer cannot

pass on bad faith costs because it is in competition with

other insurers, meaning employers would have the option

of purchasing benefits from carriers selling policies at

lower rates because they had not acted in bad faith. Third,

the market determines what benefits will be provided, so

that employers will provide benefits as needed to compete

for the employees they require to operate their businesses.

On the other hand, Colorado’s law actually furthers

ERISA’s purpose of encouraging employers to provide

benefits because employers will know their employees will

stand a better chance of receiving benefits when insurers

understand they risk being held liable for wrongfully

denying claims. Also, employers will not have to deal with

deflation of morale when their employees come to conclude

that because their insurer is willing to act in bad faith,

benefits are simply illusory.

II. This Court’s Dicta in Support of Conflict

Preemption Has Harmed the Very Employees

ERISA was Enacted to Protect

This idea that there exists a super preemption doc-

trine, that acts to preempt an otherwise saved law, comes

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

Pilot Life, this Court had held that ERISA preempted

Mississippi’s bad faith law because it did not fit within the

saving clause. Despite this holding, this Court went on to

unnecessarily opine that Mississippi’s law would be

subject to conflict preemption even if it had come within

the saving clause since it allowed for an extra-ERISA

remedy. Id. at 52-57. The result has been a rampant,

unconscionable denial of employee benefits by insurers

over the succeeding 16 years. In fact, UNUM’s own con-

duct towards Mr. Kidneigh in furtherance of its national

plan to wrongfully deprive insureds of benefits is emblem-

atic of the bad faith acts an insurer will commit when it

knows it will not suffer economic consequences in the form

of bad faith liability.

Thus, it has been said that ERISA preemption serves

as “a shield of immunity which thwarts the legitimate

claims of the very people it was designed to protect.”

Andrews-Clarke v. Travelers Ins. Co., 984 F.Supp. 49, 56

(D. Mass. 1997). See also Cathey v. Metropolitan Life Ins.

Co., 805 S.W.2d 387, 392 (Tex. 1991) (Doggett, J., concur-

ring) (“a statutory addition to worker’s rights has been

converted into a statutory removal of those rights” ena-

bling “the companies targeted by Congress [to] employ

ERISA as an effective shield against responsibility for

wrongful processing of claims”); Bogan, Protecting Patient

Rights Despite ERISA: Will the Supreme Court Allow

States to Regulate Managed Care? 74 Tul. L. Rev. 951,

1002-1003 (2000) (“[t]he anticonsumer effects of the

preemption of state-law remedies ... cannot be over-

stated”).

Recognizing the damage wrought, courts have long

bemoaned the harshness of ERISA preemption and their

inability to do anything about it. See Bogan, Protecting

Patient Rights at 1018 (citing several cases at 1018 n.332).

An example of this can be found in Dishman v. Unum Life

Ins. Co. of America, 1997 U.S. Dist. LEXIS 22676 (C.D.

Cal.), where the court observed that the insurer’s “decision

to suspend payments was made on such clearly pre-textual

bases, that it is impossible to avoid the conclusion that it

[was] made in bad faith,” id. at *33, and added, at *29:

‘The facts of this case are so disturbing that

they call into question the merit of the expansive

scope of ERISA preemption. UNUM’s unscrupu-

lous conduct in this action may be closer to the

norm of insurance company practice than the

Court has previously suspected. This case reveals

that for benefit plans funded and administered

by insurance companies, there is no practical or

legal deterrent to unscrupulous claims practices.

Absent such deterrents, the bad faith denial of

large claims, as a strategy {or settling them for

substantially less than the \amount owed, may

well become a common practice of insurance

companies.

In Suggs v. Pan Am. Life Ins. Co., 847 F.Supp. 1324,

1355 (D. Miss. 1994), the court noted “that no where does

ERISA state an intent to protect” insurers and that “it is

incongruous to place so much emphasis on the intent of

Congress in regard to preemption, which is only one part

of ERISA and not to be equally concerned about Congress’

intent as to the overall purpose of the bill,” to protect

employees. So, the court observed, it had seen insurers

deny claims due to greed “simply because there was no

perceived exposure or downside to denying the claim

under their perception of ERISA and how it would be

interpreted by the Courts.” Id. at 1357.

The Suggs’ court then expressed its frustration:

The overriding purpose of the judiciary is to pro-

vide justice. When Congress passes legislation

and clearly sets out the purposes and intentions

of such legislation, “to protect ... the interests of

participants in private pension plans and their

beneficiaries,” and Courts acknowledge that ER-

ISA “is a comprehensive statute designed to

promote the interests of employees and their

beneficiaries,” and yet the Courts have to say...

ERISA’s preemption may leave a victim of fraud

or misrepresentation without a remedy, some-

thing is wrong.

Id.

Similarly, in Andrews-Clark v. Travelers Ins. Co., 984

F.Supp 49, 53 (D. Mass. 1997) (death from failure to pre-

approve obviously needed care), the court stated:

Enacted to safeguard the interests of employees

and their beneficiaries, ERISA has evolved into a

shield of immunity that protects health insurers,

utilization review providers, and other managed

care entities from potential liability for the

consequences of their wrongful denial of health

benefits.

Just recently, Judge Becker of the Third Circuit voiced

similar concerns in his concurring opinion in Defelice v.

Aetna U.S. Healthcare, 346 F.3d 442, 2003 U.S. App.

LEXIS 20942, **31-32, saying:

ERISA has evolved into a shield that insulates

HMOs from liability for even the most egregious

acts of dereliction committed against plan benefi-

ciaries, a state of affairs that I view as directly

contrary to the intent of Congress. Indeed, exist-

ing ERISA jurisprudence creates a monetary in-

centive for HMOs to mistreat those beneficiaries,

who are often in the throes of medical crises and

entirely unable to assert what meager rights

they possess.

In the following in depth analysis, Judge Becker

further dissected the problems associated with ERISA

preemption, which although provided in the context of an

HMO’s denial of medical care, applies equally well to a

disability carrier’s denial of benefits:

The unavailability of extracontractual damages

has effects that are perverse. First, as stated

above, contingency fees are rendered entirely

impractical — precious few lawyers would be will-

ing to undertake a horrendously complex case of

uncertain outcome when the greatest potential

reward is merely provision of the care that had

been contractually promised. * * * * ~

The second perverse effect is that, at the same

time as ERISA makes it inordinately difficult to

bring an injunction to enforce a participant’s

rights, it creates strong incentives for HMOs to

deny claims in bad faith or otherwise “stiff” par-

ticipants. ERISA preempts the state tort of bad-

faith claim denial, see Pilot Life, 481 U.S. at 54-

56, so that if an HMO wrongly denies a partici-

pant’s claim even in bad faith, the greatest cost it

could face is being compelled to cover the proce-

dure, the very cost it would have faced had it

acted in good faith. Any rational HMO will rec-

ognize that if it acts in good faith, it will pay for

far more procedures than if it acts otherwise, and 4

punitive damages, which might otherwise guard

against such profiteering, are no obstacle at all.

Not only is there an incentive for an HMO to

deny any particular claim, but to the extent that

this practice becomes widespread, it creates a

“race to the bottom” in which, all else being

equal, the most profitable HMOs will be those

that deny claims most frequently.

In sum, ERISA’s remedial scheme gives HMOs

every incentive to act in their own and not in

their beneficiaries best interest while simultane-

ously making it incredibly difficult for plan par-

ticipants to pursue what meager remedies they

possess, a confounding result for a statute whose

original purpose was to protect employees.

Id., 2003 U.S. App. LEXIS 20942, **47-49.

So, although the contention that harm to employees

from state law bad faith claims, in the form of such claims

discouraging employers from purchasing benefit plans, has

been shown to be speculative and illogical, one thing is

certain and that is that when insurers are immunized

from accountability for bad faith acts, employees will not

receive the protection of their benefits which is ERISA’s

cornerstone. Accordingly, this Court has been presented

with a compelling reason to hear this case in order to

determine whether preemption of a state law bad faith

claim benefits employees, or whether, in truth, conflict

preemption has just the opposite effect of causing immense

harm to the very employees ERISA was enacted to protect.

In this regard, it must be noted that if this Court does not

decide this issue, the circuit courts will continue to hold

based on this Court’s Rush dicta, as the Tenth Circuit did

in this case, App. at 5-7, that state bad faith laws are

preempted under the conflict preemption doctrine regard-

less of whether they come within the protection of the

saving clause. See Elliot v. Fortis Benefits Ins. Co., 337

F.3d 1138, 1146-1148 (9th Cir. 2003); Fink v. Dakotacare,

324 F.3d 685, 688-689 (8th Cir. 2003).

Ill. Application of Conflict Preemption to a State

Law Coming Within the Saving Clause Is In-

consistent with Congress’s Intent

Because conflict preemption of state laws providing

for extra-ERISA remedies has undermined Congress’s

intent to protect employees, there is a compelling need for

this Court to re-evaluate its dicta favoring conflict pre-

emption in the context of basic rules of statutory construc-

tion, the development of this dicta through dependence

upon dissimilar legislation, and ERISA’s underpinnings as

a pension reform bill not an insurance regulation act.

A. Conflict Preemption Conflicts with Rules

of Statutory Construction

ERISA’s saving clause mandates that “nothing in this

title shall be construed to exempt or relieve any person

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

U.S.C. 1144(b)(2)(A) (emphasis added). The saving clause

immediately follows ERISA’s preemption clause, meaning

that Congress was well aware of the preemption clause

and ERISA’s remedial scheme, 29 U.S.C. § 1132, when it

inserted a saving clause purporting to reserve absolute

power to the states to regulate insurance. Being so aware,

had Congress truly intended for ERISA’s remedies to be

comprehensive and exclusive, Congress would have

written an express exception into the saving clause ex-

empting from saving clause protection state laws provid-

ing for extra-ERISA remedies. Instead, Congress did just

the opposite and wrote an express exception into ERISA’s

preemption clause stating that ERISA shall preempt all

state laws “[e]xcept as provided in subsection (b),” mean-

ing ERISA shall preempt all state laws except for those

state laws coming within the saving clause.

This Court has observed that effect must be given to a

statute’s plain language. Shaw v. Delta Air Lines, Inc., 463

U.S. 85, 97 (1983). Here, the plain language of the saving

clause says “nothing” shall override “any law of any state”

regulating insurance. “Nothing” means “nothing.” It does

not mean “nothing, except that ERISA’s preemption clause

can override State law.” “Any law” means “any law,” not

“any law except for a State law that allows for remedies

beyond those remedies provided for by ERISA.” Thus,

implementation of this Court’s dicta in support of conflict

preemption so as to find that ERISA preempts a state’s

bad faith law, even though it fits within the saving clause,

amounts to this Court inserting its own terms into the

statute. The effect would be to so contravene and diminish

this statute’s plain language as to usurp Congress’s right

to have the legislation it enacts enforced. Bates v. United

States, 522 U.S. 23, 29 (1997) (Court should “resist reading

words or elements into a statute that do not appear on its

face”).

This Court has also recognized that the breadth of the

saving clause is as extensive as the preemption provision,

UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 363

(1999), and has said it “makes scant sense” to argue a law

is preempted even though it fits within the saving clause.

Id. at 375. These observations are consistent with Metro-

politan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 741

(1985) (no preemption of state law requiring minimum

mental health coverage in policies), where this Court

declared: “The presumption is against pre-emption, and

we are not inclined to read limitations into federal stat-

utes in order to enlarge their pre-emptive scope.”

Similarly, this Court has stated:

We have never assumed lightly that Congress

has derogated state regulation, but instead have

addressed claims of pre-emption with the start-

ing presumption that Congress does not intend to

supplant state law. Indeed, in cases ... where

federal law is said to bar state action in fields of

traditional state regulation, we have worked on

the “assumption that the historic police powers of

the States were not to be superseded by the Fed-

eral Act unless that was the clear and manifest

purpose of Congress.”

New York State Conference of Blue Cross & Blue Shield

Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995)

(quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230

(1947).

The problem with this Court's dicta favoring conflict

preemption is that it elevates a preemptive plan that can

at best be implied into ERISA over the saving clause’s

express language and extensive scope, even though there

is an express exception in the preemption clause in favor

of the saving clause. This is the case despite the presump-

tion against preemption and the lack of any clear indica-

tion from Congress that such a preemptive scheme was

intended to supersede the saving clause’s plain language.

For these reasons Judge Newcomer declined to follow this

court’s dicta in Rosenbaum v. UNUM Life Ins. Co. of Am.,

2003 U.S. Dist. LEXIS 15652, *23 (E.D. Pa.), stating:

The Pilot Life and Rush holdings present an im-

plied Congressional intent which flatly contra-

dicts this express intent. Rather than allowing

any state law which “regulates insurance” to

survive ERISA preemption, this implied intent

adds an additional requirement, that is, the law

must not offer a remedy which is not listed under

§ 502(a). The problem with such a requirement is

that the Courts have taken an implied intent,

which was derived by questionable means, and

have interpreted that implied intent to overrule

Congress’ express intent, as reflected in the sav-

ing clause.

Finally, this Court must look “to the objectives of the

ERISA statute as a guide to the scope of the state law that

Congress understood would survive.” New York State

Conference of Blue Cross & Blue Shield Plans, 514 U.S. at

656. See also Firestone Tire & Rubber Co. v. Bruch, 489

U.S. 101, 113-114 (1989) (Court rejects “reading of ERISA

[that] would afford less protection to employees and their

beneficiaries than they enjoyed before ERISA”). Because

conflict preemption encourages insurers to run roughshod

over the employees ERISA was meant to protect, it runs

counter to ERISA’s purpose and so provides employees

ASA SUR REN LAER Sos nan eh or eee AGS Ta

with significantly less protection than they had before

ERISA. On the other hand, Colorado’s bad faith law is in

perfect step with Congress’s desire to safeguard employ-

ees, and nothing in the statute’s language, the purposes

underlying ERISA, or its legislative history supports a

contrary conclusion. Accordingly, there is no’ basis for

construing ERISA so that a saved law is subject to conflict

preemption.

B. Conflict Preemption Derives from Dis-

similar Legislation

That this Court arrived at its dicta in support of

conflict preemption by “questionable means” is demon-

strated by the Pilot Life Court’s heavy reliance on the

Labor Management Relations Act, 1947, 29 U.S.C. § 185

(hereinafter LMRA), wherein the Court noted that ERISA

preemption was “modeled on the exclusive remedy pro-

vided by § 301” of the LMRA. Pilot Life, 481 U.S. at 52.

However, it is difficult to envision how this citation to the

LMRA can have any bearing on a law that falls within the

saving clause. The LMRA has no saving clause and thus is

not comparable legislation when addressing a law that fits

within ERISA’s saving clause. Cf. Firestone Tire & Rubber

Co., 489 U.S. at 109-110 (““LMRA principles offer no

support for the adoption of the arbitrary and capricious

standard [of review of fiduciary’s decision] insofar as

[ERISA] is concerned” because unlike ERISA, employee

may not bring suit against fiduciary under LMRA).

Moreover, while the LMRA comprehensively regulates

the field of labor relations, ERISA contains virtually no

regulation of insurance. Indeed, this Court has said:

The phrasing of § 502 [ERISA’s remedial provi-

sion] is instructive. It does not purport to reach

every question relating to plans covered by ER-

ISA ... Furthermore, § 514(b)(2)(A) of ERISA

[the saving clause] makes clear that Congress

did not intend to preempt entirely every state

cause of action relating to such plans. With im-

portant, but express limitations, it states that

“nothing in this subchapter shall be construed to '

exempt or relieve any person from any law of any :

State which regulates insurance, banking, or se-

curities.” In contrast, § 301(a) of the LMRA ap-

plies to all “suits for violation of contracts

between an employer and a labor organization

representing employees in an industry effecting

commerce... or between any such organization.”

Franchise Tax Board of Cal. v. Construction Laborers

Vacation Trust for Southern Cal., 463 U.S. 1, 25 (1983).

C. Congress Never Intended ERISA’s En-

forcement Scheme to Preclude State

Regulation of Insurance Through Bad

Faith Law

ERISA was enacted as a pension reform bill intended

to protect worker retirement benefits. Shaw v. Delta Air

Lines, Inc., 463 U.S. 85, 90 (1983); 29 U.S.C. § 1001a; 29

U.S.C. § 1001b. With this in mind, there is an illuminating

law review article by Donald T. Bogan, Protecting Patient

Rights Despite ERISA: Will the Supreme Court Allow

States To Regulate Managed Care? 74 Tul. L. Rev. 951

(2000) (hereinafter, Bogan, Protecting Patient Rights),

demonstrating that ERISA was never intended to compre-

hensively regulate nonpension employee benefits in any

way, including by way of remedies, and that this explains

why the saving clause was enacted to leave the full gamut

of state laws regulating insurance free from preemption.

Professor Bogan observed that legislative history

reveals that abuses in the pension industry led to ERISA’s

enactment “to comprehensively reform the private pension

industry.” Id. at 964, 967 n.7. See also Taggart Corp. v. Life

and Health Benefits Admin., Inc., 617 F.2d 1208, 1211 (5th

Cir. 1980); Andrews-Clarke v. Travelers Ins. Co., 984

F. Supp. 49, 56 n.29 (D. Mass. 1997). Consequently, ER-

ISA’s major substantive provisions - e.g., provisions

dealing with funding, protection against insolvency,

vesting, and protection of workers in cases of insolvency —

apply only to pension plans. Bogan, Protecting Patient

Rights at 974-975. On the other hand, Professor Bogan

demonstrates that “ERISA’s legislative history provides no

evidence that Congress seriously investigated, studied, or

debated any issues or concerns with nonpension employee

benefit plans.” Id. at 972.

There is no documentation anywhere in ERISA’s

legislative history of any study or investigation of

the history or growth of nonpension employee

benefit plans, or of any specific concern with the

management of nonpension plan assets. Further,

ERISA’s legislative history fails to disclose any

concerted investigation of any complaints about

nonpension benefits, such as inadequate health

care, accident, death, or disability coverage, or

problems with health, life or disability benefits

claims. In short, Congress just was not dealing

with nonpension benefit plans when it enacted

ERISA.

Id. at 976-977. Thus, Professor Bogan notes that “[w]Jhile it

is true that portions of ERISA apply to nonpension benefit

plans, the statute certainly does not provide a complete

and coordinated network of rules to govern nonpension

employee benefits.” Id. at 973. See also id. at 956, 958.

However, state law does provide substantial regula-

tion of insurance, where ERISA does not. Citing Metropoli-

tan Life, 471 U.S. at 727-32, Professor Bogan noted that

“unlike prevailing state law that commonly dictates the

terms of insurance policies, regulates insurance company

claims practices, and provides regulatory protections

against insurance company insolvency,” there was no

ERISA regulation at all relating to these insurance mat-

ters. Bogan, Protecting Patient Rights at 990. Thus, it

should be of no surprise that there exists no

legislative history addressing Conference Com-

mittee action indicating. any intent to displace

state laws regulating the predominant nonpen-

sion employee benefits such as health care and

disability.

Id. at 982 n.139.

In fact, Professor Bogan maintains that the only

reason ERISA regulates nonpension plans at all is because

it was introduced as a bill to amend the Welfare and

Pension Plan Disclosure Act, 29 U.S.C. §§ 301-309 (re-

pealed 1974), whose disclosure requirements applied to all

employee benefit plans. Id. at 977 n.124. So, Professor

Bogan reasons that if courts were to accept

[t]his new ERISA super-preemption doctrine [it

would] create[] a glaring void in the field of wel-

fare plan regulation because ERISA, with its de-

tailed focus on pension issues, does not replace

preempted state laws in the field of welfare bene-

fit plans with any substantive federal regulation.

Id. at 986. As such, conflict preemption would be “inconsis-

tent with the scope of ERISA’s substantive regulations,

which pertain only to pension plans, and with the statute’s

comparatively modest objective of protecting workers’

rights to their pension benefits.” Id. at 955.

In view of this, Professor Bogan concludes that in

enacting the saving clause, Congress intended to confine

preemption to pension plans “because ERISA provides a

pervasive and coordinated regulatory scheme to govern

pension plans and because the field of pension regulation

does not have strong state-law roots.” Id. at 957. This

conclusion, considered in the context of a dearth of ERISA

substantive regulation of insurance, is consistent with this

Court’s observation that the saving clause was made part

of ERISA to preserve and continue the long held right the

McCarran-Ferguson Act gave to the states to regulate the

business of insurance in all respects. Metropolitan Life,

471 U.S. at 744 n.21.

IV. Colorado’s Bad Faith Law Satisfies the Miller

Test to Come Within ERISA’s Saving Clause

In Kentucky Ass’n of Health Plans, Inc. v. Miller, 123

S. Ct. 1471, 1479 (2003), this Court eliminated the McCar-

ran-Ferguson factors from consideration on the issue of

whether a state law comes within ERISA’s savings clause,

stating:

Today we make a clean break from the McCar-

ran-Ferguson factors and hold that for a state

law to be deemed a “law ... which regulates

insurance” under §1144(b)(2)(A), it must satisfy

two requirements. First, the state law must be

specifically directed toward entities engaged in

insurance. See Pilot Life, supra, at 50, UNUM,

‘am

supra, at 368, Rush Prudential, supra, at 366.

Second, as explained above, the state law must

substantially affect the risk pooling arrangement

between the insurer and the insured.

Analysis demonstrates that Colorado’s bad faith law

meets the two Miller requirements to come within ERISA’s

saving clause, and so avoid preemption. Yet, the Tenth

Circuit’s panel majority insisted upon utilizing the McCar-

ran-Ferguson factors in finding that Colorado's law did not

satisfy the saving clause. Because the Tenth Circuit is not

alone in this regard, see Leuthner v. Blue Cross and Blue

Shield of Northeastern Pennsylvania, 270 F. Supp. 2d 584,

593-594 (M.D.Pa. 2003); Bank of Louisiana v. Aetna U.S.

Healthcare, Inc., 2003 U.S. Dist. LEXIS 12001, *8 (E.D.

La.), there is a compelling reason for this Court to hear

this case to clarify the extent to which the McCarran-

Ferguson factors should be employed to determine

whether a state law comes within the saving clause.

A. Colorado’s Bad Faith Law Is “Specifically

Directed Toward Entities Engaged in In-

surance”

Colorado’s bad faith law meets the first Miller prong

requiring that it “be specifically directed toward entities

engaged in insurance.”

Colorado first recognized the tort of bad faith in 1970,

in Aetna Casualty & Surety Co. v. Kornbluth, 471 P.2d 609

(Colo. App.), in allowing an insured to sue his insurer for

not settling a claim within policy limits where this failure

to so settle resulted in an excess judgment against the

insured.

In 1984, the tort of bad faith was extended in Farmers

Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.), so that

an insurer could be liable for the manner in which it

handles a claim against its insured, with the court saying:

By obtaining insurance, an insured seeks to ob-

tain some measure of financial security and pro-

tection against calamity, rather than to secure

commercial advantage. [Citations omitted] The

refusal of the insurer to pay valid claims without

justification, however, defeats the expectations of

the insured and the purpose of the insurance

contract. It is, therefore, necessary to impose a

legal duty upon the insurer to deal with its in-

sured in good faith. [Citations omitted]

In Travelers Insurance Co. v. Savio, 706 P.2d 1258

(Colo. 1985), bad faith was broadened to cover an insured

bringing a first-party action against an insurer for its

denial of benefits. The court recognized that the insured

had an interest in the insurer dealing fairly and in good

faith in order to be protected from economic calamity due

to injury, id. at 1273-1274, and so that the insured would

not be coerced into accepting an unfair settlement due to

economic pressures. Id. at 1273.

In 1987, Colorado’s legislature enacted C.R.S. 10-3-

1113, mandating that a jury in a bad faith case be in-

structed as follows:

(1) In any civil action for damages founded

upon contract, or tort, or both against an insur-

ance company, the trier of fact may be in-

structed that the insurer owes its insured the

duty of good faith and fair dealing, which duty is

breached if the insurer delays or denies pay-

ment without a reasonable basis for its delay or

denial.

(2) Under a policy of liability insurance, the

determination of whether the insurer’s delay or

denial was reasonable shall be based on whether

the insurer’s delay or denial was negligent.

(3) Under a policy of first-party insurance, the

determination of whether the insurer’s delay or

denial was reasonable shall be based on whether

the insurer knew that its delay or denial was

unreasonable or whether the insurer recklessly

disregarded the fact that its delay or denial was

unreasonable.

(4) In determining whether an insurer's delay

or denial was reasonable, the jury may be in-

structed that willful conduct of the kind set forth

in section 10-3-1104(1)(h)(I) to (1)(h)(XIV) is pro-

hibited and may be considered if the delay or de-

nial and the claimed injury, damage, or loss was

caused by or contributed to by such prohibited

conduct.

(Emphasis added). Thus, this statute indicates that the

tort of bad faith in Colorado applies only to an insurer’s

treatment of its insured.

This statute’s subsection (4) says that an insurer’s

willful conduct as set forth in C.R.S. 10-3-1164(1)(h)(D-

(XIV) is evidence of bad faith and, in looking at these

subsections, they clearly focus only on insurance. Section

(1) begins in saying: “The following are defined as unfair

methods of competition and unfair or deceptive acts or

practices in the business of insurance: ... .” (Emphasis

added). The subsections then indicate that this includes

“Unfair claims settlement practices,” such as an insurer:

misrepresenting facts or policy provisions; failing to

respond promptly to communications concerning insur-

ance claims; failing to have reasonable standards for

claims investigation and failing to pay claims without

conducting a reasonable investigation; failing to say

within a reasonable time whether there is coverage; not

attempting to settle in good faith when liability is rea-

sonably clear; compelling insureds to litigate claims by

offering substantially less than what is ultimately recov-

ered; attempting to settle for less than what a reasonable

person would feel entitled to; attempting to settle claims

based upon an altered application; not telling insureds

under what coverage a claim is being paid; making known

a policy of appealing arbitration awards unless the insured

will settle for less than the award; requiring insureds to

submit multiple claim forms containing the same informa-

tion; not settling under one portion of a policy to influence

settlement under another portion; and failing to explain

the basis for a claim denial or compromise offer.

As the court stated in Dale v. Guaranty National

Insurance Company, 948 P.2d 545, 552 (Colo. 1997), an

insurer’s duty to act in good faith “permeates all of the

dealings between the parties.” This is because of the

special relationship between insured and insurer, and the

insured’s dependence upon the insurer to provide the

security bargained for at a time the insured is most in

need. Vaughan v. McMinn, 945 P.2d 404, 406 (Colo. 1997).

Yet, because the parties to non-insurance contracts do

not have the same relationship as exists between insured

and insurer, Colorado’s courts have refused to extend the

bad faith tort beyond the insurance context. Centennial

Square, Ltd. v. Resolution Trust Co., 815 P.2d 1002 (Colo.

App. 1991) (no cause of action in bad faith for breach of

non-insurance contract); Decker v. Browning-Ferris Indus-

tries of Colorado, Inc., 931 P.2d 436 (Colo. 1997) (no bad

faith cause of action in employment arena). Thus, while it

ccc i

is true that the duty to act in good faith is implied as a

term in every contract in Colorado, Amoco Oil Co. v. Ervin,

908 P.2d 493, 498 (Colo. 1995), a bad faith cause of action

exists only for an insurer’s bad faith breach of an insur-

ance contract, such that Colorado’s law is “specifically

directed toward entities engaged in insurance.”

B. Colorado’s Bad Faith Law “Substantially

Affect[s] the Risk Pooling Arrangement”

Under Miller, Colorado’s bad faith law must also

“substantially affect the risk pooling arrangement between

the insurer and the insured.” The Court noted that this

“requires only that the state law substantially affect the

risk pooling arrangement between the insurer and in-

sured; it does not require that the state law actually

spread risk.” Miller, 123 S.Ct. 1477 n.3 (emphasis in

original). So while the Court recognized that the Ninth

Circuit had held that California’s notice-prejudice rule did

not spread risk, the Court observed that the rule

governs whether or not an insurance company :

must cover claims submitted late, which dictates :

to the insurance company the conditions under

which it must pay for the risk that it has as-

sumed. This certainly qualifies as a substantial

effect on the risk pooling arrangement between

the insurer and insured.

Id.

By telling insurers, for example, that they must

attempt to settle when liability becomes reasonably clear

and they cannot offer less than what a reasonable person

would feel entitled to, Colorado’s bad faith law is “dic-

tat[ing] to the insurance company the conditions under

which it must pay for the risk it has assumed.” Therefore,

Colorado’s bad faith law has the same impact as the

notice-prejudice rule, and so meets the second prong of the

Miller test.

C. The Tenth Circuit Failed to Follow Miller

Despite the clear pronouncement of this Court in

Miller that it was making a “clean break from the McCar-

ran-Ferguson factors,” the Tenth Circuit's panel majority

applied those factors anyway in determining that Colo-

rado’s bad faith law did not come within ERISA’s saving

clause. As the dissent recognized, had Colorado’s law been

correctly reviewed under the new Miller criteria, it would

have been protected from express preemption by the

saving clause. App. 20-35.

The persistence of the panel majority in applying the

McCarran-Ferguson factors can be seen in the way Colo-

rado’s law was evaluated to determine whether it was

“specifically directed towards entities engaged in insur-

ance.” In this regard, the majority based the outcome on

whether the law was limited to entities engaged in insur-

ance, i.e., the third McCarran-Ferguson factor. App. 8. Not

only was this error considering the Court’s “clean break”

decree, but it ignored the Miller Court's express holding

that Kentucky’s “Any Willing Provider” statute came

within the saving clause although its effect was not

limited to insurers. Id., 123 S. Ct. at 1475-76, 1476 n.1.

The majority also cited Pilot Life Ins. Co. v. Dedeaux,

481 U.S. 41 (1987), in holding that Colorado’s law was not

saved because its roots were firmly planted in general

principles of Colorado’s tort and contract law. App. 8-9. Yet,

Miller said nothing about a law coming within the saving

clause being conditioned upon how that law had devel-

oped. Thus, the majority impermissibly added a third

requirement to the Miller test. Even so, as shown above,

‘Colorado’s law is limited to entities engaged in insurance

and does not have roots firmly planted in general princi-

ples of Colorado’s tort and contract law. The majority

misconstrued Colorado case law in ruling that Colorado

recognizes a bad faith cause of action outside the insur-

ance context. So, it has been said: “Colorado has also

recognized a separate cause of action sounding in tort for

bad faith breach of insurance contract. However, no such

tort claim has been recognized in other contract ac-

tions.... ” Wells Fargo Realty Advisors Funding, Inc. v.

Uioli, Inc., 872 P.2d 1359, 1362 (Colo. App. 1994) (empha-

sis in original) (breach of implied duty of good faith and

fair dealing by “acts of deception, concealment, and chi-

canery” gives rise to “merely a breach of contract [action]

with standard remedies,” but not bad faith claim for

relief).

In fact, far from being an actual cause of action, the

duty to act in good faith and to deal fairly is no more than

a rule of construction to determine if there has been a

breach where a contract gives one party discretion in the

performance of a term. See Id. at 1363; Amoco Oil Co. v.

Ervin, 908 P.2d 493, 498 (Colo. 1995) (failure to exercise

discretion in good faith in setting rent amounts to breach

of contract entitling party to contract damages only, 1.e.,

the amount of overpayment); Rogers v. Westerman Farm

Co., 29 P.3d 887, 908-910 (Colo. 2001) (where contract

gives seller discretion to set price,. price determined based

on “what a fair sale price would have been had the lessee

acted in good faith”).

The panel majority also applied obsolete precedent,

making use of McCarran-Ferguson factors one and two, in

holding that Colorado’s law did not “substantially affect

the risk pooling arrangement” because it did not spread

risk and that it was not integral to the policy relationship

since it did not affect the contract’s substantive terms.

App. 9-11. In so holding, the majority inexplicably disre-

garded Miller’s ruling that this prong did not equate with

spreading of risk, 123 S.Ct. at 1477 n.3, and ignored this

Court’s rejection of the idea that the law must affect a

substantive term of the policy. So, this Court stated: “We

have never held that state laws must alter or control the

actual terms of insurance policies to be deemed ‘laws...

which regulate insurance’ under § 1144(b)(2)(A); it suffices

that they substantially affect the risk pooling arrangement

between insurer and insured.” Id. at 1477.

Therefore, in applying the discarded McCarran-

Ferguson factors, the panel majority not only disregarded

Miller’s “clean break” edict, but as appreciated by the

dissent, “help[ed] dismantle the protective system devised

by Colorado’s legislature and courts for Colorado’s citi-

zens.” App. 35.

CONCLUSION

Since 1987 insurers have been immune from bad faith

liability through application of ERISA’s preemption clause.

This has allowed insurers to mock justice by trampling

upon the rights of disabled employees in pursuit of un-

earned profits. This Court, through review of the instant

case upon the granting of this petition, can restore justice

to its rightful place so that millions of employees will

er a

finally receive the protection Congress intended in enact-

ing ERISA.

Respectfully submitted,

STEPHEN C, KAUFMAN

Counsel of Record for Petitioners

3801 E. Florida Avenue, Suite 900

Denver, Colorado 80210

(303) 393-6666

————————————

App. l

APPENDIX A

Jon F. KIDNEIGH, Plaintiff/Cross-Appellee,

and

Barbara Kidneigh, Plaintiff-Appellant/Cross-

Appellee,

Vv.

UNUM LIFE INSURANCE COMPANY OF AMERICA,

a Maine Corporation, Defendant-Appellee/Cross-

Appellant.

Colorado Trial Lawyers Association,

Amicus Curiae.

Nos. 02-1277, 02-1282.

United States Court of Appeals,

Tenth Circuit.

Filed Oct. 3, 2003.

Stephen C. Kaufman, Denver, CO, for Plaintiffs-

Appellants/Cross-Appellees.

Michael S. Beaver, Holland & Hart, L.L.P., Greenwood

Village, CO, (Marcy G. Glenn and Jack M. Englert, Jr.,

Holland & Hart, L.L.P., Denver, CO, with him on the

briefs), for Defendant-Appellee/Cross-Appellant.

Michael J. Rosenberg and Bradley A. Levin, Roberts,

Levin & Patterson, P.C., Denver, CO, for Amicus Curiae

Colorado Trial Lawyers Association.

Before KELLY, HENRY, and HARTZ, Circuit Judges.

KELLY, Circuit Judge.

Plaintiff/Cross-Appellee Jon Kidneigh and Plaintiff-

Appellant/Cross-Appellee Barbara Kidneigh brought suit

App. 2

seeking disability benefits pursuant to 29 U.S.C.

§§ 1132(aX 1B) and (g), the Employment Retirement Income

Security Act of 1974 (“ERISA”), along with state law claims for

bad faith and loss of consortium. We have jurisdiction under

28 U.S.C. § 1292(b), and we affirm in part and reverse in part.

Background

Plaintiff Jon Kidneigh brought a claim against UNUM

Life Insurance Co. (“UNUM”) seeking disability benefits

pursuant to §§ 1132(aX1\B) and (g) of the Employment Re-

tirement Income Security Act of 1974 (“ERISA”). UNUM is the

claims administrator of a long-term disability plan covering

employees of the law firm of Kidneigh & Kaufman, P.C. Though

UNUM paid disability benefits to Mr. Kidneigh after a series of

back and hernia surgeries, UNUM stopped paying benefits on

' March 31, 1999, after determining that Mr. Kidneigh was

physically capable of performing his job as an attorney.

Mr. Kidneigh also brought a state law claim for bad

faith along with the direct ERISA claim seeking continued

benefits, and his wife brought a state law claim for loss of

consortium. UNUM moved to dismiss Mr. Kidneigh’s bad

faith claim and Mrs. Kidneigh’s loss of consortium claim

on the grounds that both are preempted by ERISA. The

district court denied the motion with respect to Mr. Kid-

neigh but granted the motion with respect to Mrs. Kid-

neigh. The district court granted an unopposed motion for

interlocutory appeal brought pursuant to Fed.R.Civ.P.

52(b), finding that the issue “involves a controlling ques-

tion of law as to which there is substantial ground for

difference of opinion and that an immediate appeal from

the order may materially advance the ultimate termina-

tion of the litigation.” 28 U.S.C. § 1292(b). Both Mrs.

App. 3

Kidneigh and UNUM appeal from the district court’s

order; Mrs. Kidneigh appeals from the dismissal of her

loss of consortium claim, and UNUM appeals from the

denial of the motion to dismiss Mr. Kidneigh’s bad faith

claim.

Discussion

Because the scope of ERISA preemption is a question

of law, the district court’s decision is subject to de novo

review. Conover v. Aetna U.S. Health Care, Inc., 320 F.3d

1076, 1077 (10th Cir.2003).

“fAjny court forced to enter the ERISA preemption

thicket sets out on a treacherous path.” Gonzales uv.

Prudential Ins. Co., 901 F.2d 446, 451-52 (5th Cir.1990). In

this case we must resolve whether a Colorado state law

bad faith claim against an employment disability insur-

ance provider is preempted by ERISA. A secondary issue is

whether a spouse’s derivative loss of consortium claim is

also preempted by ERISA.

The issue here is one that frequently confronts the

federal courts due to ERISA’s “statutory complexity.”

Metro. Life Ins. Co. v. Mass., 471 U.S. 724, 740, 105 S.Ct.

2380, 85 L.Ed.2d 728 (1985). ERISA’s preemption clause

broadly states that “[e]xcept as provided in subsection (b)

of this section, the provisions of this subchapter and

subchapter III of this chapter 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). What

Congress took away with one hand, however, it gave back

with the other as contained in ERISA’s saving clause:

“Except as provided in subparagraph (B), nothing in this

subchapter shall be construed to exempt or relieve any

App. 4

person from any law of any State which regulates insur-

ance, banking, or securities.” Id. § 1144(b)(2)(A). Subpara-

graph (B) (the deemer clause), in turn, provides:

Neither an employee benefit plan ... nor any

trust established under such a plan, shall be

deemed to be an insurance company or other in-

surer, bank, trust company, or investment com-

pany or to be engaged in the business of

insurance or banking for purposes of any law of

any State purporting to regulate insurance com-

panies, insurance contracts, banks, trust compa-

nies, or investment companies.

Id. § 1144(b)(2)(B). As summarized by the Supreme Court:

If a state law “relate[s] to ... employee benefit

plan{s],” it is pre-empted. The saving clause ex-

cepts from the pre-emption clause laws that

“regulat[e] insurance.” The deemer clause makes

clear that a state law that “purport[s] to regulate

insurance” cannot deem an employee benefit

plan to be an insurance company.

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45, 107 S.Ct.

1549, 95 L.Ed.2d 39 (1987) (citations omitted). The Su-

preme Court has further noted that “[t]he pre-emption

clause is conspicuous for its breadth,” FMC Corp. uv.

Holliday, 498 U.S. 52, 58, 111 S.Ct. 403, 112 L.Ed.2d 356

(1990), and that “the express pre-emption provisions of

ERISA are deliberately expansive, and designed to ‘estab-

lish pension plan regulation as exclusively a federal

concern.’” Pilot Life, 481 U.S. at 45-46, 107 S.Ct. 1549.

In addition to Congress’s power to “define explicitly

the extent to which its enactments pre-empt state law,” a

state law can also be preempted “to the extent that it

actually conflicts with federal law.” English v. Gen. Elec.

App. 5

Co., 496 U.S. 72, 78-79, 110 S.Ct. 2270, 110 L.Ed.2d 65

(1990). Where a state law “stands as an obstacle to the

accomplishment and execution of the full purposes and

objectives of Congress,” then the state law is preempted.

Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85

L.Ed. 581 (1941). State law causes of action, then, are

preempted under ERISA both when they are expressly

preempted by the terms of the statute as well as when the

state law provides remedies beyond those contained in

ERISA itself. See Ingersoll-Rand Co. v. McClendon, 498

U.S. 133, 143-44, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990);

Pilot Life, 481 U.S. at 54, 107 S.Ct. 1549 (“The deliberate

care with which ERISA’s civil enforcement remedies were

drafted and the balancing of policies embodied in its choice

of remedies argue strongly for the conclusion that ERISA’s

civil enforcement remedies were intended to be exclu-

give.”). The Supreme Court has noted that a distinction

can be drawn between cases involving an “additional claim

or remedy,” such as Pilot Life, and cases “bear[ing] a

resemblance to the claims-procedure rule” sustained in

UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 368, 119

S.Ct. 1380, 143 L.Ed.2d 462 (1999). Rush Prudential

HMO, Inc. v. Moran, 536 U.S. 355, 380, 122 S.Ct. 2151,

153 L.Ed.2d 375 (2002). Cases on the former side of the

distinction fall within “Pilot Life's categorical preemption.”

Id.

We hold that Colorado bad faith claims are preempted

by ERISA because they conflict with ERISA’s remedial

scheme. State law bad faith claims such as the Colorado

claim in this case — insofar as they provide an “additional

claim” to plaintiffs — clearly fall on the former side of the

distinction drawn in Rush Prudential and “fit within the

App. 6

category of state laws Pilot Life had held to be incompati-

ble with ERISA’s enforcement scheme” by “provid[ing] a

form of ultimate relief in a judicial forum that add[s] to

the judicial remedies provided by ERISA.” Jd. at 379, 122

S.Ct. 2151.

As this court explained recently, “Nowhere does

[ERISA] allow consequential or punitive damages. Dam-

ages are limited to the recovery of ‘benefits due ... under

the terms of the plan.’” Conover, 320 F.3d at 1080 (altera-

tion in original). The Oklahoma bad faith claim in Conover,

like the Colorado bad faith claim here, “allows plan par-

ticipants to obtain ‘consequential and, in a proper case,

punitive, damages’ for breach of good faith and fair dealing

by an insurer.” Jd. Where such damages are available,

they “provide[ ] a cause of action excluded from [ERISA’s]

civil enforcement scheme and would therefore ‘pose an

obstacle to the purposes and objectives of Congress.’” Id.

(quoting Gaylor v. John Hancock Mut. Life Ins. Co., 112

F.3d 460, 466 (10th Cir.1997)); see also Moffett v. Hallibur-

ton Energy Servs., Inc., 291 F.3d 1227, 1237 (10th

Cir.2002).

The Supreme Court has strongly indicated in dicta

that a state law falling within ERISA’s savings clause

(“nothing in this subchapter shall be construed to exempt

or relieve any person from any law of any State which

regulates insurance,” 29 U.S.C. § 1144(b)(2)(A)) would still

be preempted merely by providing remedies beyond those

prescribed in ERISA. See Rush Prudential, 536 U.S. at

377, 122 S.Ct. 2151 (2002) (“Although we have yet to

encounter a forced choice between the congressional

policies of exclusively federal remedies and the ‘reserva-

tion of the business of insurance to the States,’ we have

anticipated such a conflict, with the state insurance

App. 7

regulation losing out if it allows plan participants ‘to

obtain remedies ... that Congress rejected in ERISA.’”)

(citations omitted). In addition to being preempted due to

conflict with ERISA’s remedial scheme, we are persuaded

that — in the alternative — the Colorado bad faith claim in

this case does not fall within ERISA’s savings clause, and

as such is expressly preempted.

It is undisputed that the Kidneighs’ claims “relate” to

an employee benefit plan, and so our inquiry on this aspect

of preemption moves to the second phase of determining

whether Colorado bad faith law “regulates insurance.” In

light of the case law in this area, our conclusion is that it

does not. The Supreme Court’s recent decision in Kentucky

Ass’n of Health Plans, Inc. v. Miller, __ U.S. __, 123 S.Ct.

1471, 155 L.Ed.2d 468 (2003) (holding Kentucky’s “Any

Willing Provider” statute not preempted by ERISA),

substantially clarified the test for determining when a

state law is not preempted by ERISA because it “regulates

insurance” under § 1144(b)(2)(A): “First, the state law

must be specifically directed toward entities engaged in

insurance,” and “[sJecond ... the state law must substan-

tially affect the risk pooling arrangement between the

insurer and the insured.” ___ U.S. at __, 123 S.Ct. at

1479.

Tested against these two factors, we hold, as noted

above, that a Colorado state law bad faith cause of action

against an ERISA provider is expressly preempted. In

order to be characterized as a state law “regulating insur-

ance,” the law must not “just have an impact on the

insurance industry” but must be “specifically directed

toward that industry.” Pilot Life, 481 U.S. at 50, 107 S.Ct.

1549. Stated otherwise, the state law must “home[] in on

App. 8

the insurance industry.” Ward, 526 U.S. at 368, 119 S.Ct.

1380.

The Colorado courts do appear to have largely (but,

importantly, not exclusively) confined bad faith causes of

action to the insurance setting. See Dale v. Guar. Nat'l Ins.

Co., 948 P.2d 545, 552 (Colo.1997); Vaughan v. McMinn,

945 P.2d 404, 406 (Colo.1997). But see Rogers v. Westerman

Farm Co., 29 P.3d 887, 908 (Colo.2001) (bad faith claim

applied to oil and gas leases); Amoco Oil Co. v. Ervin, 908

P.2d 493, 498 (Colo.1995) (“Colorado, like the majority of

jurisdictions, recognizes that every contract contains an

implied duty of good faith and fair dealing. ... The good

faith performance doctrine is generally used to effectuate

the intentions of the parties or to honor their reasonable

expectations.”) (emphasis added). Even if the Colorado

state courts had limited bad faith claims to the insurance

context, however, that fact alone would not save Colorado

bad faith claims from ERISA preemption. The Supreme

Court’s Pilot Life decision, in which Mississippi’s bad faith

cause of action was held to be preempted by ERISA, dealt

with a state bad faith law apparently confined by a state

supreme court to insurance contracts. “Even though the

Mississippi Supreme Court has identified its law of bad

faith with the insurance industry, the roots of this law are

firmly planted in the general principles of Mississippi tort

and contract law,” and so the Court held that the Missis-

sippi law did not “regulate insurance.” 481 U.S. at 50, 107

S.Ct. 1549; see also Gaylor v. John Hancock Mut. Life Ins.

Co., 112 F.3d 460, 466 (10th Cir.1997) (“[A]lthough Okla-

homa’s bad faith law is specifically directed at the insur-

ance industry, we note that, like the bad faith law in Pilot

Life, its origins are from general principles of tort and

contract law.”); Halprin v. Equitable Life Assurance Soc.,

App. 9

267 FSupp.2d 1030, 1038 (D.Colo.2003)’ (following Kelley

v. Sears, Roebuck & Co., 882 F.2d 453 (10th Cir.1989), and

holding Colorado’s bad faith law preempted; subsequent

Colorado case law developments merely described, but did

not change, the development of bad faith).

As to the second factor in ERISA express preemption

analysis, Pilot Life and other ERISA preemption cases

show that state bad faith claims do not “substantially

affect the risk pooling arrangement” between insurers and

their insureds, which is the hallmark of insurance con-

tracts. See SEC v. Variable Annuity Life Ins. Co. of Am.,

359 U.S. 65, 73, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959). State

law bad faith claims are not integral to the risk pooling

arrangement for the reasons summarized in Pilot Life:

In contrast to the mandated-benefits law in Met-

ropolitan Life, the common law of bad faith does

not define the terms of the relationship between

the insurer and the insured; it declares only that,

whatever terms have been agreed upon in the in-

surance contract, a breach of that contract may

in certain circumstances allow the policyholder to

obtain punitive damages. The state common law

of bad faith is therefore no more “integral” to the

insurer-insured relationship than any State's

general contract law is integral to a contract

made in that State.

481 U.S. at 51, 107 S.Ct. 1549.

‘ Thus, we reject Colligan v. UNUM Life Ins. Co. of Am., 2001 WL

533742 (D.Colo. April 23, 2001), which held that Colorado’s bad faith

law was not preempted without citation or discussion of Kelley.

Ke —O

App. 10

Any-willing provider statutes, notice-prejudice rules,

and independent review provisions all “substantially

affect[ ] the type of risk pooling arrangements that insur-

ers may offer.” Miller, 123 S.Ct. 1471, 1477-78. By con-

trast, bad faith claims, whether common law or statutory,

merely provide an additional remedy for policyholders. See

Gaylor, 112 F.3d at 466 (“[Oklahoma bad faith law] does

not effect a change in the risk borne by insurers and the

insured, because it does not affect the substantive terms of

the insurance contract. On the other hand, a law mandat-

ing that a certain disease be covered under health insur-

ance contracts would effect a spread of risk, both from

insureds to insurers, and among the insureds them-

selves.”); Nguyen v. Healthguard of Lancaster, )

F.Supp.2d __, 2003 WL 22100157, at *8 (E.D.Pa. Aug.14,

2003) (Pennsylvania bad faith statute by providing an

additional remedy for insureds if contract is breached,

“bears no relation to the risk insured against, ... even

though [it] may raise the premiums insureds must pay for

their coverage.”). As the Colorado federal district court in

Denette v. Life of Ind. Ins. Co., 693 F.Supp. 959

(D.Colo.1988), noted with regard to Colorado’s bad faith

law, “[T]here is no indication that the statutes ... have

any effect of transferring or spreading policy holder

risk.... [T]hese statutes do not purport to regulate the

substantive terms or content of insurance policies by

mandating certain benefits.”. Jd. at 966.

An examination of Tenth Circuit case law on the

preemption of state law bad faith claims under ERISA

underscores our conclusion that bad faith claims will

rarely, if ever, be saved from preemption. In Kelley v.

Sears, Roebuck & Co., 882 F.2d 453 (10th Cir.1989), this

court held that ERISA preempted a Colorado bad faith

App. 11

claim, finding that Colorado’s law is “‘very similar in

substance’ to the Mississippi law at issue in Pilot Life.” Id.

at 456 (quoting Denette, 693 F.Supp. at 966). Tracking the

language of Pilot Life, the court held in Kelley that (1)

“Colorado’s common law of bad faith does not regulate

insurance,” insofar as (2) “[i]t neither spreads policyholder

risk nor controls the substantive terms of the insurance

contract,” (3) “[aJlthough associated with the insurance

industry, [Colorado bad faith law] developed from the

general principles of tort and contract law,” and (4) “Colo-

rado’s common law of bad faith conflicts with ERISA’s civil

enforcement remedies.” Id.

The Kidneighs fail to overcome Kelley’s precedential

value in this case. According to the Kidneighs, the Su-

preme Court’s decisions in Ward and Miller worked a

wholesale reconsideration of ERISA preemption analysis,

and pre-Ward Tenth Circuit case law (and, by implication,

pre-Ward Supreme Court cases such as Pilot Life) is not

controlling here. This argument, however, is hard to

square with the continued citation to Pilot Life in recent

Supreme Court cases and citations to Kelley in recent

Tenth Circuit cases. See Moffett, 291 F.3d at 1236-37 (10th

Cir.2002) (“[Wle conclude that Wyoming’s law does not

regulate insurance such that it falls within ERISA’s saving

clause. Wyoming’s bad faith law does not have the effect of

transferring or spreading policyholder risk.”) (citing Kelley,

882 F.2d at 456). Recent Supreme Court and Tenth Circuit

cases indicate that, while the precise formulation of the

test for analyzing ERISA preemption cases has evolved,

the holdings of prior cases are still valid as to the preemp-

tion of bad faith claims.

The Kidneighs similarly overstate the effect of Miller

on this case when they claim in their Supplemental Brief

App. 12

that “[plrior case law from the Supreme Court and this

Circuit holding that state bad faith laws are preempted

based upon a McCarran-Ferguson analysis are now

without precedential value” and that “t]he Supreme Court

has thus eviscerated the precedential value of Pilot Life.”

Aplt. Supp. Br. at 1-2. On the contrary, the Court in Miller

notes that the now-discarded McCarran-Ferguson factors

used in Pilot Life were, in the earlier opinion, “mere

‘considerations [to be] weighed’ in determining whether a

state law falls under the savings clause,” __ US. at __.

123 S.Ct. at 1479 (quoting Pilot Life, 481 U.S. at 49, 107

S.Ct. 1549), and that in none of the Court's ERISA pre-

emption decisions were “the McCarran-Ferguson factors

an essential component of the [preemption] analysis,” id.

(discussing Metro. Life, 471 U.S. at 742-43, 105 S.Ct. 2380,

and Ward, 526 U.S. at 374, 119 S.Ct. 1380). Had the

Supreme Court intended Miller to overrule Pilot Life or, in

the Kidneighs’ words, eviscerate its precedential value, the

Court could have said as much; the fact that Pilot Life is

still cited in Miller with approval suggests otherwise. See

also Leuthner v. Blue Cross and Blue Shield, 270

F.Supp.2d 584, 592-94 (M.D.Pa.2003) (applying Miller and

relying upon reasons in Pilot Life to conclude that Penn-

svlvania bad faith statute did not affect risk pooling

arrangement); McGuigan v. Reliance Standard Life Ins.

Co., 256 FSupp.2d 345, 348 (E.D.Pa.2003) (same).

Nor is the Kidneighs’ argument availing that Colorado

law governing bad faith claims has evolved to the point

where a case from 1989 (Kelley) is no longer applicable in

2003. The statute on insurance unfair competition and

deceptive practices in Colorado cited by the Kidneighs —

enacted before Kelley — merely provides remedies for and

prevents unfairness in the insurance industry and states

App. 13

that juries in civil cases against insurance companies may

be instructed that “the insurer owes its insured the duty of

good faith and fair dealing.” Colo.Rev.Stat. Ann. § 10-3-

1113(1) (West 2003). Colorado is hardly the only state to

attempt to so distinguish generic contract bad faith and

insurance bad faith; several states have similar insurance

bad faith statutory provisions, and they are routinely held

to be expressly preempted by ERISA. See, e.g., Gilbert v.

Alta Health & Life Ins. Co., 276 F.3d 1292, 1297-99 (11th

Cir.2001) (Alabama insurance bad faith statute preempted

by ERISA); Gaylor, 112 F.3d at 466 (Oklahoma insurance

bad faith statute preempted by ERISA); Swerhun uv.

Guardian Life Ins. Co. of Am., 979 F.2d 195, 199 (11th

Cir.1992) (Florida insurance bad faith statute preempted

by ERISA).

As to Mrs. Kidneigh’s loss of consortium claim, the

Kidneighs concede that preemption of Mr. Kidneigh’s bad

faith claim would entail preemption of Mrs. Kidneigh’s

loss of consortium claim:

[A]s a derivative claim, a claim for loss of consor-

tium is only as valid as the claim from which it

derives. In essence it is no more than an element

of damages that comes with the principal

claim. ...

[A] loss of consortium claim is not preempted if

the claim it derives from is not preempted, but it

is preempted if ERISA preempts the principal

claim.

Aplt. Br. at 11-12 (citing Pacificare of Okla., Inc. v. Bur-

rage, 59 F.3d 151 (10th Cir.1995)). This result is true

whether the loss of consortium claim is understood to

derive from the bad faith claim (as the Kidneighs contend)

or from the ERISA claim (as UNUM contends). If the

App. 14

former, then the Kidneighs’ concession above controls. If

the loss of consortium claim is derived from the ERISA

claim, then the loss of consortium claim is best character-

ized as a state law claim preempted by ERISA. See Bast v.

Prudential Ins. Co. of Am., 150 F.3d 1003, 1009-10 (9th

Cir.1998); Burrage, 59 F.3d at 155 (“A loss of consortium

claim against an [insurer] alleging negligent or fraudulent

administration of the plan is preempted by ERISA.”). The

plain language of ERISA and prevailing Supreme Court

and Tenth Circuit authority lead, then, to the conclusion

that Mr. Kidneigh’s Colorado state law bad faith claim is

preempted by ERISA and that his wife’s loss of consortium

is similarly preempted.

We are unpersuaded that Elliot v. Fortis Benefits Ins.

Co., 337 F.3d 1138 (9th Cir.2003), suggests a different

result. That case held that a state-law unfair trade prac-

tices act claim was preempted under ERISA’s civil en-

forcement provision, 29 U.S.C. § 1132, relying upon Pilot

Life. Elliot, 337 F.3d at 1147. The court found that the

state act “provides damages above and beyond those

provided in ERISA, including punitive damages,” and was

therefore preempted by § 1132. Id. Though the opinion

contains an interesting discussion concerning the evolu-

tion of § 1144 preemption, the court did not reach whether

(1) the state act was specifically directed toward entities

engaged in insurance and (2) whether it substantially

affects the risk pooling arrangement between the insurer

and the insured. Elliot, 337 F.3d at 1146. Notwithstanding

the dissent and its reliance on Elliot, we remain persuaded

that neither factor is present here.

The district court’s decision is AFFIRMED in part (as

to Mrs. Kidneigh’s loss of consortium claim) and RE-

VERSED in part (as to Mr. Kidneigh’s bad faith claim).

App. 15

HENRY, J., concurring in part and dissenting in part.

I concur in the majority’s holding that Mr. Kidneigh’s

Colorado bad faith claim is foreclosed by ERISA conflict

preemption. See Maj. Op. at 1184-1186. Because I agree

that “preemption of Mr. Kidneigh’s bad faith claim ...

entail[s] preemption of Mrs. Kidneigh’s loss of consortium

claim,” id. at 1189, I therefore also concur in the ultimate

holding that the Kidneighs’ claims are “preempted by

ERISA.” Id. at 1189. My agreement with the majority,

however, ends there.

Two aspects of the majority's reasoning concern me.

First, the majority's ERISA direct preemption analysis, see

id. at 1186-1189, is unnecessary to our ultimate holding.

Second, the majority’s conclusion following that analysis,

that Mr. Kidneigh’s Colorado insurance bad faith claim is

foreclosed by ERISA direct preemption, is problematic.

A. The Majority’s Direct Preemption Analysis is

Unnecessary

Justice Breyer has warned of the need in certain

situations for “judicial caution and humility.” This is one

of those situations: we should be very careful in invalidat-

ing state legislatures’ actions under federal law. To decide

this case, we did not need to go any further than the

majority's concise and correct application of the ERISA

conflict preemption rules from Rush Prudential HMO, Inc.

v. Moran, 536 U.S. 355, 375, 122 S.Ct. 2151, 153 L.Ed.2d

Stephen Breyer, Our Democratic Constitution, 77 N.Y.U. L.Rev.

245, 261 (2002).

} Pa ere

App. 16

375 (2002), and Conover v. Aetna U.S. Health Care, Inc.,

320 F.3d 1076 (10th Cir.2003), to the remedies sought by

the plaintiffs. See Maj. Op. at 1184-1186.

“This court considers itself bound by Supreme Court

dicta almost as firmly as by the Court’s outright holdings,

particularly when the dicta is recent and not enfeebled by

later statements.” Gaylor v. United States, 74 F.3d 214,

217 (10th Cir.1996) (emphasis supplied). As the majority

explains, see Maj. Op. at 1184-1186, a state law regulating

insurance is foreclosed by ERISA conflict preemption if it

allows plan participants to obtain remedies not available

under ERISA. And as the majority concedes, see id. at

1186, the Supreme Court has made clear that if a state

law claim is foreclosed by ERISA conflict preemption, that

claim is foreclosed regardless of whether the law on which

the claim is based is, or is not, foreclosed by the doctrine of

direct preemption. See Rush, 536 U.S. at 377, 122 S.Ct.

2151 (“Although we have yet to encounter a forced choice

between the congressional policies of exclusively federal

remedies and the reservation of the business of insurance

to the States, we have anticipated such a conflict, with the

state insurance regulation losing out if it allows plan

participants to obtain remedies that Congress rejected in

ERISA”) (internal citations and quotation marks omitted)

(emphasis supplied); Boggs v. Boggs, 520 U.S. 833, 841,

117 S.Ct. 1754, 138 L.Ed.2d 45 (1997) (“We can begin, and

in this case end, the analysis by simply asking if state law

conflicts with the provisions of ERISA or operates to

frustrate its objects. We hold that there is a conflict, which

suffices to resolve the case. We need not inquire whether

the statutory phrase ‘relate to’ provides further and

additional support for the pre-emption claim.”) (emphasis

supplied); cf. Ingersoll-Rand Co. v. McClendon, 498 US.

App. 17

133, 142, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990) (“Even if

there were no express pre-emption in this case, the Texas

cause of action would be pre-empted because it conflicts

directly with an ERISA cause of action.”) (emphasis

supplied).

Indeed, on several occasions, the Supreme Court has

addressed conflict preemption as a basis independent of

direct preemption for holding that ERISA superseded the

common law tort claim in a given case. See Pilot Life Ins.

Co. v. Dedeaux, 481 U.S. 41, 51-57, 107 S.Ct. 1549, 95

L.Ed.2d 39 (1987); Ingersoll-Rand, 498 U.S. at 142-45, 111

S.Ct. 478. Significantly, in its recent ERISA preemption

cases the Court has assumed that ERISA conflict preemp-

tion could foreclose a state claim even if the state law in

question fell within ERISA’s insurance savings clause. See,

e.g., Rush, 536 U.S. at 374-87, 122 S.Ct. 2151 (performing

ERISA conflict preemption after rejecting an ERISA direct

preemption claim); UNUM Life Ins. Co. of Am. v. Ward,

526 U.S. 358, 375-77, 119 S.Ct. 1380, 143 L.Ed.2d 462

(1999) (same).

The necessary logical predicate of these cases is that

ERISA direct preemption and ERISA conflict preemption

operate independently from each other. Put another way, a

state statute is preempted, and a claim based on that

statute foreclosed, when the party asserting ERISA

preemption satisfies the applicable standard for either of

the two main flavors of ERISA preemption, direct or

conflict. When one of those two types of ERISA preemption

is demonstrated, it is wholly unnecessary for a court to

engage in analysis of whether the other ERISA preemption

doctrine applies. The majority does not attempt to dispute

this principle.

App. 18

Nonetheless, the majority, having correctly deter-

mined that the claims are barred by ERISA conflict pre-

emption, ventures unnecessarily and at length further

down that “treacherous path,” as it accurately terms

- ERISA preemption analysis, Op. at 1184, by engaging in

ERISA direct preemption analysis. The majority makes an

ERISA direct preemption holding “in the alternative,” Maj.

Op. at 1186, reaching to interpret as a matter of first

impression the test recently announced in Kentucky Ass’n

of Health Plans, Inc. v. Miller, __ U.S. __, 123 S.Ct. 1471,

155 L.Ed.2d 468 (2003). Although such certainty and

courage may in some contexts warrant admiration, I am

concerned that the majority misapplies Miller. I therefore

address also the majoritys ERISA direct preemption

analysis.

B. Colorado’s Insurance Bad Faith Law is Not

Foreclosed by ERISA Direct Preemption

1. ERISA’s Direct Preemption and Insurance

Savings Clauses

ERISA “comprehensively regulates employee pension

and welfare plans.” Metropolitan Life Ins. Co. v. Massa-

chusetts, 471 U.S. 724, 732, 105 S.Ct. 2380, 85 L.Ed.2d 728

(1985). Benefit providers may either self-insure or pur-

chase insurance for their beneficiaries. See id. Plans such

as the Kidneighs’ that purchase insurance “are directly

affected by state laws that regulate the insurance indus-

try.” Id. The question in such cases becomes whether the

state law at issue is preempted by ERISA. ERISA contains

an express, or direct, preemption provision, which states

that ERISA “shall supersede any and all State laws

insofar as they may now or hereafter relate to any

App. 19

employee benefit plan.” 29 U.S.C. § 1144(a); see also

Conover, 320 F.3d at 1079.

In a legislative act that the Supreme Court has

described politely as “perhaps . . . not a model of legislative

drafting,” Metropolitan Life, 471 U.S. at 739, 105 S.Ct.

2380, Congress, despite the breadth of ERISA’s direct

preemption clause, followed that clause with an insurance

savings clause, which “saves from preemption state laws

‘regulat[ing] insurance.’” Conover, 320 F.3d at 1078 (quot-

ing 29 U.S.C. §1144(b)(2)(A)). The insurance savings

clause “reclaims a substantial amount of ground with its

provision that ‘nothing in this subchapter shall be con-

strued to exempt or relieve any person from any law of any

State which regulates insurance.’” Rush, 536 U.S. at 364,

122 S.Ct. 2151 (quoting 29 U.S.C. § 1144(b)(2)(A)).

Thus, “employee benefit plans that are insured are

subject to indirect state insurance regulation.” FMC Corp.

v. Holliday, 498 U.S. 52, 61, 111 S.Ct. 403, 112 L.Ed.2d 356

(1990). “An insurance company that insures a plan re-

mains an insurer for purposes of state laws purporting to

regulate insurance.” Jd. (internal quotation marks omit-

ted). “The insurance company is therefore not relieved

from state insurance regulation.” Jd. (emphasis supplied).

The Supreme Court has noted that this distinction reflects

“the presumption the: “‘ongress does not intend to pre-

empt areas of traditional state regulation.... Congress

provided that the ‘business of insurance, and every person

engaged therein, shall be subject to the laws of the several

States which relate to the regulation or taxation of such

business.’” Jd. at 62, 111 S.Ct. 403 (quoting 15 U.S.C.

§ 1012(a)) (emphasis supplied).

App. 20

It is undisputed that the Kidneighs’ claims “relate” to

an employee benefit plan. Thus, resolution in this case of

whether ERISA direct preemption applies turns on

whether Colorado’s insurance bad faith law “escape(s]

preemption under the saving clause.” Ward, 526 U.S. at

367, 119 S.Ct. 1380 (citing 29 U.S.C. § 514(b)(2)(A)). “To

determine whether [Colorado’s laws] are saved from

preemption, we must ascertain whether they are ‘laws...

which regulate insurance’ under § 1144(b)(2)(A).” Miller,

__ US. at ___, 123 S.Ct. at 1475.

2. Applying Miller

The Supreme Court’s most recent interpretation of

§ 1144’s “regulate insurance” language came in Miller, __

U.S. __, 123 S.Ct. 1471, 155 L.Ed.2d 468, a unanimous

decision handed down in April of this year. The majority

states that Miller effected merely a change in the “precise

formulation of the test for analyzing ERISA preemption

cases.” Maj. Op. at 1188. However, as recognized by the

only circuit decision to interpret Miller, Miller announced

a “change in the law involving § 1144.” Elliot v. Fortis

Benefits Ins. Co., 337 F.3d 1138, 1145 (9th Cir.2003)

(noting that under the new risk standard, state laws

might be found to regulate insurance “under a much wider

variety of statutes” than earlier Supreme Court caselaw

suggested) (emphasis supplied). See also Rosenbaum v.

Unum Life Ins. Co. of Am., 2003 WL 22078557 (E.D.Pa.

Sept.8, 2003); 2 Guide to Employment Law and Regulation

§ 19:39 (June 2003) (noting that “[t]he rationale utilized by

the Supreme Court [in Miller] is contrary to its previous

decisions that set forth a test for determining whether

laws regulate insurance within the meaning of ERISA.”).

App. 21

Indeed, prior to Miller, courts were required to follow

the test set forth in Metropolitan Life: (1) asking whether,

from a “common-sense view of the matter,” a state law

“regulates insurance,” and (2) testing that result against

the factors interpreting the “business of insurance” anti-

trust exemption in the McCarran-Ferguson Act. Metropoli-

tan Life, £71 U.S. at 743, 105 S.Ct. 2380; Conover, 220 F.3d

at 1078. The Court in Miller explained that its “prior

decisions construing § 1144(b)(2)(A) have relied, to varying

degrees, on our cases interpreting §§ 2(a) and 2(b) of the

McCarran-Ferguson Act.” __ U.S. at __, 123 S.Ct. at

1478 (emphasis supplied). “In determining whether

certain practices constitute ‘the business of insurance’

under the McCarran-Ferguson Act,” noted the Court, “our

cases have looked to three factors: first, whether the

practice has the effect of transferring or spreading a

policyholder’s risk; second, whether the practice is an

integral part of the policy relationship between the insurer

and the insured; and third, whether the practice is limited

to entities within the insurance industry.” Jd. (internal

quotation marks omitted) (emphasis deleted).

The Court then indicated its dissatisfaction with the

pre-Miller doctrine:

our use of the McCarran-Ferguson case law in

the ERISA context has misdirected attention,

failed to provide clear guidance to lower federal

courts, and, as this case demonstrates, added lit-

tle to the relevant analysis. That is unsurprising,

since the statutory language of § 1144(b)(2)(A)

differs substantially from that of the McCarran-

Ferguson Act.

Id.

App. 22

The Court then made new Jaw and announced a two-

part test:

Today we make a clean break from the McCar-

ran-Ferguson factors and hold that for a state

law to be deemed a “law ... which regulates in-

surance” under § 1144(b)(2)(A), it must satisfy

two requirements. First, the state law must be

specifically directed toward entities engaged in

insurance. Second, as explained above, the state

law must substantially affect the risk pooling ar-

rangement between the insurer and the insured.

Id. at 1479 (internal quotation marks and select internal

citations omitted) (emphasis supplied).

Thus, under Miller, we analyze whether Colorado’s

insurance bad faith law “regulates insurance,” and there-

fore falls within ERISA’s insurance savings clause. 29

U.S.C. § 1144(b)(2)(A). In this context, we examine both

Colorado’s decisional and statutory law. See Winchester v.

Prudential Life Ins. Co. of Am., 975 F.2d 1479, 1484 n. 5

(10th Cir.1992). As the majority acknowledges, see Maj.

Op. at 1188, we thus ask whether Colorado’s insurance

bad faith law is (1) “specifically directed toward entities

engaged in insurance,” Miller, __ U.S. at ___, 123 S.Ct. at

1479; and (2) “substantially affect[s] the risk pooling

arrangement between the insurer and the insured.” Id.

However, the majority's cramped interpretation of Miller

infects its analysis on both Miller prongs.

a. Specifically directed towards entities

engaged in the insurance industry

The majority concludes that Colorado’s insurance bad

faith law is not specifically directed at entities engaged in

App. 23

the insurance industry, reasoning that Colorado courts

have “not exclusively [] confined bad faith causes of action

to the insurance setting.” Maj. Op. at 1186. In doing so, the

majority erroneously conflates two separate causes of

action that happen to include the words “bad faith,” but

are quite distinct under well-settled Colorado law.

The first such cause of action is a bad faith claim that

sounds in contract and arises from an alleged breach of the

implied covenant of good faith and fair dealing that

Colorado imports into every contract. See, e.g., Maj. Op. at

1186 (citing Rogers v. Westerman Farm Co., 29 P.3d 887,

908 (Colo.2001) (claim against oil company for breach of

implied covenant of good faith and fair dealing), and

Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo.1995)

(same)). The second is an insurance bad faith claim that

sounds in tort and exists solely due to the unique relation-

ship of a surety — insured such as that present in the cases

cited by the majority. See Maj. Op. at 1186 (citing Dale v.

Guar. Nat'l Ins. Co., 948 P.2d 545, 552 (Colo.1997) (analyz-

ing “the tort of bad faith breach of insurance contract”),

and Vaughan v. McMinn, 945 P.2d 404, 406 (Colo.1997) (“A

breach of the covenant of good faith and fair dealing by an

insurer may give rise to tort liability. The basis for this

liability is the special nature of the insurance contract

relative to other types of contracts.”)).

Contrary to the majority’s insistence, in Colorado,

“(cjlaims for bad faith breach ... of an insurance contract

sound in tort... . [and] exist independently of the liability

imposed by an insurance contract.” Pham v. State Farm

Mut. Auto. Ins. Co., 70 P.3d 567, 571 (Colo.Ct.App.2003)

(emphasis supplied) (citing Daugherty v. Allstate Ins. Co.,

55 P.3d 224 (Colo.Ct.App.2002), and Flickinger v. Ninth

Dist. Prod. Credit Ass’n, 824 P.2d 19 (Colo.Ct.App.1991)).

App. 24

Accordingly, Colorado courts have analyzed bad faith

claims brought against insurers not in terms of general

“bad faith” claims, but specifically as “insurance bad faith

claim[s].” Dale, 948 P.2d at 551 (emphasis supplied); see

also Herod v. Colo. Farm Bur. Mut. Ins. Co., 928 P.2d 834,

835 (Colo.Ct.App.1996) (stating that in “cases in which the

insured brings an action against the insurer, the insurer's

denial of a valid claim will constitute bad faith if the

insurer’s conduct is unreasonable and it knows that the

conduct is unreasonable or recklessly disregards the fact

that the conduct is unreasonable”). Indeed, earlier this

year, the Colorado Supreme Court reaffirmed that “[t]he

basis for liability in tort for the breach of an insurer’s

implied duty of good faith and fair dealing is grounded

upon the special nature of the insurance contract and the

relationship which exists between the insurer and the

insured.” Cary v. United of Omaha Life Ins. Co., 68 P.3d

462, 467 (Colo.2003) (quoting Travelers Ins. Co. v. Savio,

706 P.2d 1258, 1272 (Colo.1985) (emphasis supplied)).

That there is a distinct body of insurance bad faith

law pertaining to the insurance industry is no mere

tautology. Insurance-specific policy considerations underlie

Colorado’s insurance bad faith tort cause of action. As the

Colorado Supreme Court has explained, the doctrine

reflects that “[t]he motivation of the insured when enter-

ing into an insurance contract differs from that of parties

entering into an ordinary commercial contract.” Cary, 68

P.3d at 467 (internal quotation marks and citation omit-

ted). “[A]n insurer in contractual privity with an insured, |

has a financial incentive to use its leverage to limit

claims,” id., the Colorado Supreme Court has noted,

because “once a calamity has befallen an employee covered

by workers compensation or an insured covered under a

App. 25

private insurance contract, the injured party is particu-

larly vulnerable because of the injury or loss.” Jd. (internal

quotations and citation omitted) (emphasis supplied).

The concern expressed by the Colorado Supreme

Court is that large-scale “[iJnsurers, backed by sufficient

financial resources, are encouraged to delay payment of

claims to their insureds with an eye toward settling for a

lesser amount than due under the policy.” Jd. (internal

quotation marks omitted). Regarding claims for disability

coverage, the Colorado Supreme Court has noted that

“(t]he inequity of this situation becomes particularly

apparent in the area of disability insurance in which the

insured [is] often pursued by creditors and devoid of

bargaining power.” Jd. (internal quotation marks omitted).

The Coiorado iegislature has similarly carved out a

distinct set of laws applicable to insurance companies’ bad

faith behavior. The majority's conclusion that Colorado’s

insurance bad faith law is not specifically directed towards

entities engaged in insurance lies in contrast with the

following. In 1987, the Colorado legislature amended the

Chapter 65 of its civil code, the chapter addressing “The

Regulation of Insurance Companies.” In an Act titled,

“Concerning Remedies for Persons Injured by Acts of

Insurance Companies Which Constitute Unfair Settlement

Practices,” 1987 Colo. Leg. Sess., Vol. I at 423, the Colo-

rado legislature enacted § 10-3-1113 to supplement the

state’s common law insurance bad faith tort law. See id. at

423-424 (codifying the enactment of Colo. Stat. §§ 10-3-

1113 and 10-3-1114). See also Col.Rev.Stat. § 10-3-1114

(“Nothing in this part ... shall be construed to ... abro-

gate any common law contract or tort cause of action.”).

The statute provides a standard applicable only to bad

faith claims against insurance providers; it mandates jury

App. 26

instructions that shall apply in a bad faith claim “ijn any

civil action for damages founded upon contract, or tort, or

both against an insurance company,” and states that “the

trier of fact may be instructed that the insurer owes its

insured the duty of good faith and fair dealing, which duty

is breached if the insurer delays or denies payment with-

out a reasonable basis for its delay or denial.”

Col.Rev.Stat. § 10-3-1113.

Section 10-3-1113(4) states that “[iJn determining

whether an insurer’s delay or denial was reasonable, the

jury may be instructed that willful conduct of the kind set

forth in sections 10-3-1104(1)(h)(I) to (1)(h)(XIV) is prohib-

ited and may be considered if the delay or denial and the

claimed injury, damage, or loss was caused by or contrib-

uted to by such prohibited conduct.” Those provisions

define “as unfair methods of competition and unfair or

deceptive acts or practices in the business of insurance”

(emphasis supplied), numerous and unmistakable refer-

ences to the conduct of insurance companies, including

Failing to acknowledge and act reasonably

promptly upon communications with respect to

claims arising under insurance policies; or

Failing to adopt and implement reasonable stan-

dards for the prompt investigation of claims aris-

ing under insurance policies; or

Refusing to pay claims without conducting a rea-

sonable investigation based upon all available in-

formation; or

Failing to affirm or deny coverage of claims

within a reasonable time after proof of loss

statements have been completed; or

App. 27

Not attempting in good faith to effectuate prompt,

fair, and equitable settlements of claims in which

liability has become reasonably clear; or

Compelling insureds to institute litigation to re-

cover amounts due under an insurance policy by

offering substantially less than the amounts ul-

timately recovered in actions brought by such in-

sureds; or

Attempting to settle a claim for less than the

amount to which a reasonable man would have

believed he was entitled by reference to written

or printed advertising material accompanying or

made part of an application;

CoL.REV.STAT. § 10-3-1104(1)(h)(I) (VID) (emphasis sup-

plied).

Both this statute’s insurance-specific standard for any

suit alleging a bad faith tort claim brought by an insured

against a direct insurance provider such as UNUM, and

the Colorado common law governing insurance bad faith

torts under standards specific to the insurance setting, are

thus distinct in a meaningful way from the contract law

‘bad faith cause of action the majority repeatedly invokes.

Further evidence of this distinction is that the type of

bad faith claim at issue here has, contrary to the major-

ity’s assertion, see Maj. Op. at 1186, been cabined exclu-

sively to the insurance setting. Unlike the laws of certain

jurisdictions cited by the majority, see Maj. Op. at 1185

and 1188, the statutory and common law rules governing

insurance bad faith tort law in Colorado have not been

extended to other situations where special circumstances

create unique duties. Compare, e.g., Moffett v. Halliburton

Energy Servs., Inc., 291 F.3d 1227, 1236 (10th Cir.2002) (in

App. 28

holding that Wyoming’s bad faith law did not regulate

insurance, emphasizing that “the tort of bad faith breach

as developed in Wyoming is not unique to the insurance

industry; rather, it is unique to those settings in which a

‘special relationship’ exists, including the insurance and

employment contexts”) with Decker v. Browning-Ferris

Indus. of Colo., Inc., 931 P.2d 436, 446 (Colo.1997) (noting

that “the torts of wrongful discharge in violation of public

policy and bad faith breach of the implied covenant of good

faith and fair dealing inherent in insurance contracts are

based on administrative or legislative declarations of

public policy,” and concluding that “there is no appropriate

basis upon which to ground a tort of breach of an express

covenant of good faith and fair dealing in employment

contracts”) (emphasis supplied). Unlike the claim under

Mississippi law for “tortious breach of contract” held to be

preempted by ERISA in Pilot Life, 481 U.S. at 48, 107

S.Ct. 1549, insurance bad faith tort law in Colorado, in

both common law and statute form, is entirely reflective

of, and focused on, the insurance industry. Accord Elliot,

337 F3d at 1145 (in analyzing a state law under Miller,

asserting that the state law satisfies Miller’s first prong

because the state law “by its very terms is directed at

insurance, and contains provisions applicable only to

insurance companies.”); Colligan v. UNUM Life Ins. Co. of

Am., 2001 WL 533742, at *3 (D.Colo. April 23, 2001) (in

denying an insurer’s motion to dismiss on ERISA preemp-

tion grounds a Colorado insurance bad faith claim, con-

cluding that “Colorado’s bad faith cause of action is clearly

distinguishable from the Mississippi cause of action at

issue in Pilot Life”).

App. 29

Moreover, contrary to the exclusivity standard posited

by the majority, even if there existed de minimus excep-

tions to Colorado’s exclusive application of insurance bad

faith tort law to the insurance context, such exceptions

would not preclude the Colorado law from falling within

ERISA’s savings clause. The Court noted in Miller noted

[sic] that “Petitioners maintain that the application to

noninsuring HMOs forfeits the laws’ status as ‘law(s] ...

which regulat[e] insurance.’ § 1144(b)(2)(A).” __ U.S. at

__n. 1, 123 S.Ct. at 1476 n. 1 The court responded: “We

disagree .... petitioners’ argument is foreclosed by Rush

[] where we noted that Illinois’ independent-review laws

contained ‘sore overbreadth in the application of [the

Illinois statute at issue] beyond orthodox HMOs,’ yet held

that ‘there is no reason to think Congress would have

meant such minimal application to noninsurers to remove

a state law entirely from the category of insurance regula-

tion saved from preemption.’” Id. (quoting Rush, 536 U.S.

at 372, 122 S.Ct. 2151) (emphasis supplied) (internal

citation omitted). For these reasons, it is clear that Colo-

rado’s insurance bad faith law is “specifically directed

toward entities engaged in insurance.” Miller, __ U.S. at

__, 123 S.Ct. at 1479.

b. “Substantially affect the risk pooling

arrangement between the insurer and

the insured”

The majority also concludes that Colorado's insurance

bad faith law fails Miller’s second prong, which requires

that for a state law to qualify as regulating insurance, it

must “substantially affect the risk pooling arrangement

between the insurer and the insured.” Jd. To arrive at this

conclusion, the majority relies heavily on Pilot Life, Kelley

App. 30

v. Sears, Roebuck & Co., 882 F2d 453 (10th Cir.1989),

(“The Kidneighs fail to overcome Kelley’s precedential

value in this case.”), and a number of other circuit court

cases applying Pilot Life.

. However, notwithstanding the majority's assertions

that because Pilot Life has not been completely overruled

and that Pilot Life and its progeny in this circuit are

therefore binding, those authorities’ precedential value on

the precise issue of the “substantially affect” prong has

been seriously eroded, if not eviscerated, by Miller. On this

issue, the Court in Miller decidedly did not favorably cite

to Pilot Life. Indeed, as another circuit court recently put

it in assessing Pilot Life’s conclusions regarding risk,

“subsequent case law puts the validity of ... these Pilot

Life conclusions into some doubt.” Elliot, 337 F.3d at 1144.

A comparison between the rule from Pilot Life and the

new standards suggested by recent Supreme Court cases

and expressly adopted in Miller shows how Pilot Life’s risk

allocation analytical framework has been displaced by

subsequent Supreme Court decisions. The Court in Pilot

Life concluded that a claim brought under Mississippi

common law for tortious breach of an insurance contract

was “not saved by §514(b)(2)(A),” and was therefore

foreclosed by ERISA direct preemption. 481 U.S. at 57, 107

S.Ct. 1549. In so holding, the Court emphasized that the

Mississippi common law claim at issue was “firmly planted

in the general principles of Mississippi tort and contract

law,” id. at 50, 107 S.Ct. 1549, reasoning that “the common

law of bad faith does not define the terms of the relation-

ship between the insurer and the insured; it declares only

that, whatever terms have been agreed upon in the insur-

ance contract, a breach of that contract may in certain

circumstances allow the policyholder to obtain punitive

App. 31

damages,” id. at 51, 107 S.Ct. 1549, and stressing that

“the Mississippi common law of bad faith does not effect a

spreading of shareholder risk.” Jd. at 50, 107 S.Ct. 1549.

Miller, in contrast, specifically disavowed the McCar-

ran-Ferguson factors, including the test of “whether the

practice has the effect of transferring or spreading a

policyholder’s risk,” the test relied on in Pilot Life, 481

U.S. at 48, 107 S.Ct. 1549, and in Kelley, 882 F.2d at 456

(“Colorado’s common law of bad faith does not regulate

insurance. It neither spreads policyholder risk nor controls

the substantive terms of the insurance contract. See Pilot

Life.”). The Court in Miller stated: “[O]ur test requires

only that the state law substantially affect the risk pooling

arrangement between the insurer and the insured; it does

not require that the state law actually spread risk.” __

U.S. at ___ n. 3, 123 S.Ct. at 1477 n. 3 (all but second

emphasis supplied). Perhaps animated by federalism

concerns, Miller expanded the scope in ERISA direct

preemption analysis as to what affects risks. The Court’s

use of the word “only” to describe the new test shows that

“(slubstantially affect{ing] the risk pooling arrangement

between the insurer and the insured” is likely an easier

hoop to jump through. See Elliot, 337 F.3d at 1145 (stating

that Ward and Miller “leave open the possibility that risk

spreading might be found in a much wider variety of

statutes than Pilot Life suggested”) (emphasis supplied).

Miller is the culmination, so far, of a clear trend by the

Supreme Court to rein in ERISA direct preemption. Ward

and Rush, the two ERISA direct preemption cases decided

immediately prior to Miller, each concluded that the risk

analysis did not justify ERISA direct preemption, as did

Miller itself.

App. 32

In Ward, 526 U.S. 358, 119 S.Ct. 1380, 143 L.Ed.2d

462, decided in 1999, the Court held that California’s

notice-prejudice rule, under which an insurer could not

deny benefits due to an insured’s late notice without

showing that the insurer suffered prejudice, fell within

ERISA’s savings clause. In so holding, the Court reasoned

that “the rule controls the terms of the insurance relation-

ship” and is directed at the insurance industry. Id. at 368,

119 S.Ct. 1380.

In Rush, 536 U.S. 355, 122 S.Ct. 2151, 153 L.Ed.2d

375, decided in 2002, the Court held that an Illinois law

mandating a binding review by an independent physician

following an insurer’s refusal to pay for surgery fell within

the savings clause. The Court in Rush reasoned that “this

effect of eliminating an insurer’s autonomy to guarantee

terms congenial to its own interests is the stuff of garden

variety insurance regulation through the imposition of

standard policy terms.” Jd. at 387, 122 S.Ct. 2151.

Miller, decided unanimously earlier this year, ana-

lyzed whether Kentucky's “Any Willing Provider” (“AWP”)

statutes fell within ERISA’s savings clause. The AWP

statutes required health insurance plans to provide access

to the plans’ network to all health care providers in the

plans’ geographic coverage region willing to meet insurer’s

participation requirements. See Miller, __ U.S. at __-__.,

123 S.Ct. at 1473-74 (summarizing Ky.Rev.Stat. Ann.

§ 304.17A-270). Miller was the Court’s first-ever applica-

tion of the “substantially affects” version of the risk prong.

Holding that the AWP statutes satisfied the risk prong, the

Court stated that the “rule [that] governs whether or not

an insurance company must cover claims submitted late,

which dictates to the insurance company the conditions

under which it must pay for the risk that it has assumed

App. 33

.... certainly qualifies as a substantial effect on the risk

pooling arrangement between the insurer and insured.”

Id. at 1478 n. 3.

If, contrary to the Supreme Court’s teachings dis-

cussed earlier, it was necessary to address this matter, I

would hold that Colorado’s insurance bad faith law fits

within this unbroken line of recent Supreme Court cases

as sufficiently affecting the pooling of risk to qualify as a

regulation of insurance. As amended in 1987,’ Colorado

statutory law requires that insurers attempt to settle

when liability becomes reasonably clear, and forbidding

insurers from offering less than what a reasonable person

would feel entitled to, Colorado’s insurance bad faith law

“substantially affects the risk-pooling arrangement.” Even

without the additional remedies foreclosed by ERISA

conflict preemption, it tends to make it less likely that

insureds will suffer from delayed settlement.

Colorado’s law effects this alteration of risk by making

clear that such behavior may yield liability against the

insurer, presumably altering the insurer’s incentives to

play the “delay game” and drive down settlement amounts.

By mandating that insurers attempt to settle when liabil-

ity becomes reasonably clear and barring insurers from

* The fact that the Colorado legislature passed the amendment at

issue in this case in 1987 is an additional reason that Kelley, contrary to

the majority's assertions, does not control. Though decided by this court

in 1989, Kelley involved a claim brought under the Colorado bad faith

statute as it stood prior to the important amendments enacted in 1987

to Colorado’s insurance bad faith statutory law. See Kelley, 882 F.2d at

455 (“[Kelley] ... asserted causes of action under Colorado’s common

law of bad faith insurance practices and Colo.Rev.Stat. § 10-3-1104

(1973)”).

App. 34

offering less than what a reasonable person would feel

entitled to, Colorado’s insurance bad faith law “dictates to

the insurance company the conditions under which it must

pay for the risk it has assumed.” Miller, __ U.S. at ___ n.

3, 123 S.Ct. at 1477 n. 3. Accord Elliot, 337 F.3d at 1145

(noting that Supreme Court decisions subsequent to Pilot

Life “call[] into question Pilot Life’s conclusion that a

claim processing law does not affect risk allocation”). The

greater likelihood of the imposition of liability for bad faith

behavior makes bad behavior more costly. As the cost of

bad behavior rises, behavior tends to change. The statute

thus changes the conditions under which an insurer will

“pay for the risk that it has assumed,” Miller, __ U.S. at

__n. 8, 123 S.Ct. at 1478 n. 3, by making the law deci-

sively clear that the risk of nonperformance in settlement

negotiations lies with the insurer.

Colorado’s insurance bad faith law thus substantially

affects the risk-pooling arrangement by giving insureds

clear protection they did not previously possess in their

settlement negotiation practices with insurers. Because

this law satisfies both of the requisite elements to qualify

as “regulating insurance,” it thus falls with ERISA’s

savings clause.

CONCLUSION

ERISA was enacted as a balanced statute, offering

certain protection to insurers while securing protection for

insured patients who are at their most vulnerable when

they suffer medical harm. Through the insurance savings

clause, Congress specifically authorized the states to

continue regulating the business practices of insurance

companies. State regulation of insurance is an undeniably

App. 35

proper state function that permits states to respond to the

specific aspects of their policy problems better than the

one-size-fits-all approach the majoritys reading empha-

sizes. The majority's approach helps dismantle the protec-

tive system devised by Colorado’s legislature and courts

for Colorado’s citizens.

Because, under binding precedent of the Supreme

Court and this court, Mr. Kidneigh’s claim is foreclosed by

ERISA conflict preemption, I respectfully concur in the

majority's disposition of this case. However, I do not join

the majority ERISA direct preemption analysis because,

for the reasons detailed above, it is both unnecessary and

probably incorrect as a matter of law.

App. 36

APPENDIX B

[1] IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

Civil Action No. 02-Z-210

JON F. KIDNEIGH and BARBARA KIDNEIGH,

Plaintiffs,

Vs.

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Defendant.

REPORTER’S TRANSCRIPT

(Hearing on Motion to Dismiss)

(Filed Jun. 19, 2002)

Proceedings before the HONORABLE ZITA L. WEIN-

SHIENK, Judge, United States District Court for the

District of Colorado, commencing at 2:44 p.m., on the [sic]

May 1, 2002, in Courtroom C-400, United States Court-

house, Denver, Colorado.

APPEARANCES

STEPHEN C. KAUFMAN, Attorney at Law, 3801

East Florida Avenue, Suite 900, Denver, Colorado, 80120,

and NEVIN A. SEGER, Attorney at Law, 1080 Kalamath

Street, Denver, Colorado 80104, appearing for the plain-

tiffs.

JACK M. ENGLERT, JR., Attorney at Law, 555 17th

Street, Suite 3200, Denver, Colorado, 80202, appearing for

the defendant. :

App. 37

* * *

[24] insurance policies in California; therefore, it regulated

insurance.

In Colorado, in this case, the existence of a bad faith

claim has no effect on the terms and conditions of the

policy. It does not alter the way the policy operates. But if

the policy is found to have been breached, given the right

circumstances, it may increase the damages. But that

doesn’t have any effect on the terms.

I agree with Ward. I don’t think Ward changes the

law. And I think that under Ward and all the other Su-

preme Court precedent, our decision — our analysis is the

correct one, your Honor.

THE COURT: It would be very helpful if we had

some better law from the circuit on some of these points.

MR. ENGLERT: I agree. Thank you.

THE COURT: Thank you.

RULING

THE COURT: Well, I think reading the deci-

sions of the various judges other than myself has been

helpful. And certainly, there is certainly a strong argu-

ment, as made by, for example, Judge Matsch in his

decision, that this claim, this bad faith claim, is not

preempted.

I wish we had some better directive, circuit law,

telling us whether this type of claim falls under Pilot Light

[sic] or falls under Ward, and unfortunately, we don’t.

App. 38

[25] My conclusion after hearing the arguments is

that the motion to dismiss the bad faith claim will be

denied based on the indication which appears to be —

which appears to apply — it may not, but it appears to

apply in the Ward case and the decisions of several of us

who sit on this bench — my decision, Judge Kane’s, Judge

Matsch’s, Judge Daniel’s, which all have allowed bad faith

claims to proceed despite ERISA.

I wish some of these had been appealed. I wish we had

some clear direction from the Tenth Circuit. Unfortu-

nately, we don’t. These colleagues of mine are scholarly

people. And as recently as January of 2002, Judge Wiley

Daniel found no preemption.

So the court’s decision on this motion to dismiss will

be that it should be denied, and the bad faith claim should

go forward, will not be dismissed.

Now, I still have problems with the consortium claim

because I’m not at all sure that the consortium claim can

be lumped in with the bad faith claim when we do have a

Tenth Circuit decision, which I handed to somebody — do

you still have it there?

MR. KAUFMAN: Ihave it.

THE COURT: [I'll have Jeannette bring it back

up to me — where we have the Tenth Circuit indicating in

Pacificare of Oklahoma, which is cited as 59 F.3d 151,

1995, Tenth Circuit. And it’s Judge Anderson, who speaks

for himself, and [26] Judges Brorby and Henry and who

pretty well says a loss of consortium claim against an

HMO alleging negligent or fraudulent administration of

the plan is preempted and then goes on to talk about the

vicarious liability for wrongful death.

App. 39

It appears to me that this case falls within that type of

claim, which is, indeed, preempted; and I see no reason to

lump together the bad faith and consortium and say that

they both have to be decided the same way.

Based on the case, Pacificare, and the fact that I think

it probably does apply to the allegations here, the Court

will grant the motion to dismiss the consortium claim; and

this case will go forward to trial, or at least to the point of

motions for summary judgment, on the first claim and the

second claim, but the third claim is dismissed.

Now, we don’t have a trial date on this yet. And even

though the case that was argued before the Tenth Circuit

was in March, it would seem to me that there might be

some chance that when the Tenth Circuit comes down

with their opinion they could give some help to us on this

case, even though that was Wyoming law and this is

Colorado law.

So when you folks set your trial — or have you a trial

date?

MR. KAUFMAN: No, your Honor.

THE COURT: You don’t have it yet. Well, may I

ask [27] this: If either side hears something from the

Tenth Circuit, would you be kind enough to let me know

through my staff, either Beth Appleton, my law clerk, or

Jeannette Gallardo, my courtroom deputy, what has been

decided by the Tenth. It may or may not have any effect on

this case, but I would be interested.

So I'd appreciate it if you let me know, unless I see it

before you do.

App. 40

The magistrate judge that you folks have is a very

good one for settling cases, Judge Schlatter. And I would

strongly urge that — Apparently Mr. Kidneigh is doing well

now; is that correct?

MR. KAUFMAN: Well, he’s doing much better

than what he was doing. He still has residual problems,

but he’s doing better.

THE COURT: So it may be that there may be

room for some sort of resolution of these claims. If you can,

please try to resolve it and let me know through my staff.

If you think you want to try to take this to the Court

of Appeals and have something decided definitively by

them, then do that, too.

Otherwise, we’ll get a trial date on this and it will go

to trial on whatever claims remain by that date.

Do you have a settlement conference set before Judge

Schlatter? Do you know that?

[28] MR. KAUFMAN: Your Honor, we just filed

the case basically a month or six weeks ago, or something

like that, so we have —

THE COURT: Okay. 2002 case.

MR. KAUFMAN: We have our scheduling

conference next week.

THE COURT: Okay. Well, my urging to you

folks — you’ve had a scheduling conference, though, haven’t

you?

MR. KAUFMAN: No, your Honor. Next — May 7,

we have the scheduling conference.

App. 41

THE COURT: When you meet for the schedul-

ing conference, you might want to talk together and see

about setting a settlement conference. Otherwise, we'll

give you a trial date right after you get your pretrial order

in place.

Anything further on the record before we recess this

case? We’ve got another one coming up.

MR. KAUFMAN: No, your Honor.

MR. ENGLERT: No, your Honor.

THE COURT: Okay. The Court will be in recess

very briefly, and then we'll call up the next case, which is

Hobleman. d

(Recess at 3:30 p.m.)

* * *

App. 42

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

JON F. KIDNEIGH,

Plaintiff —

Cross-Appellee,

and

BARBARA KIDNEIGH,

Plaintiff — Appellant .

— Cross-Appellee,

Vv. Nos. 02-1277 & 02-1282

UNUM LIFE INSURANCE

COMPANY OF AMERICA, a

Maine corporation,

Defendant — Appellee

~— Cross-Appellant.

COLORADO TRIAL

LAWYERS ASSOCIATION,

Amicus Curiae.

ORDER

Filed October 28, 2003

Before KELLY, HENRY and HARTZ, Circuit Judges.

Appellant/Cross-Appellees' petition for rehearing is

denied.

App. 43

The petition for rehearing en banc was transmitted to

all of the judges of the court who are in regular active

service. As no member of the panel and no judge in regular

active service on the court requested that the court be

polled, that petition is also denied.

Entered for the Court

PATRICK FISHER,

Clerk of Court

by: /s/ Jeanne

Deputy Clerk

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.