Petition for Writ of Certiorari — Tri-State Machine, Inc. v. Nationwide Life Insurance
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Supreme Cour, U.S.
\ FiLED
Y4 972 NOV 28 19%
OFFICE OF THE CLERK
In The
Supreme Court of the Hnited States
October Term, 1994
TRI-STATE MACHINE, INC.,
Petitioner,
vs.
NATIONWIDE LIFE INSURANCE COMPANY,
Respondent.
Petition for Writ of Certiorari to
the United States Court of Appeals
for the Fourth Circuit
PETITION FOR WRIT OF CERTIORARI
DAVID B. FAWCETT, III
(Counsel of Record)
JAMES W. FORSYTH
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
600 Grant Street, 58th Floor
Pittsburgh, PA 15219
(412) 562-393 1/3935
Attorneys for Petitioner,
Tri-State Machine, Inc.
i
QUESTIONS PRESENTED FOR REVIEW
Where an insurance company fraudulently computes the pre-
miums an employer must pay for employer-sponsored health
care coverage, do the employer’s state law claims for viola-
tion of common and statutory law ‘‘relate to’’ a benefit plan
such that they are preempted by ERISA?
Are state insurance laws as applied to the claim of an
employer against an insurance company arising out of the
fraudulent computation of insurance premiums saved from
preemption by ERISA’s saving clause?
Where an employer purchases health insurance for its work-
ers from an insurance company, the effect of which is to
transfer risk from the employer to the insurance company,
does the insurance create a ‘‘self-funded plan’’ such that the
employer’s claims against the insurance company cannot be
saved from preemption?
Does ERISA or federal common law provide a remedy for
an employer who has been defrauded in the purchase of
health care insurance for its employees?
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED FOR REVIEW .............. i
TABLE OF AUTHORITIES............... ec eme eek 4 iv
OFFICIAL AND UNOFFICIAL REPORTS OF OPINIONS
EEA VEEL SEW WE GME 6 occ ccccceccccceceecess l
SUREREII Beas GHEE cc cvcccccccccwcecescees l
STATUTES INVOLVED IN THE CASE ................ l
STATES Gi WEE GND oo ows sees cavensseuesess 5
I I a oe 5.0 bt ee ene eaaeeeaneudeaass es b
TTT rn ee eee 7
Pe eer ee eo er er ert Peer e 10
I. IMPORTANCE OF DECISION ............... 10
A. Importance of Encouraging the Develop-
ment and Continuation of Employer-
Sponsored Benefit Plans and Preventing
Insurance Company Fraud................ 10
B. Strong Concerns of Federalism are at Stake . . 12
Il. THE CIRCUITS ARE SPLIT AS TO THE
TEST TO BE USED IN DETERMINING THE
SCOPE OF THE ‘*RELATE TO’’ CLAUSE,
THE ‘*‘SAVING CLAUSE’”’ AND THE
**DEEMER CLAUSE”’ OF SECTION 514 OF
A. Judicial Construction of the ‘‘Relate To’’
B. Judicial Construction of the ‘‘Saving
gh AD Ag errr aa aas 22
C. Judicial Construction of the ‘*Deemer
REE GAUOO he 6 400 65 64-00 000 00040508 0 24
1. Erroneous application to insurance
Ce hkG bodes eee s v0 88 toes 26
2. What is a self-funded plan?........... 27
er ee ere 29
EE ee eee eee la
Opinion and Order of District Court dated
September 23, 1991 denying plaintiff's motion for
partial summary judgment................20e0000: la
Order of District Court dated February 27, 1992
certifying question for appeal .................---. Sa
Order dated March 26, 1992 denying petition for
permission to appeal...... LG Oe SS Pe eee ee ee Ta
Opinion and Order of District Court dated
July 2, 1993 granting judgment sua sponte in
CO a ee ee 8a
Opinion and Order of Fourth Circuit affirming
Ts Sd bpawWe sees csvessceses 1Sa
iV
TABLE OF AUTHORITIES
CASES
Page
Aetna Life Ins. Co. v. Borges, 869 F.2d 142 (2d Cir.),
care. Gaiam, GS AER. GED ATBGOD vc icc ecccccccccss 18
Airparts Co., Inc. v. Custom Benefit Services of Austin,
Inc., 28 F.3d 1062 (10th Cir. 1994)............. 17, 18
Consolidated Beef Indus. v. New York Life Ins. Co.,
949 F.2d 960 (8th Cir. 1991), cert. denied,
py Ne eR eee 17
DiPietro-Kay Corp. v. Interactive Benefits Corp.,
S25 F. Sap. 40 GA Cope, 1908). oc cc cece ccccess 19
Farlow v. Union Cent. Life Ins. Co., 875 F.2d 791
fe Tre er rer eT Ter eee eee 17
First Nat'l Life Ins. Co. v. Sunshine-Jr. Food Stores, Inc.,
960 F.2d 1546 (11th Cir. 1992), cert. denied, __
iS ee ee eee 16
FMC Corp. v. Holliday, 498 U.S. 52 (1990)....... 24, 25, 27
Franchise Tax Bd. v. Construction Laborers Vacation
Fo RE RS ee re 20
Hampton Indus., Inc. v. Sparrow, 981 F.2d 726
CO Ge, I dk Sar A ee Ok idee 5 28
Hermann Hospital v. MEBA Medical & Benefits Plan,
S45 POG TAG GG ii ih ekki tencies... 20
Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990)... .13
Int’l Resources, Inc. v. New York Life Ins. Co., 950 F.2d
294 (6th Cir.), cert. denied, U.S , 112 S. Ce.
SA COs 6:6 00 akan een tired Ges 6 ned Ke dds os 24
Lincoln Mut. Casualty Co. v. Lectron Products, Inc.
Employee Health Plan, 970 F.2d 206 (6th Cir. 1992) . .28
Page
Martori Bros. Distributors v. James-Massengale,
781 F.2d 1349, (9th Cir.), amended, 791 F.2d 799,
cert. denied, 479 U.S. 949 (1986) ..........5---05- 19
Metropolitan Life Ins. Co. v. Massachusetts,
Po gt Me errr rere eee eee eee 13, 23
Monarch Cement Co. v. Lone Star Indus.,
982 F.2d 1448 (10th Cir. 1992) .......... eee eee 18
Northern Group Services, Inc. v. Auto Owners Ins. Co.,
833 F.2d 85 (6th Cir. 1987), cert. denied, 486 U.S.
hi. rr re es ee er ee 28
Perkins v. Time Ins. Co., 898 F.2d 470 (Sth Cir. 1990). .... 18
Perry v. P*I*E Nationwide, Inc., 872 F.2d 157 (6th Cir.
1989), cert. denied, 493 U.S. 1093 (1990).........-. 18
Pilot Life Ins. Co. v. Dedeaux,
r igit & Et, ore rr ere ree ee 13, 20, 22, 2
Pressroom Unions-Printers League Income Sec. Fund v.
Continental Assurance Co., 700 F.2d 889 (2d Cir.),
cert. dismissed, 464 U.S. 845 (1983) .........---55- 20
Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984),
cert. denied, 472 U.S. 1008 (1985). ..........---55- 19
Tri-State Machine, Inc. v. Nationwide Life Ins. Co.,
33 F.3d 309 (4th Cir. 1994) ........-- eee ee eeee 26, 28
Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982) . .23
Washington Nat'l Ins. Co. v. Hendricks, 855 F. Supp.
1542 (W.D. Wis. 1994) ........ cece cece cree eens 17
Whitworth Bros. Storage Co. v. Cent. States Pension
Fund, 794 F.2d 221 (6th Cir.), cert. denied, 479
U.S. 1007 (1986)
28 U.S.C. § 1254 (1988) ...... Sie al on io 1
BO Dis Re I ii hn hh nas 66g eke baebac tenes 8
Se Gen eR 6 8 K.n-0d 085 0b NS A Sls sees 7
Employee Retirement Income Security Act of 1974
y Bie io Be a er rere Te a, & 1S 1, 2
McCarran-Ferguson Act, 15 U.S.C. § 1011 ef seg. ....... 23
We VE; QR ee SNR AE ME ie Peek ee bases sssness 3,4
OTHER AUTHORITIES
Douglas G. Houser, Unfair Claims Settlement Practices
Act - How the Courts Have Interpreted the Act, 15 The
FUGUE Tw CEPTS. «x00 00 cwwee eh dees cate Veeci es 10
1992 Annual Report of the West Virginia Insurance
COME 6a 6 5s RAN ee ease 13
l
OFFICIAL AND UNOFFICIAL REPORTS OF
OPINIONS DELIVERED IN THIS CASE
The decision of the United States Court of Appeals for the
Fourth Circuit is reported at 33 F.3d 309 (4th Cir. 1994). The
decision of the United States District Court for the Northern Dis-
trict of West Virginia is not reported but can be found at 1993
WL 735796 {N.D. W. Va. July 2, 1993).
JURISDICTIONAL GROUNDS
The opinion and judgment of the United States Court of
Appeals for the Fourth Circuit sought to be reviewed herein was
entered on August 31, 1994. Jurisdiction to review that opinion
and judgment by writ of certiorari is conferred on this Court by
*28 U.S.C. § 1254 (1988). Petitioner did not seek a rehearing by
the Fourth Circuit.
STATUTES INVOLVED IN THE CASE
Section 514 of ERISA reads, in pertinent part, as follows:
(a) Supersedure; effective date. Except as provided in
subsection (b) of this section, the provisions of this
titie 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) and not
exempt under section 4(b). This section shall take
effect on January 1, 1975.
(b) Construction and application. (1) This section shall
not apply with respect to any cause of action which
arose, or any act or omission which occurred, before
January 1, 1975.
(2)(A) Except as provided in subparagraph (B), noth-
ing in this title shall be construed to exempt or relieve
any person from any law of any State which regulates
insurance, banking or securities.
2
(B) Neither an employee benefit plan described in sec-
tion 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 insurer, bank, trust company, or
investment company or to be engaged in the business
of insurance or banking for purposes of any law of any
State purporting to regulate insurance companies,
insurance contracts, banks, trust companies, or invest-
ment companies.
* * *
29 U.S.C. § 1144 (1988).
Section 502(a) of ERISA reads as follows:
(a) Persons empowered to bring a civil action. A civil
action may be brought—
(1)
by a participant or beneficiary—
(A) for the relief provided for in subsection (c) of
this section, or
(B) to recover benefits due to him under the terms
of his plan, to enforce his rights under the terms
of the plan, or to clarify his rights to future bene-
fits under the terms of the plan;
by the Secretary, or by a participant, beneficiary
or fiduciary for appropriate relief under section
409;
by a participant, beneficiary, or fiduciary
(A) to enjoin any act or practice which violates
any provision of this title or the terms of the plan,
or (B) to obtain other appropriate equitable relief
(i) to redress such violations or (ii) to enforce any
provisions of this title or the terms of the plan;
3
(4) by the Secretary, or by a participant, or benefici-
ary for appropriate relief in the case of a violation
of 105(c);
(S) except as otherwise provided in subsection (b), by
the Secretary (A) to enjoin any act or practice
which violates any provision of this title, or (B) to
obtain other appropriate equitable relief (i) to
redress such violation or (ii) to enforce any provi-
sion of this title; or
(6) by the Secretary to collect any civil penalty under
subsection (c)(2) or (i) or (1).
29 U.S.C. § 1132(a).
Article 11 of Chapter 33 of the West Virginia Code (entitled
‘‘Unfair Trade Practices’’) states, in pertinent part, as follows:
§ 33-11-1. Declaration of purpose.
The purpose of this article is to regulate trade practices
in the business of insurance in accordance with the intent of
Congress as expressed in the act of Congress of March
ninth, one thousand nine hundred forty-five (Public Law fif-
teen, seventy-ninth Congress) [the McCarran-Ferguson
Act], by defining, or providing for the determination of, all
such practices in this State which constitute unfair methods
of competition or unfair or deceptive acts or practices and
by prohibiting the trade practices so defined or determined.
(1957, c. 97; 1974, c. 51.)
W. Va. Code § 33-11-1 (1974)
* * *
§ 33-11-3. Unfair methods of competition and unfair or
deceptive acts or practices prohibited.
No person shall engage in this State in any trade prac-
tice which is defined in this article as, or determined pursu-
ant to section seven [§ 33-11-7] of this article to be, an
4
unfair method of competition or an unfair or deceptive act
or practice in the business of insurance. (1957, c. 97; 1974,
G. Fig
W. Va. Code § 33-11-3 (1974)
§ 33-11-4. Unfair methods of competition and unfair or
deceptive acts or practices defined.
The following are hereby defined as unfair methods of
competition and unfair or deceptive acts or practices in the
business of insurance:
+ OK *
(5) False statements and entries. —(a) No person shall
knowingly file with any supervisory or other public official,
or knowingly make, publish, disseminate, circulate or
deliver to any person, or placed before the public, any false
material statement of fact as to the financial condition of a
person.
(b) No person shall knowingly make any false entry of
a material fact in any book, report or statement of any per-
son or knowingly omit to make a true entry of any material
fact pertaining to the business of such person in any book,
report or statement of such person.
* * *
W. Va. Code § 33-11-4 (1974)
5
STATEMENT OF THE CASE
Background Facts
Tri-State Machine, Inc. (‘‘Tri-State’’)' contracted with
Nationwide Life Insurance Company (‘‘Nationwide’’) to have
Nationwide provide insurance for Tri-State’s employees. Tri-
State purchased a combination of health, life, prescription drug,
dental and total disability insurance (the ‘‘Policy’’) which was
used to fund the employee benefit plan sponsored by Tri-State
(the ‘‘Tri-State benefit plan’’). Tri-State’s premium payments
were to be calculated according to a Cash Priority Plan Funding
Agreement (the ‘‘Funding Agreement’’).
Nationwide and its agents administered the Tri-State benefit
plan and paid claims submitted by Tri-State’s employees as con-
tractually bound to do under the Policy. The Policy required
Nationwide to provide insurance to each of Tri-State’s employ-
ees and their families, and to administer the claims. For example,
Nationwide and its agents would determine whether an
employee’s medical claim was covered and, if so, the claim was
paid by Nationwide. Tri-State did not pay claims or have any
role in the claims adjudication process. Tri-State had no role in
the administration of the Tri-State benefit plan. In short, Tri-
State had no discretion relative to the plan and, as such, was not
a plan fiduciary within the meaning of ERISA.
Like any employer that purchases insurance for its employ-
ees, Tri-State’s insurance premiums were based upon a number
of factors: volume of claims, nature of claims, volume of life
insurance, number of lives insured and, of course, the amount of
those claims. Under the Funding Agreement, Nationwide
reported claims information to Tri-State and collected premiums
'Tri-State has no parent or subsidiary corporations.
6
based on that information. The premiums were the sum of vari-
ous factors: an amount to cover Nationwide’s cost of administer-
ing the plan; another amount equal to the aggregate of all claims
under $25,000 per year/per employee; plus an additional amount
to cover the risk assumed by Nationwide to absorb any claims
per individual that exceeded $25,000 in any given policy year
and the risk assumed by Nationwide of paying any and all claims
that exceeded the annual cap.? Thus, Nationwide’s exposure
depended upon the amount and timing of the payment of claims
to Tri-State’s employees.
As far as Tri-State could determine, Nationwide properly
determined coverage issues over the course of the years that the
insurance was in place. Likewise, where Nationwide determined
that the Policy provided coverage, it timely paid claims on behalf
of Tri-State’s employees to their health care providers.
However, when it came time for Nationwide to report
claims information to Tri-State and to calculate Tri-State’s insur-
ance premium, Nationwide acted dishonestly in an attempt, suc-
cessful to date, to save itself money. For purposes of calculating
Tri-State’s obligation to pay premiums, Nationwide manipulated
the posting of dates on which Nationwide paid claims so as to
increase Tri-State’s insurance premium. Nationwide fraudulently
reported to Tri-State that claims were paid later than when actu-
ally paid, so as to ‘‘spread out’’ the claims of employees.
Spreading out the time periods in which claims were paid by
Nationwide created the appearance, falsely, that certain Tri-State
employees had claims less than or equal to $25,000 per year,
when in fact their claims exceeded $25,000. In addition, in direct
violation of the terms of the Funding Agreement, Nationwide
?The Funding Agreement contained a cap on the premiums that Tri-State
was required pay in any given year. For example, the maximum amount pay-
able during the first year of the Funding Agreement was approximately
$130,000.
7
grouped medical, dental, prescription and major medical claims
into one monthly amount which was applied towards the
*“*monthly policyholder liability limit amount,’’ so as to increase
Tri-State’s insurance premium.
Nationwide also reported claims as having been paid in the
year subsequent to when actually paid to avoid the annual cap on
Tri-State’s maximum premium liability. In other words, Nation-
wide ceased posting claims to Tri-State’s account before the end
of any given plan year. When a new year began under the Fund-
ing Agreement, wherein Tri-State would be fully responsible for
the maximum premium liability, Nationwide resumed posting
claims to Tri-State’s account. Claims which had been paid
months before were suddenly posted to Tri-State’s account and
were applied against Tri-State’s new premium limit. This pur-
poseful manipulation of information caused Tri-State’s premi-
ums to be much higher than they otherwise would have been.
The manipulation of data fraudulently allowed Nationwide to
recoup, on a dollar-for-dollar basis, more than it was entitled to
under the terms of the Funding Agreement.
Proceedings Below
After discovering Nationwide’s fraud, Tri-State sued
Nationwide in West Virginia state court. The complaint alleged
various theories of recovery such as breach of contract, breach of
implied covenant of good faith and fair dealing, statutory ‘‘bad
faith,’’ and violation of West Virginia insurance laws. Nation-
wide removed the case to the United States District Court for the
Northern District of West Virginia alleging that Tri-State’s
claims were governed and preempted by ERISA. The District
Court ruled that diversity jurisdiction existed pursuant to 28
U.S.C. § 1332(a) (1988).
Initially, Tri-State moved for partial summary judgment
seeking a determination from the District Court that ERISA did
8
not preempt Tri-State’s state law causes of action because the
fraudulent conduct involved the sale of insurance and did not
‘‘relate to’’ the administration of an ERISA plan. Although it did
not formally dismiss Tri-State, the District Court denied the
motion, ruling that all of Tri-State’s claims based on West Vir-
ginia law were preempted by ERISA.’ The District Court certi-
fied the preemption issue to the Fourth Circuit; however, the
appellate court declined to hear the issue at that time.‘
Tri-State later sought entry of a final order under Rule 54(b)
in an attempt to have the District Court acknowledge that it had
effectively dismissed Tri-State’s state law claims from the case.
The entry of a final judgment under Rule 54(b) would have
allowed Tri-State to appeal the ERISA preemption issue.
On July 2, 1993, the District Court issued an order in which
it refused Tri-State’s request for a Rule 54(b) final judgment and
refused to alter its finding that Tri-State’s state law causes of
action were preempted by ERISA.’ The District Court further
refused to find that the facts, as alleged, formed the basis for fed-
eral common law or ERISA claims and, instead, issued summary
judgment sua sponte for Nationwide. This final order was
appealed to and heard by the Fourth Circuit pursuant to 28
U.S.C. § 1291 (1982).
The Fourth Circuit affirmed by a 2-1 majority.6 The Fourth
Circuit’s analysis was similar to that of the District Court:
Tri-State’s claims ‘‘related to’’ an ERISA plan; the insurance
>The District Court’s opinion and order denying Tri-State’s motion for
summary judgment is found at pages la - 4a of the appendix to the petition.
‘The Fourth Circuit's order denying permission to appeal is found at page
7a of the appendix.
‘The District Court’s opinion and order granting summary judgment
against Tri-State is found at pages 8a - 14a of the appendix.
°The Fourth Circuit’s opinion and order is found at pages 15a - 34a of the
appendix.
9
laws asserted to be applicable were not ‘‘saved’’ from preemp-
tion; therefore, all of Tri-State’s claims arising under West Vir-
ginia common or statutory law were preempted. As to Tri-State’s
argument that claims arising under West Virginia's Insurance
Code were ‘‘saved’’ from preemption by ERISA’s saving clause,
both courts rotely cited precedent standing for the proposition
that self-funded plans are exempt from state insurance laws by
virtue of the ‘‘deemer’’ clause. ERISA Section 514(b)(2)(B).
These analyses failed to recognize that Nationwide is not an
employee benefit plan but, rather, an insurance company. The
lower courts mistakenly reasoned that since the Policy had some
stop-loss insurance features, the Policy was actually a self-
funded plan which could not be deemed to be an insurance com-
pany or an insurer. The Fourth Circuit additionally held that the
insurance provision of the West Virginia Code which Tri-State
sued under was not a ‘‘law regulating insurance’’ within the
meaning of ERISA’s saving clause.
Tri-State was defrauded in the purchase of insurance for its
employee benefit plan. Various state law causes of action were
brought against Nationwide to remedy the wrong, but each cause
of action was held to be preempted, even though the face of the
Policy clearly states ‘‘SUBJECT TO THE LAWS OF THE
STATE IN WHICH IT IS DELIVERED.”’ Thus far Tri-State has
been left without either state or federal remedies against Nation-
wide to redress an obvious insurance fraud.
10
ARGUMENT
I. IMPORTANCE OF DECISION
A. Importance of Encouraging the Development and Con-
tinuation of Employer-Sponsored Benefit Plans and
Preventing Insurance Company Fraud.
It is very important for the Court to hear this appeal because
the matters at issue affect the societal and legislatively-expressed
interest in encouraging employers to sponsor health care benefits
for their employees.
This case is also immensely important because it affects the
enforceability of every state’s Unfair Trade Practices Act against
insurance companies in the sale of insurance products. Over 27
states have enacted an unfair trade practices act based on the
model act proposed by the National Association of Insurance
Commissioners.’ If this case is not heard, Nationwide and other
insurers can be expected to continue to engage in their fraudulent
business practices under the protection of the ERISA preemption
shield.
There is every reason to believe that the manipulation of
claims to generate increased premiums is a widespread practice
within the multi-billion dollar business* of providing insurance
products to fund ERISA welfare benefit plans (i.e., employer-
sponsored health care). Yet, to date, this Court has not had occa-
sion to address the effect of ERISA on regulating the sale of
insurance products by insurance companies to employers within
the context of employer-sponsored benefit plans.
7Douglas G. Houser, Unfair Claims Settlement Practices Act - How the
Courts Have Interpreted the Act, 15 The Forum 336 (1979).
*According to the Statistical Abstract of the United States 1994, Table No.
155, businesses paid $152.7 billion in private health insurance premiums in
1991.
1k
The end result of decisions like the one being appealed from
- decisions which broadly interpret the scope of ERISA preemp-
tion, yet narrowly construe the saving clause - is the opposite of
what Congress intended.
If an individual or a corporation bought insurance in West
Virginia and was victimized by the type of fraud Tri-State
alleges against Nationwide, those persons would have claims
under West Virginia’s Unfair Trade Practices Act for compensa-
tory and punitive damages. However, under the decisions issued
by the District Court and the Fourth Circuit in this case, an
employer who funds a benefit plan by purchasing an insurance
package from an insurance company is deprived of remedies
against an insurance company - remedies that any other pur-
chaser of insurance would possess. That result is wrong and will
have strong negative repercussions throughout the United States
because it allows insurance companies to raise the shield of
ERISA preemption and protect themselves not only against the
employee beneficiaries of a welfare plan, but against employers
who sponsor plans. Tri-State’s counterparts within the small! bus-
iness community will surely be apprised of Tri-State’s inability
to obtain redress against Nationwide’s fraud and will be unques-
tionably opposed to running the same risk.
The model unfair practices act is designed to force insur-
ance companies to conform to certain standards of conduct.
Likewise, states throughout the nation have developed other stat-
utory and common law remedies which vigorously protect pur-
chasers of insurance against insurance fraud. Under the rationale
of cases extending ERISA preemption to insurance fraud, these
state law protections are nonexistent whenever an insurance
product is purchased to fund an employee benefit plan. Yet, the
sale of and payment for insurance is surely not an area Congress
sought to preempt when ERISA was enacted. Indeed, Congress
12
specifically carved out of preemption, through the saving clause,
laws regulating the business of insurance.
Employers should be given every benefit and should be
extended the protection of state insurance laws where they
purchase insurance related to an ERISA employee benefit plan.
The purposes of ERISA are furthered if ERISA is interpreted to
limit the remedies of a participant against his employer, thereby
creating an incentive for the employer to provide health benefits
to its employees. However, if state-provided remedies are
stripped from an employer purchasing insurance for a plan, then
the Court has placed a serious burden on an employer providing
health benefits for its employees.
It is Tri-State’s contention that Congress intended to restrict
the displacement of state law to those areas with which ERISA is
directly concerned—i.e., primarily the operation and administra-
tion of plans, and to leave state law in place to the extent it does
not affect those core concerns.
The effect of the lower courts’ decisions in this case is that
insurance companies have no strong disincentive to manipulate
premium calculations to defraud employers in connection with
employer-sponsored health care. Nationwide and other compa-
nies in the insurance business are currently enjoying this wind-
fall and, as such, have no incentive to ferret out and alter the
fraudulent practices of their employees. This is especially signif-
icant when one considers that insurance companies process bil-
lions of dollars of claims per month from which employer-spon-
sored health care premiums are calculated.
B. Strong Concerns of Federalism are at Stake.
The effect of the Fourth Circuit’s decision and other deci-
sions like it is to take power from the States and give it to the
federal government.
13
It is well established that Congress can supplant state stat-
utes and common law with federal law, especially where an issue
of such importance as employee benefits is at stake. ERISA’s
preemption provisions are deliberately expansive, and designed
to establish pension plan regulation as exclusively a federal con-
cern. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138
(1990); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45-46
(1987).
However, it is equally clear that with the passage of ERISA,
Congress intended to retain in the States the ability to regulate
insurance companies and insurance practices. ‘‘We also must
presume that Congress did not intend to pre-empt areas of tradi-
tional regulation.’’ Metropolitan Life Ins. Co. v. Massachusetts,
471 U.S. 724, 740 (1985).
States have a keen interest in controlling and policing the
actions of insurance companies, and each state goes about it dif-
ferently. States like West Virginia have established an Insurance
Commission and have enacted detailed laws and regulations
regarding all aspects of insurance. West Virginia and other states
also devote substantial time, money and effort to protect their
citizens in their dealings with insurance companies. Indeed, in
virtually every state, employers comprise a huge segment of
those purchasing insurance.’
For courts such as the Fourth Circuit to interpret ERISA so
as to displace the bulk of state insurance laws as they might be
invoked by sponsors of employee benefit plans, is to .ob the
%Employers in West Virginia, for example, pay over $20 million per year
in accident and health insurance premiums. /992 Annual Report of the West
Virginia Insurance Commissioner. Insurance companies pay an insurance pre-
mium tax to the State of West Virginia when insurance is purchased by West
Virginia resident companies. The purpose of the premium tax is to help defray
the cost of the insurance commissioner, staff and regulating agencies to ‘‘regu-
late insurance.”’
os
States of a very large and important area of traditional state con-
cern. Such a broad reading of ERISA also unnecessarily and
improperly empowers insurance companies.
This case is not about paying claims to any care provider;
nor is this case about providing benefits to or for any participant
or beneficiary. This case is about one company (Nationwide)
breaching its contract with another company (Tri-State). It is
about the lower courts ignoring a contract which, as presented
and sold, clearly stated “‘Subject to the Laws of the State in
Which it is Delivered.’’ By stripping state law remedies from an
insurance purchaser, the lower courts have also taken from the
States their rights to protect employers or other purchasers of
insurance. This case is merely a billing dispute over the billing
procedures of one company to another company.
Insurance companies are not placed under an extra burden
by being required to comply with state laws relating to the sale
of insurance products for employee benefit plans. To the con-
trary, if the same type of policies as in question here are sold
outside the arena of employee benefits, insurance companies
must comply with state law (like West Virginia’s Unfair Trade
Practices Act). Similarly, insurance companies are required to
comply with the same state insurance laws in the sale of every
other type of insurance product. There is no good reason for
relieving insurance companies of such burden for the sale of
employee benefit plan policies.
Because federal courts throughout the country are tending
to expansively construe the scope of ERISA preemption and nar-
rowly construe the saving clause, the balance of power between
the States and the federal government is at stake. This is a con-
cern that has a very real effect on all States, and on all employers
and employees who choose to do business in any particular state.
It is an issue that strikes at the core of our federalism. As such,
this case presents questions of important public concern.
15
II. THE CIRCUITS ARE SPLIT AS TO THE TEST TO
BE USED IN DETERMINING THE SCOPE OF THE
‘“*RELATE TO”’ CLAUSE, THE “SAVING CLAUSE”’
AND THE “‘DEEMER CLAUSE”’ OF SECTION 514
OF ERISA
One of the primary goals of Congress in enacting ERISA
was to encourage the creation and continuation of employer-
sponsored employee benefit plans by defining, yet limiting, the
universe of claims and remedies that may be sought by plan ben-
eficiaries. Section 514 of ERISA, 29 U.S.C. § 1144, the broad
preemption provision, minimizes the burden upon plans and their
sponsors of complying with complex and conflicting state regu-
lations. State laws that ‘‘relate to any employee benefit plan’’ are
preempted. 29 U.S.C. § 1144(a).
At the same time Congress sought to preempt this area of
federal concern, Congress also expressly permitted the States to
continue to regulate insurance companies via Section
514(b)(2)(A) of ERISA (the ‘‘savirg clause’’), 29 U.S.C.
§ 1144(b)(2)(A) (** . . . nothing in this title shall be construed to
exempt or relieve any person from any law of any State which
regulates insurance ...°’). The ‘“deemer clause’’ of ERISA then
states that no employee benefit plan ‘‘shall be deemed to be an
insurance company or other insurer.’’ 29 U.S.C. § 1144(b)(2)(B)
(1988). Congress feared that if this provision were not added, an
employee benefit plan might, itself, be forced to follow a variety
of burdensome state insurance laws and regulations.
The foregoing three clauses in Section 514 of ERISA affect
the scope of ERISA preemption. A separate test has been devel-
oped for each clause, and the circuits are split in how they apply
the tests for each clause.
A. Judicial Construction of the ‘‘Relate To’’ Clause.
The circuits are split as to the proper construction of the
‘‘relate to’’ clause. The central question giving rise to the split is
16
whether ERISA preempts claims that relate in some manner to
ERISA plans, but for which ERISA provides no express remedy.
Some circuits have held that the ‘‘relate to’’ clause of
ERISA Section 514(a) is to be given a broad construction and,
consequently, that courts must create federal common law rights
and remedies to deal with such preempted claims. Other circuits
have come to a contrary conclusion, reasoning that although
ERISA broadly preempts all areas with which it is concerned,
the ‘‘relate to’’ clause should be narrowly construed when areas
of traditional state concern are at stake for which ERISA pro-
vides no remedies.
In the case in question, the Fourth Circuit held Tri-State’s
state law claims to be preempted, even though ERISA provides
no remedy for the claims alleged, and even though Tri-State, as a
non-fiduciary plan sponsor, apparently is not authorized to sue
under ERISA’s civil enforcement provisions.
In addition to the Fourth Circuit’s decision below, a case
decided by the Eleventh Circuit provides a good example of the
view that ERISA preempts all claims, even those not implicating
the rights of plan participants and beneficiaries. In First Nat'l
Life Ins. Co. v. Sunshine-Jr. Food Stores, Inc., 960 F.2d 1546
(11th Cir. 1992), cert. denied, US. , 113 S.Ct. 1045
(1993), an insurance company brought claims against an
employer for the employer’s failure to adhere to certain condi-
tions under which a group insurance policy was issued, such as
an alleged failure to maintain 75% employee participation in the
plan. The insurance served as an employer-sponsored benefit
plan. Although ERISA obviously has no express provisions or
remedies addressing such a dispute, the Eleventh Circuit found
that, because the claims ‘“‘related to’’ a plan, all state laws con-
cerning such a dispute were preempted. Consequently, any rem-
edy must be under ERISA or federal common law to fill the
**gaps’’ of ERISA.
17
The Fourth and Eleventh Circuits are not alone in being
unable to risk the temptation of expanding the scope of federal
law to areas of traditional state law concer. See, e.g., Consoli-
dated Beef Indus. v. New York Life Ins. Co., 949 F.2d 960, 964
(8th Cir. 1991), cert. denied, __ U.S. —_, 112 S.Ct. 1670
(1992) (employer has no remedy because its claim of misrepre-
sentation in the sale of an insurance program related to the plan
and was, therefore, preempted); Farlow v. Union Cent. Life Ins.
Co., 874 F.2d 791, 794 (11th Cir. 1989), (claims arising out of
misconduct in the sale of a plan are preempted, since ‘‘a state
law claim relates to a plan for preemption purposes as long as it
is not ‘wholly remote in content’’’); Washington Nat'l Ins. Co.
v. Hendricks, 855 F. Supp. 1542 (W.D. Wis. 1994) (where an
insurer sued an employer for unpaid premiums and the employer
counterclaimed for what it alleged to be the improper termina-
tion of an insurance policy, held that these actions related to an
ERISA plan and that courts were empowered to create causes of
action for breach of contract and similar state law theories under
ERISA).
Other circuits, in contradiction to the Fourth, Eighth and
Eleventh Circuits, have limited the preemptive effect of the
**relate to’’ provision to benefits administration and processing
issues. These courts hold that ERISA concerns itself only with
the rights of fiduciaries and beneficiaries in the administration of
a plan, recognizing that Congress did not intend to preempt the
application of state laws to what are essentially commercial
disputes.
For example, in Airparts Co., Inc. v. Custom Benefit Ser-
vices of Austin, Inc., 28 F.3d 1062 (10th Cir. 1994), an employer
who sponsored a plan brought claims of negligence and common
law fraud against a consultant to the employee benefit plan
administrators. The employer alleged that the consultant failed to
2a
diversity of citizenship and federal question, arguing that Tri-
State’s complaint is completely preempted by 29 U.S.C. § 1001
et seq., the Employee Retirement Income Security Act of 1974
(‘‘ERISA’’). The Court subsequently denied Tri-State’s motion
for remand finding that diversity jurisdiction existed, but
declined to rule on the ERISA preemption issue.
Tri-State now moves for partial summary judgment on the
ERISA preemption issue. Nationwide claims that the preemption
issue cannot be determined by summary judgment, and moves to
have the motion stricken. In its answer, Nationwide asserts as its
first affirmative defense that Tri-State’s complaint is preempted
by ERISA. Tri-State now seeks a ruling by the Court that, as a
matter of law, its claims are not preempted by ERISA. Summary
judgment is an appropriate vehicle for such a ruling. Therefore,
Nationwide’s motion to strike is DENIED.
Proceeding to the merits of Tri-State’s motion, the com-
plaint clearly relates to an employee welfare benefit plan as
defined in ERISA § 1002(1)(A). Tri-State argues that Nation-
wide lacks standing to assert its preemption defense. Said argu-
ment is without merit. There is no requirement that a defendant
have standing to be sued.
Apparently, Tri-State seeks to circumvent preemption by
arguing that ERISA is designed to protect employees and benefi-
Ciaries; that it is not applicable to contracts between employers
and insurance companies. However, ERISA provides broad cov-
erage, including actions such as the one before the Court. Both
parties are definitely plan fiduciaries. As such, § 1132(a)(2) per-
mits Tri-State to maintain a § 1109 action against Nationwide.’
'Even if Tri-State was not a fiduciary, it would probably be able to main-
tain a suit against Nationwide under ERISA federal common law. See Plumbers
& Steamfitters Local Union No. 152 etc. v. Bland, 745 F. Supp. 1172
(N.D.W.Va. 1990).
3a
Therefore, under § 1144(a), ERISA preempts all of Tri-
State’s claims based upon West Virginia laws relating to the
health insurance plan upon which its complaint is based. See
FMC Corp. v. Holliday, 111 S. Ct. 403 (1990); Metropolitan Life
Ins. Co. v. Massachusetts, 471 U.S. 724 (1985); Thompson v.
Talquin Bldg. Products Co., 928 F.2d 649 (4th Cir. 1991); Pow-
ell v. Chesapeake & Potomac Tel. Co., 780 F.2d 419 (4th Cir.
1985).
Having so found general preemption, Tri-State argues that
its claims based upon the West Virginia Trade Practices act are
saved from preemption under § 1144(b)(2). This savings clause,
however, is limited by § 1144({b)(2)(B), also known as the
‘*deemer’’ clause. The deemer clause excludes self-funded bene-
fit plans from the savings clause. FMC Corp. v. Holliday, supra.
The plan involved herein is a self-funded plan. Therefore,
under the deemer clause, the plan cannot be regulated by the
West Virginia Trade Practices Act. The fact that Nationwide pro-
vides stop-loss coverage does not change this outcome. Thomp-
son v. Talquin Bldg. Products Co., supra. Also, the outcome is
not changed by the fact that Nationwide provides administrative
claims processing functions for Tri-State. Powell v. Chesapeake
& Potomac Tel. Co., supra.
Accordingly, the Court is of the opinion that plaintiff's
motion for partial summary judgment should be DENIED.
It is so ORDERED.
4a
The Clerk is directed to transmit certified copies of tnis
Memorandum Opinion and Order to counsel of record herein.
ENTER:
/s/ WILLIAM M. KIDD
WILLIAM M. KIDD
UNITED STATES DISTRICT JUDGE
Filed September 23, 1991
Sa
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF WEST VIRGINIA
ORDER FILED
February 27, 1992
TRI-STATE MACHINE, INC.,
Plaintiff,
Vs. CIVIL ACTION NO. 90-0027-W(K)
NATIONWIDE LIFE INSURANCE
COMPANY,
Defendant.
ORDER
Currently pending is the plaintiff's motion for reconsidera-
tion or, in the alternative, for certification to the Fourth Circuit
Court of Appeals, pursuant to 28 U.S.C. § 1292(b). Defendant
has filed its opposition to both motions.
In regard to the plaintiff's motion for reconsideration of the
Court’s Memorandum Opinion and Order, entered September
23, 1991, the Court finds that the plaintiff has cited no grounds
warranting reconsideration. The plaintiff’s action is completely
preempted by 29 U.S.C. § 1001 et seq., the Employee Retire-
ment Income Security Act of 1974 (‘‘ERISA’’). Therefore,
plaintiff's motion for reconsideration is DENIED.
In regard to plaintiff's motion for the Court to certify an
appeal of its Memorandum Opinion and Order to the Fourth Cir-
cuit pursuant to 28 U.S.C. § 1292(b), the Court is of the opinion
that its ruling does involve a controlling question of law as to
which there is substantial ground for difference of opinion and
that an immediate appeal may materially advance the ultimate
termination of this action. The Court agrees with the defendant
that certifications are the exception, not the rule. However, there
6a
is no doubt that the Court’s ruling on the question of law, in
effect, eliminates the plaintiff's case. Furthermore, as aptly cited
by the plaintiff, the ERISA preemption question ‘‘was caught up
in the ‘ERISA quicksand.’ ’’ The Court believes that the law is
not as clear as the defendant asserts and that there is substantial
ground for difference of opinion.
Accordingly, the Court is of the opinion that the plaintiff's
motion to certify an appeal of the Court’s Memorandum Opinion
and Order to the Fourth Circuit is hereby GRANTED. This find-
ing is made pursuant to 28 U.S.C. § 1292(b) which grants appel-
late jurisdiction upon the Fourth Circuit Court of Appeals which
may, in its discretion, permit an immediate appeal to be taken if,
within ten (10) days of entry of this Order, an application is
made. Furthermore, the Court hereby STAYS all further pro-
ceedings before the Court.
It is so ORDERED.
The Clerk is directed to transmit certified copies of this
Order to counsel of record herein.
ENTER:
/s/ WILLIAM M. KIDD
WILLIAM M. KIDD
UNITED STATES DISTRICT JUDGE
Ta
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
FILED
March 26, 1992
TRI-STATE MACHINE, INCORPORATED,
Petitioner
Vv. No. 92-8022
NATIONWIDE LIFE INSURANCE CA-90-00-27-W(K)
COMPANY, an Ohio Corporation
Respondent
ORDER
Petitioner has filed a petition for permission to appeal an
interlocutory order pursuant to 28 U.S.C. 1292(b).
The Court denies the petition for permission to appeal.
Entered at the direction of Judge Niemeyer, with the con-
currence of Judge Hall and Judge Phillips.
For the Court,
/s/ JOHN M. GREACEN
Clerk
8a
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF WEST VIRGINIA
ORDER FILED
JULY 2, 1993
TRI-STATE MACHINE, INC.,
Plaintiff,
Vs. CIVIL ACTION NO. 90-0027-W(K)
NATIONWIDE LIFE INSURANCE
COMPANY,
Defendant.
MEMORANDUM OPINION AND ORDER
Once again, the plaintiff Tri-State Machine, Inc. (‘‘Tri-
State’’) petitions the Court to reverse itself and provide a
favorable ruling that Tri-State’s complaint, which asserts only
state causes of actions against defendant Nationwide Life Insur-
ance Company (‘‘Nationwide’’), is not preempted by § 514 of
the Employee Retirement Income Security Act of 1974
(‘‘ERISA’’) as set forth at 29 U.S.C. § 1144. In pursuit of its
goal, Tri-State has filed a ‘*‘Conditional Motion for Entry of
Final Judgment under Rule 54(b) or, Alternatively, Motion for
Summary Judgment and Request for Entry of Final Judgment.’’!
Nationwide filed its opposition motion to which Tri-State
replied. In addition, Nationwide filed a motion for Rule 11 sanc-
tions which is opposed by Tri-State.
To put this matter in perspective, a brief review of the pro-
cedural history is in order. This action was originally filed in the
Circuit Court of Ohio County, West Virginia, on February 28,
'On the same date, Tri-State also filed a motion for leave to file an
amended complaint, a motion to compel, and a motion for oral argument. Said
motions have also been fully briefed.
9a
1990. On March 29, 1990, Nationwide removed it, basing juris-
diction on ERISA preemption as well as diversity of citizenship.
On April 24, 1990, Tri-State filed its motion for remand, which
included a twenty page brief arguing that there was no ERISA
preemption, and that diversity was lacking due to the direct
action exception found at 28 U.S.C. § 1332(C)(1). Finding the
direct action exception inapplicable and that diversity jurisdic-
tion existed, the Court denied the remand motion. The Court did
not rule on the preemption issue.
On April 24, 1991, Tri-State filed its motion for partial
summary judgment, with attached memorandum, seeking a rul-
ing that its complaint is not preempted by ERISA. On May 17,
1991, Nationwide filed its opposition brief, asserting that Tri-
State’s entire complaint is preempted by ERISA. Tri-State filed
no reply brief.2 By Memorandum Opinion and Order entered on
September 23, 1991, the Court denied Tri-State’s motion, hold-
ing that all of its state law claims were preempted by ERISA.’
On November 29, 1991, Tri-State filed its motion for recon-
sideration of the Court’s denial of its partial summary judgment
motion. Alternatively, Tri-State moved for certification pursuant
to 28 U.S.C. § 1292(b), should the Court not reconsider its prior
ruling. On December 16, 1991, Nationwide filed its opposition to
both motions. Again, Tri-State filed no reply brief. By Order
entered February 21, 1992, the Court denied Tri-State’s motion
for reconsideration, but granted its motion for certification. On
?Tri-State complains about Nationwide’s alleged misrepresentations of
facts and misleading of the Court in its opposition brief regarding the funding
of the insurance policy. If this in fact was the case, a reply brief was the proper
means to bring it to the Court’s attentions.
5Tri-State takes issue with the Court’s ruling in regard to the ‘‘savings’’
clause and ‘‘deemer’’ clause, found at 29 U.S.C. § 1144(b)(2), claiming that
‘‘neither Plaintiff nor Defendant briefed that issue.’’ In its motion for partial
summary judgment, Tri-State specifically alleged as its second ground that ‘‘29
U.S.C. § 1144(b)(2) exempts the plaintiff's claim from ERISA.”’
10a
March 26, 1992, the Fourth Circuit Court of Appeals denied Tri-
State’s petition for permission to appeal.
On April 7, 1992, Tri-State filed its motion to vacate and
reenter order of certification, asserting that the Fourth Circuit
denied the petition because it was not timely filed. On April 23,
1992, Nationwide filed its opposition brief. Tri-State’s reply
brief was filed on May 7, 1992. By Order entered June 16, 1992,
the Court denied Tri-State’s motion, finding that the Fourth Cir-
cuit’s denial was most likely upon the merits since untimeliness
could easily have been remedied if the Fourth Circuit had so
desired. The Court also ordered Tri-State to indicate whether it
intended to pursue an ERISA claim. By notice filed July 9, 1992,
Tri-State informed the Court that it intended to pursue this action
under ERISA. However, to date, there has been no effort by Tri-
State to amend its complaint to state a cause of action under
ERISA.
Instead, Tri-State has filed the motion currently before the
Court, as well as a motion for leave to amend two paragraphs of
its complaint, with the specific design to avoid ERISA preemp-
tion and proceed on the state law claims asserted in its com-
plaint.* Specifically, Tri-State asserts that the Court erred by
finding the ‘‘deemer’’ clause* applicable and that Tri-State was a
fiduciary under ERISA. However, neither of these contentions is
material to a finding of complete preemption under ERISA.
The Rule 54(b) motion merits little discussion. The Court
has not dismissed any claims asserted by Tri-State. The Court
‘Specifically, Tri-State seeks to amend its complaint to allege that the
group insurance policy was not self-funded, in furtherance of its attempt to
avoid preemption. Tri-State makes no effort to also add an ERISA claim to its
complaint.
SThe ‘‘deemer’’ clause is found at § 406(b)(2)(B) [sic] of ERISA, 29
U.S.C. § 1144(b)(2)(B). The ‘‘savings’’ clause is found at § 406(b)(2)(A) [sic]
of ERISA, 29 U.S.C. § 1144(b)(2)(A).
lla
denied Tri-State’s partial summary judgment motion. Therefore,
there is nothing to enter partial judgment upon. The proper
mechanism for review of this decision was certification, which
the Fourth Circuit dtutied. Accordingly, Tri-State’s Rule 54(b)
motion is DENIED.
Preemption under ERISA is ‘‘conspicuous for its breadth.’’
FMC Corp. v. Holliday, 498 U.S. 52, 111 S. Ct. 403, 407 (1990).
If the state cause of action ‘‘relates to’’ an employee welfare
benefit plan, it is preempted. See Ingersoll-Rand Co. v. McClen-
don, 498 U.S. 133, 111 S. Ct. 478 (1990). Tri-State concedes:
“It is clear that the employee benefit plan sponsored by Plaintiff
is an ‘employee welfare benefit plan’ for purposes of ERISA.”’
Furthermore, as stated in its memorandum of law in support of
motion to remand, filed on April 24, 1990, Tri-State character-
ized its complaint as follows:
... Specifically, it is alleged that defendant breached its
duties to administer the benefits program and failed to
determine what claims should be paid or what claims
Should not be paid. It is alleged that defendant failed to
timely process claims with the intent of imposing liability
on plaintiff under the stop-loss provisions of the plan, and
' that defendant deliberately mismanaged the contract. It is
alleged that defendant breached its fiduciary duty to plain-
tiff and that defendant breached the implied covenants of
good faith and fair dealing. It is also alleged that defendant
misrepresented pertinent facts of the insurance policy and
committed the common law and statutory offense of ‘‘insur-
ance bad faith.’’ Further, it is alleged that defendant’s
actions violated the applicable law of the State of West Vir-
ginia, including the rules and regulations of the Insurance
Commissioner of the State of West Virginia and, more spe-
cifically, Series XV-V-1981, Unfair Trade Practices, relat-
ing to deceptive and unfair trade practices.
12a
However, it is plaintiff's contention that its claim is
based entirely and solely upon state law and does not
invoke ERISA original jurisdiction.
More than three years later, Tri-State’s position has not changed.
In its reply brief, filed on May 20, 1993, Tri-State states: ‘‘In our
case, Plaintiff, as an insurance purchaser, is seeking damages for
fraudulent conduct under an insurance contract.’”’ It is inconceiv-
able to the Court how Tri-State can continue to argue that its
complaint for improper plan administration does not relate to the
employee welfare benefit plan alleged to have been improperly
administered by Nationwide. See Diduck v. Kaszycki & Sons
Contractors, Inc., 974 F.2d 270, 288 (2nd Cir. 1992) (‘‘The
fraud alleged ‘relates to’ an ERISA-regulated employee benefit
plan because it concerns the conduct of a fiduciary and third par-
ties in relation to the plan.’’); Consolidated Beef Industries, Inc.
v. New York Life Ins. Co., 949 F.2d 960, 963 (8th Cir. 1991)
(‘‘Given ERISA’s broad pre-emption provision, state law claims
for improper plan administration are pre-empted.’’); Howard v.
Parisian, Inc., 807 F.2d 1560, 1564 (11th Cir. 1897) [sic]
(‘‘However, if a state law claim arises out of the administration
of benefits under a plan, the claim is preempted’’).
The fact that Tri-State claims that it is not a fiduciary is
immaterial to preemption. Although the Court has no doubt that
Tri-State is a fiduciary, and has so found, if it were not, it would
still be able to pursue a federal common law ERISA remedy
under Provident Life & Acci. Ins. Co. v. Waller, 906 F.2d 985
(4th Cir. 1990). See Whitworth Bros. Storage Co. v. Central
States, Southeast & Southwest Areas Pension Fund, 794 F.2d
221 (6th Cir. 1986). Accordingly, as a matter of law, the Court
holds that all of the claims asserted in Tri-State’s complaint
relate to the employees welfare benefit plan.
Tri-State’s final argument is that the ‘‘deemer’’ clause is
inapplicable and that the ‘‘savings’’ clause would not exempt its
13a
claims from ERISA preemption. Even if the Court were to
reverse its finding that Tri-State was self-funding, and hold that
the ‘‘deemer’’ clause was inapplicable, all of Tri-State’s claims
would still be preempted. The ‘‘savings’’ clause only applies to
state laws that ‘‘regulate insurance.’’ Whether a state law regu-
lates insurance is a question of federal law. Federal courts have
consistently held that ‘‘bad faith’’ claims as well as *‘deceptive
and unfair trade practices’’ claims, whether based upon statute or
common law, are not laws that regulate insurance.
In order for a state law to regulate insurance it must have
the effect of ‘‘spreading and underwriting of a policyholders’
[sic] risk.’” Powell v. Chesapeake & Potomac Telephone Co.,
780 F.2d 419, 423 (1985). The state laws asserted by Tri-State
against Nationwide do not do so. The state laws asserted do not
regulate the type of insurance contract which could be issued,
nor mandate any benefits which must be included in the insur-
ance contract. Simply put, the state laws do not regulate insur-
ance within the meaning of the ‘‘savings’’ clause. See Metropoli-
tan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985); Stuart
Circle Hospital Corp. v. Aetna Health Management, —_— F.2d
___. (4th Cir. June 2, 1993); Hogan v. Kraft Foods, 969 F.2d
142, 145 (Sth Cir. 1992); International Resources, Inc. v. New
York Life Ins. Co., 950 F.2d 294 (6th Cir. 1991). Accordingly,
the ‘‘savings’’ clause is inapplicable.
Therefore, it is still the opinion of the Court that § 406 [sic]
of ERISA, 29 U.S.C. § 1144(a), preempts all of Tri-State’s
claims asserted in its complaint. In that this issue has been
repeatedly and exhaustively briefed, in that Tri-State has fully
defended and has presented all material pertinent to its claim,
and since Tri-State has failed to seek leave to amend its com-
plaint to assert an ERISA claim, the Court hereby GRANTS
14a
summary judgment sua sponte for Nationwide, and hereby DIS-
MISSES this action. See Pension Ben. Guaranty Corporation v.
Mize Co., 987 F.2d 1059, 1061 (4th Cir. 1993); Portsmouth
Square, Inc. v. Shareholders Protective Committee, 770 F.2d
866, 869 (9th Cir. 1985) (‘‘For example, sua sponte summary
judgment is appropriate where one party moves for summary
judgment and, after hearing, it appears from all the evidence
presented that there is no genuine issue of material fact and the
non-moving party is entitled to judgment as a matter of law.’’).
In light of the Court’s ruling herein, all remaining motions are
DENIED.
It is so ORDERED.
Judgment shall be entered accordingly, and this action shall
be dismissed and removed from the docket of the Court.
The Clerk is directed to transmit certified copies of this
Memorandum Opinion and Order to counsel of record herein.
ENTER: July 2, 1993
/s/ WILLIAM M. KIDD
WILLIAM M. KIDD
UNITED STATES DISTRICT JUDGE
‘In essence, by granting summary judgment against Tri-State, the Court
has made possible the appeal Tri-State sought in its Rule 54(b) motion.
15a
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
Tri-State Machine, Incorporated,
Plaintiff-Appellant,
v. No. 93-1971
Nationwide Life Insurance Company,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of West Virginia, at Elkins.
William M. Kidd, Senior District Judge.
(CA-90-27-W-K)
Argued: March 9, 1994
Decided: August 31, 1994
Before NIEMEYER and LUTTIG, Circuit Judges,
and PHILLIPS, Senior Circuit Judge.
Affirmed by published opinion. Judge Niemeyer wrote the opin-
ion, in which Senior Judge Phillips joined. Judge Luttig wrote a
separate dissenting opinion.
COUNSEL
ARGUED: David B. Fawcett, II], BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION, Pittsburgh, Pennsylvania,
for Appellant. Gregory Darwin Port, CHORPENNING, GOOD
& MANCUSO CO., L.P.A., Columbus, Ohio, for Appellee. ON
BRIEF: James W. Forsyth, BUCHANAN INGERSOLL PRO-
FESSIONAL CORPORATION, Pittsburgh, Pennsylvania; Ray
A. Byrd, SCHRADER, RECHT, BYRD, BYRUM & COMPAN-
ION, Wheeling, West Virginia, for Appellant. Philip F. Brown,
CHORPENNING, GOOD & MANCUSO CO., L.P.A., Colum-
bus, Ohio, for Appellee.
18
give timely advice, improperly calculated pension benefits, pro-
posed and drafted a useless plan amendment, and deliberately
concealed the cost of the amendment and its eventual useless-
ness. The Tenth Circuit recognized that claims obviously having
some relationship to an ERISA plan did not ‘‘relate to an ERISA
plan’’ within the meaning of ERISA’s preemption provision:
[It] is clear that the state law claims here do not relate to an
ERISA plan. The state laws involved do not regulate the
type of benefits or terms of the plan; they do not create
reporting, disclosure, funding, or vesting requirements for
the plan; they do not affect the calculation of benefits; and
they are not common law rules designed to rectify faulty
plan administration. (Citation omitted.) Similarly, plaintiffs
are not employees resorting to state law to avail themselves
of an alternative cause of action to collect benefits...
Id. at 1065.
Other circuits addressing the scope of the ‘‘relate to’’ clause
align themselves with the Tenth Circuit in Airparts. See, e.g.,
Perkins v. Time Ins. Co., 898 F.2d 470, 473 (Sth Cir. 1990)
(ERISA did not preempt an employee’s claim against insurance
agents for fraudulently misrepresenting a plan’s coverage); Perry
v. P*I*E Nationwide, Inc., 872 F.2d 157 (6th Cir. 1989) (misrep-
resentation of the terms of a plan to induce participation was not
preempted when Congress has not provided a remedy for the
wrong and the employees’ claims do not relate to any plan bene-
fit), cert. denied, 493 U.S. 1093 (1990); Aetna Life Ins. Co. v.
Borges, 869 F.2d 142, 146-47 (2d Cir.), cert. denied, 493 U.S.
811 (1989) (‘‘What triggers ERISA preemption is not just any
indirect effect on administrative procedures but rather an effect
on the primary administrative functions of benefit plans, such as
determining an employee’s eligibility for a benefit and the
amount of that benefit.’’); Monarch Cement Co. v. Lone Star
Indus., 982 F.2d 1448, 1452 (10th Cir. 1992), citing Aetna Life,
19
supra, (*‘[L]aws that have been ruled preempted are those that
provide an alternative cause of action to employees to collect
benefits protected by ERISA, refer specifically to ERISA plans
and apply solely to them, or interfere with the calculation of ben-
efits owed to an employee. Those that have not been preempted
are laws of general application—often traditional exercises of
State power or regulatory authority—whose effect on ERISA
plans is incidental.’’); Martori Bros. Distributors v. James-
Massengale, 781 F.2d 1349, 1356-57, (9th Cir.) (state law claims
are not preempted unless they fall into one of four categories -
‘*First, laws that regulate the type of benefits or terms of ERISA
plans. Second, laws that create reporting, disclosure, funding, or
vesting requirements for ERISA plans. Third, laws that provide
rules for the calculation of the amount of benefits to be paid
under ERISA plans. Fourth, laws and common-law rules that
provide remedies for misconduct growing out of the administra-
tion of the ERISA plan.’’ (citations omitted.)), amended, 791
F.2d 799, cert. denied, 479 U.S. 949 (1986); Rebaldo v. Cuomo,
749 F.2d 133, 139 (2d Cir. 1984) (where a state law does not
affect the structure, the administration, or the type of benefits
provided by an ERISA plan, the mere fact that the [law] has
some economic impact on the plan does not require that the
[law] be invalidated.’’), cert. denied, 472 U.S. 1008 (1985); See
also DiPietro-Kay Corp. v. Interactive Benefits Corp., 825 F.
Supp. 459 (D. Conn. 1993) (employer’s claims against insurer
for negligence, misrepresentation and violation of Connecticut
Unfair Trade Practices Act were not preempted by ERISA).
The denial of certiorari for circuit court cases on both sides
of the diverging authority has only increased the uncertainty of
the analysis being applied by the lower courts. The Supreme
Court now has the opportunity to clear up this confusion after
many circuits have considered the issue, with differing results.
——
20
ERISA Section 502(a) has been construed by courts to limit
the remedies available to those expressly enumerated.'° ERISA
itself also provides no express remedies at all for a plan sponsor
such as Tri-State - a further indication that Congress did not
intend for preemption to apply to the sale of insurance.'' Thus,
section 502(a) provides civil remedies to a limited group of per-
sons—namely, plan participants, beneficiaries and fiduciaries—
and defines a limited number of categories of claims that may be
asserted.
Importantly, the circuits are generally following this Court’s
holding'* that remedies under ERISA are in fact limited to plan
beneficiaries, participants or fiduciaries. See, e.g., Hermann Hos-
pital v. MEBA Medical & Benefits Plan, 845 F.2d 1286, 1288-89
(Sth Cir. 1988) (‘‘Where Congress has defined the parties who
may bring a civil action founded on ERISA, we are loathe to
ignore the legislature’s specificity.’’); Pressroom Unions-Print-
ers League Income Sec. Fund v. Continental Assurance Co., 700
F.2d 889, 892 (2d Cir.) (‘‘legislature [did not]intend . . . to grant
subject matter jurisdiction over suits by employers, funds, or
other parties not listed in § 1132(a)...’’), cert. dismissed, 464
'°Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987) (‘‘The deliberate
care with which ERISA’s civil enforcement remedies were drafted and the bal-
ancing of policies embodied in its choice of remedies argue strongly for the
conclusion that ERISA’s civil enforcement remedies were intended to be
exclusive.’’).
‘'In general, ERISA’s civil enforcement provision grants plan participants
and beneficiaries the right to bring a private action to recover benefits under a
plan; to enforce ERISA’s plan disclosure, funding, and administrative require-
ments; and to obtain ‘‘appropriate relief’’ for breach of fiduciary duty by an
ERISA plan administrator or other person who exercises discretionary control
or authority over the plan or its assets. See 29 U.S.C. § 1132(a).
'2In Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S.
1 (1983), this Court stated that ‘‘[t]he express grant of federal jurisdiction in
ERISA is limited to suits brought by certain parties... as to whom Congress
presumably determined that a right to enter a federal court was necessary to
further the statute’s purposes.’’ /d. at 21.
21
U.S. 845 (1983); Whitworth Bros. Storage Co. v. Cent. States
Pension Fund, 794 F.2d 221, 228 (6th Cir.) (employer could not
maintain suit under ERISA because ‘‘Congress intended to limit
the parties who could maintain actions pursuant to [ERISA] sec-
tion 502, [and] that section 502 is an exclusive grant of jurisdic-
tion.’’), cert. denied, 479 U.S. 1007 (1986).
Thus, the Fourth Circuit has found that ERISA preempts
Tri-State’s state law claims notwithstanding the fact that Tri-
State is not authorized by ERISA to institute an action and
despite the fact that ERISA contains no remedial provisions
addressing the fraud or bad faith of an insurance company vis-a-
vis an employer/plan sponsor.
Again, there is no question that the scope of ERISA pre-
emption is broad. Also, there is a sound basis for courts to hold
that the saving clause of ERISA does not permit plan partici-
pants and beneficiaries from grafting state insurance law rights
and remedies onto ERISA, since ERISA strikes a delicate bal-
ance between the interest of participants versus the societal inter-
est in encouraging employers to create plans. But while ERISA
has detailed provisions regarding the rights and remedies of plan
beneficiaries and participants, ERISA does not have express pro-
visions providing remedies for employers who are non-fiduciary
plan sponsors.
The Court is now presented with the opportunity to stop the
unnecessary expansion of federal common law by courts like the
Fourth, Eighth and Eleventh Circuits. The ‘‘relate to’’ clause is
properly viewed expansively when Section 502(a) enumerated
parties institute suit, because ERISA provides a remedy to such
parties. However, as illustrated by the Second, Fifth, Sixth, Ninth
and Tenth Circuit cases discussed above, the ‘‘relate to’’ clause
should not be viewed expansively when non-enumerated parties
such as Tri-State, a non-fiduciary plan sponsor, institute suit.
22
Because ERISA does not provide a remedy for misrepresen-
tation or other fraudulent acts committed in connection with the
sale of insurance and the computation of insurance premiums,
this case gives rise to the issues of whether the dispute ‘‘relates
to’’ an ERISA plan in the first instance and whether it is appro-
priate for courts to create federal common law to replace state
law governing disputes not addressed by ERISA. Similarly, this
case gives rise to the analogous issue of whether actions can be
brought by parties not identified in ERISA Section 502(4) (i.e.,
plan sponsors who are not participants, beneficiaries or fiducia-
ries) and, if so, whether such actions must be pursued under
ERISA, federal common law or under state law.
These are important issues that have important ramifica-
tions for all employers who provide welfare benefits to their
employees through the purchase of insurance, who are consider-
ing doing so, or who may be forced to do so if employer-benefits
are mandated.
B. Judicial Construction of the ‘‘Saving Clause’’.
The conflicting interests in allowing states to regulate areas
of traditional state law concern versus the need for exclusive fed-
eral regulation of employee benefits comes to a head in constru-
ing the saving clause of ERISA’s preemption provision. Follow-
ing this Court’s lead in Pilot Life, it appears to be well accepted
in all of the circuits that claims asserted by participants or bene-
ficiaries under state law, even state insurance law, are preempted
because inevitably they strike at the core concern of ERISA - to
provide a uniform and limited remedial scheme. On the other
hand, where claims are asserted by persons other than partici-
pants or beneficiaries, such as in the case at bar, the courts are
split.
23
In cases involving beneficiaries seeking to invoke state
insurance laws to enhance their remedies, this Court has sug-
gested looking, first, to the common sense understanding of the
term ‘‘regulates insurance’’ and, second, to the McCarran-
Ferguson Act test to determine whether the law regulates the
business of insurance. See, e.g., Metropolitan Life, supra, and
Pilot Life, supra.'* In Pilot Life, this Court found that bad faith
insurance claims asserted by a plan participant are not insurance
regulations of the type that Congress intended to save. Although
this Court obviously intended the McCarran-Ferguson Act test to
assist courts in distinguishing core insurance concerns from rem-
edies that conflict with the interests embodied by ERISA, the test
is not well-suited for addressing the application of preemption to
parties not enumerated in ERISA Section 502(a) and has been
used to severely limit the scope of the saving clause. Conse-
quently, preemption has been extended into areas not addressed
by ERISA.
For example, in the case at bar, the Fourth Circuit perfunc-
torily applied the McCarran-Ferguson test (without first consid-
ering the common sense test) and reached the conclusion that
Congress intended to displace state law that would otherwise
provide an employer with remedies against an insurance com-
pany from whom the employer purchased insurance.
On the other hand, where an employer brought suit against
an insurance company for failing to ensure that a policy con-
formed to the requirements of state law, the Sixth Circuit ruled
In Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985),
this Court referenced a test developed under the McCarran-Ferguson Act, 15
U.S.C. § 1011 et seq., to guide courts in determining whether state laws regu-
late insurance: ‘‘first, whether the practice has the effect of transferring or
spreading a policyholder’s risk; second, whether the practice is an integral part
of the policy relationship between the insurer and the insured; and third,
whether the practice is limited to entities within the insurance industry.’’ /d. at
743 (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)).
24
that pertinent state insurance law was saved from preemption
because state insurance law applied to insurance policies pur-
chased by ERISA plans. Int’l Resources, Inc. v. New York Life
Ins. Co., 950 F.2d 294, 300 (6th Cir.), cert. denied, _. U.S.
—, 112 S.Ct. 2941 (1992).
The Fourth Circuit’s ruling in the case at bar is in direct
conflict with the Sixth Circuit and is typical of the collective fail-
ure of the lower courts to scrutinize this Court’s guidance. See
FMC Corp. v. Holliday, 498 U.S. 52, 64 (1990) (‘‘the saving
clause retains the independent effect of protecting state insurance
regulation of insurance contracts purchased by employee benefit
plans.’’)
C. Judicial Construction of the ‘‘Deemer Clause.’’
The saving clause states that ‘‘any law of any State which
regulates insurance, banking, or securities’’ is saved from
ERISA preemption. ERISA Section 514(b)(2)(A). The deemer
clause limits the effect of the saving clause and states that no
employee benefit plan ‘‘shall be deemed to be an insurance com-
pany or other insurer... or... engaged in the business of insur-
ance ... for purposes of any law of any state purporting to regu-
late insurance companies [or] insurance contracts.’’ ERISA
Section 514(b)(2)(B).
The deemer clause has been interpreted by the Supreme
Court to exempt ‘‘ERISA plans from state laws that ‘regulat[e]
insurance’ within the meaning of the saving clause.’’ FMC Corp.
v. Holliday, 498 U.S. 52, 61 (1990).
State laws that directly regulate insurance are ‘‘saved’’ but
do not reach self-funded employee benefit plans because the
plans may not be deemed to be insurance companies, other
25
insurers, or engaged in the business of insurance for pur-
poses of such state laws. On the other hand, employee bene-
fit plans that are insured are subject to indirect state insur-
ance regulation. An insurance company that insures a plan
remains an insurer for purposes of state laws ‘‘purporting to
regulate insurance’ after application of the deemer clause.
The insurance company is therefore not relieved from state
insurance regulation. The ERISA plan is consequently
bound by state insurance regulations insofar as they apply
to the plan’s insurer.
Id. (emphasis added). If the foregoing statements were not suffi-
ciently clear, this Court concluded its analysis in FMC Corp. by
stating that ‘‘[oJur interpretation of the deemer clause makes
clear that if a plan is insured, a State may regulate it indirectly
through regulation of its insurer and its insurer's insurance con-
tracts; if the plan is uninsured, the State may not regulate it.’’ /d.
at 64 (emphasis added).
This guidance from the Court provides two important dic-
tates that are not being followed by the lower courts throughout
the United States. First, lower courts should not extend deemer
clause protection to insurance companies. Clearly, the deemer
clause prohibits plans from being deemed insurers or engaged in
the business of insurance. Obviously, insurance companies are
insurers and ought to be governed by state insurance law.
Second, the lower courts are ignoring the Court's mandate
that only self-funded plans escape state insurance regulation. The
common sense concept of a self-funded plan is a plan that con-
tains no insurance. Lower courts and the Fourth Circuit, in par-
ticular, however, are extending application of the deemer clause
to plans having insurance.
26
1. Erroneous application to insurance companies.
Although the deemer clause is obviously intended to relieve
employee benefit plans from state insurance laws, the clause has
been used by insurance companies to avoid the application of
state insurance laws to the sale of their insurance policies.
Nationwide sold an insurance policy to Tri-State. As noted by
Judge Luttig in his dissenting opinion in this case, the sale of the
insurance policy and the computation of premiums due were
clearly not made by the Tri-State benefit plan. It is plain that Tri-
State is seeking to hold Nationwide, not the benefit plan,
accountable for Nationwide’s fraudulent conduct in violation of
West Virginia’s insurance laws. Tri-State is not seeking to deem
the Tri-State benefit plan to be an insurance company.
Nevertheless, the Fourth Circuit majority found, from a
review of the plan documents, that Tri-State’s benefit plan was
‘*a self-funded one for the most part... Accordingly, the district
court correctly held that the plan was self-funded and that the
Deemer Clause of ERISA would also apply to preempt Tri-
State’s claims.’’ Tri-State Machine, Inc. v. Nationwide Life Ins.
Co., 33 F.3d 309, 315 (4th Cir. 1994). Having incorrectly con-
cluded that the plan was self-funded, the Fourth Circuit ruled
that the deemer clause applied without considering the identity
of the defendant—an insurer. This case presents the Court with
the opportunity to clarify application of the deemer clause by
holding that plan sponsors asserting premium-related causes of
action are not seeking to hold the employee benefit plan account-
able for a breach of state insurance law (consequently, the
deemer clause is completely inapplicable).
Consistent with FMC Corp., Tri-State is seeking to enforce
state insurance regulation of Nationwide, not the Tri-State bene-
fit plan. FMC Corp. permits state regulation of companies that
insure ERISA plans. The deemer clause relieves ERISA benefit
27
plans—both insured and uninsured plans—from direct state reg-
ulation. The deemer clause does not relieve the plan’s insurer
from regulation by state law.
2. What is a self-funded plan?
Notwithstanding this Court’s decision in FMC Corp., the
circuits are split as to when a plan is ‘‘self-funded’’ so as to trig-
ger application of the deemer clause. Some courts have recog-
nized that the deemer clause should be narrowly construed so
that employers who transfer risk to insurance companies for the
purpose of limiting their own exposure may be protected by state
insurance laws. These cases recognize that a self-funded plan, by
definition, is not insured.
Another line of cases, however, has broadly construed the
deemer clause to mean that an employer who retains some risk
through a partially funded plan is precluded from invoking state
insurance laws. In particular, the Fourth Circuit, as discussed
below, views a self-funded plan as a plan that receives some
claims reimbursement from the employer (through increased pre-
mium obligations).
The issue which must be decided then, and which is of huge
importance to all insurance companies and all employers who
sponsor health care plans, is whether insurance companies are
exempt from state insurance laws where an employer funds some
portion of the health care plan. It is Tri-State’s contention that
this area of law desperately needs a bright line rule stating that
insurance companies are subject to state insurance laws in all sit-
uations where they are insuring employers against any risk in
connection with the sponsorship of an ERISA plan.
The Fourth Circuit has twice applied the deemer clause to
plans that were insured. In the instant case, the court reviewed
the plan documents and found that Tri-State’s benefit plan was _
‘ta self-funded one for the most part’’ and applied the deemer
28
clause to prevent the ‘‘saving’’ of any state law causes of action.
Tri-State Machine, 33 F.3d at 315 (emphasis added). As
explained in the Statement of the Case herein, Nationwide pro-
vided insurance to Tri-State and was liable for all claims over
specified dollar amounts.
Also, in Hampton Industries, Inc. v. Sparrow, 981 F.2d 726
(4th Cir. 1992), the Fourth Circuit applied the deemer clause to a
plan that was merely responsible for claims up to $60,000 per
year/per employee. The employer purchased insurance from
Blue Cross/Blue Shield which required Blue Cross/Blue Shield
to pay for any claims over the self-funded amount. /d. at 727,
n.1. In the insurance industry, this arrangement is known as
‘*stop loss’’ insurance.
Other circuits, in contradiction to the Fourth Circuit, recog-
nize that the presence of insurance ipso facto negates the possi-
bility that a plan is self-funded. In Northern Group Services, Inc.
v. Auto Owners Ins. Co., 833 F.2d 85 (6th Cir. 1987), cert.
denied, 486 U.S. 1017 (1988), the Sixth Circuit was faced with
determining whether certain employee benefit plans were self-
insured. Without deciding whether the insured party was the
employee benefit plan or the employer, the court noted that
insurance proceeds would be payable only when claims
exceeded specified ceilings. Consequently, the particular
employee benefit plan at issue was not self-insured. Jd. at 91.'*
‘Northern Group was later limited in its holding. In Lincoln Mut. Casu-
alty Co. v. Lectron Products, Inc. Employee Health Plan, 970 F.2d 206 (6th
Cir. 1992), the Sixth Circuit ruled that a self-funded benefit plan which pur-
chased stop loss insurance to cover its own catastrophic losses remained a self-
funded plan. Lincoln Mutual did not involve an employer’s purchase of insur-
ance as does the case at bar.
29
This area of law begs for guidance recognizing that employ-
ers who purchase an insurance contract to fund an employee ben-
efit plan may require the insurance company to comply with the
dictates of state insurance law.
CONCLUSION
The implications of the matters at issue in this-appeal are
expansive, especially in this age of calls for health care reform
and demands for employer-sponsored health care. Tri-State bar-
gained for insurance to shift its risk and burden of providing
health care benefits. What it received in return was insurance
fraud.
The plain language of ERISA indicates that it was not
designed to protect insurance companies from complying with
insurance regulations, and most certainly not from breach of con-
tract and tort claims arising out of fraudulent billing practices
unrelated to benefits administration.
There are several reasons why the issues in this lawsuit
merit the attention of the Supreme Court, especially at this point
in time. First, a trend has swept the country’s courts, developed
from the early preemption cases decided by this Court, to inter-
pret the force of ERISA preemption more and more broadly so
as to cover transactions and parties that Congress never intended.
Second, the analysis performed to determine the breadth of
ERISA’s preemptive effect needs to be retooled. Presently the
‘relates to’’ analysis is not a test at all, because it knows no
bounds. Third, the saving and deemer clause analysis has been
modeled after an old insurance law standard that has simply not
been workable or meaningful outside of the beneficiary or par-
ticipant context of preemption analysis. The net effect of this is
to gut state insurance laws as they may apply to employer-
sponsored health coverage.
30
Finally, and most importantly, the strong interest in having
employers create and continue ERISA welfare plans has been
undermined by the misapplication of preemption analysis. When |
employers should be encouraged to create plans by, for example,
buying health insurance for their workers, they are actually dis-
couraged from doing so by the present interpretation of ERISA
which permits insurance companies to sell insurance policies to
employers without accountability under state insurance laws.
Respectfully submitted,
/s/ DAVID B. FAWCETT, III
DAVID B. FAWCETT, III
JAMES W. FORSYTH
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
56th Floor, 600 Grant Street
Pittsburgh, PA 15219
(412) 562-393 1/3935
Attorneys for Petitioner,
Tri-State Machine, Inc.
la
APPENDIX
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF WEST VIRGINIA
ORDER FILED
SEPTEMBER 23, 1991
TRI-STATE MACHINE, INC.,
Plaintiff,
Vs. CIVIL ACTION NO 90-0027-W(K)
NATIONWIDE LIFE INSURANCE
COMPANY,
Defendant.
MEMORANDUM OPINION AND ORDER
Currently pending is the plaintiff's motion for partial sum-
mary judgment. Defendant has filed its opposition, as well as a
motion to strike plaintiff's motion. No reply has been filed by the
plaintiff. Said matters are now ripe for disposition.
The material facts underlying this matter are not in dispute.
From November of 1983 through July of 1987, Tri-State
Machine, Inc. (‘‘Tri-State’’) contracted with Nationwide Life
Insurance Company (‘‘Nationwide’’) for group health insurance
for Tri-State’s employees. After July of 1987, Tri-State became
self-insured for health benefits to its employees, with Nation-
wide providing stop-loss insurance as well as providing adminis-
trative claims processing functions. During July of 1989, the
relationship between the parties terminated.
Tri-State then commenced this civil action in state court
against Nationwide asserting common law breach of contract
claims and statutory claims under West Virginia law. Nation-
wide removed the action to this Court, basing jurisdiction upon
l6a
OPINION
NIEMEYER, Circuit Judge:
We are presented with the issue of whether the Employee
Retirement Income Security Act of 1974 (‘‘ERISA’’), 29 U.S.C.
§ 1001, et seg., preempts state law claims of Tri-State Machine,
Inc., for improper claims processing and mismanagement against
Nationwide Life Insurance Company. Nationwide Life issued
and administered a group insurance policy to provide health care
benefits for Tri-State’s employees under an employee benefit
plan. The district court ruled that Tri-State’s state law claims
were preempted by ERISA and, upon Tri-State’s failure to
amend its complaint to state a claim under ERISA, dismissed the
action. Tri-State contends on appeal that it is a ‘‘mere pur-
chaser’ of insurance and that its claims against Nationwide Life
are not preempted by ERISA because they do not ‘‘relate to’’ an
employee benefit plan. Tri-State also contends that its claims are
based on state laws regulating insurance, which are saved from
preemption under § 514(b)(2)(A) of ERISA. For the reasons that
follow, we conclude that the district court properly held that all
of Tri-State’s state law claims are preempted by ERISA and
affirm.
I
The employee benefit plan of Tri-State Machine, Inc., pro-
vides medical, disability, dental, and death benefits to Tri-State
employees and their beneficiaries. The terms of the plan give
participants notice that the plan is governed by ERISA and that
they are entitled to certain rights and protections under ERISA.
Until 1989, the plan was insured and administered by Nation-
wide Life Insurance Company under a group policy and under a
Cash Priority Plan Funding Agreement between Nationwide Life
and Tri-State. Under the agreement, claims for benefits were
self-funded by Tri-State up to a $25,000 limit for each employee
17a
for each year, beyond which Nationwide Life agreed to pay
claims under stop-loss insurance. All claims by employees were
to be submitted to Nationwide Life, who reserved the right to
determine whether the claims were payable. Nationwide Life
provided monthly reports to Tri-State detailing Tri-State’s liabil-
ity under the agreement. Nationwide Life entered into a subcon-
tract with First Benefits Agency, Inc., to administer the plan.
Effective July 1, 1989, Nationwide Life terminated its
arrangements with Tri-State. Alleging that Nationwide Life mis-
managed and improperly carried out its claims processing
responsibilities under the policy and agreement, Tri-State filed
suit in the West Virginia Circuit Court of Ohio County in Febru-
ary 1990, alleging breach of contract, breach of implied cove-
nants of good faith and fair dealing, bad faith tort, insurance bad
faith, and violation of the West Virginia Unfair Trade Practices
Act, W. Va. Code §§ 33-11-1 through 33-11-10. Tri-State
asserted that Nationwide Life failed to administer the plan
according to the terms of the agreement and mismanaged the
claims processing procedures by paying claims to wrong medical
providers, by issuing coverage cards in the names of employees
never associated with Tri-State, by charging claims to accounts
of individuals who had not submitted claims, by paying claims
not covered, by denying claims that were covered, and by
requesting reimbursement from Tri-State for claims improperly
paid. Tri-State also charged that Nationwide Life delayed pro-
cessing of claims in a year during which Tri-State had met its
stop-loss liability, deflecting claims into a new policy year so
that claims would become the obligations of Tri-State by reason
of the annual self-funding limit of $25,000 for each employee.
Nationwide Life removed the case to the federal district
court on diversity grounds and also on grounds that the claims
were preempted by ERISA. On Tri-State’s motion for partial
summaty judgment to declare that ERISA did not preempt its
18a
state law claims, the district court denied the motion and held
that ‘‘ERISA preempts all of Tri-State’s claims based upon West
Virginia laws relating to the health insurance plan upon which its
complaint is based.’’ The court held specifically that 29 U.S.C.
§ 1144(a) preempts all of Tri-State’s claims and that the excep-
tion to preemption contained in 29 U.S.C. § 1144(b)(2)(A),
known as the Savings Clause, did not apply because the
**Deemer Clause,’’ contained in § 1144(b)(2)(B), excludes from
the Savings Clause self-funded benefit plans. The court found
that the plan in this case was a self-funded plan and that the stop-
loss insurance for coverage above the self-funded amounts did
not ‘‘change this outcome.’’ Thereafter the court ordered Tri-
State to notify the court whether it intended to pursue the case
under ERISA. Although Tri-State indicated its intention to do so,
it never amended its complaint to state a claim under ERISA,
and the district court dismissed the complaint. This appeal
followed. ’ y
II
We are presented with the legal issue of whether Tri-State’s
state law claims, arising out of allegedly wrongful claims pro-
cessing by Nationwide Life, are preempted by ERISA. Since the
question is one of law, we will review the district court’s orders
de novo.
ERISA’s preemption clause provides:
Except as provided in subsection (b) of this section, the
provisions of this subchapter and subchapter III of this
chapter shall supersede any and alli State laws insofar as
they may now or hereafter relate to any employee benefit
plan....
29 U.S.C. § 1144(a) (emphasis added). This clause has been
broadly interpreted by the courts to carry out Congress’ intent to
displace any state law efforts to regulate ERISA matters. See,
19a
e.g., FMC Corp. v. Holliday, 498 U.S. 52, 58 (1990) (‘‘the pre-
emption clause is conspicuous for its breadth’’); Shaw v. Delta
Air Lines, Inc., 463 U.S. 85, 98 (1983) (‘‘the section’s pre-
emptive scope [is] as broad as its language’’); Custer v. Pan
American Life Ins. Co., 12 F.3d 410, 418 (4th Cir. 1993) (‘‘it is
frequently observed that the force of ERISA’s preemption is
strong and its scope wide’’). Thus, any law ‘‘that relates to’’ a
plan is preempted by 29 U.S.C. § 1144(a), and the phrase
“‘relates to’’ is given its common sense meaning as having ‘‘con-
nection with or reference to such a plan.’’ Shaw, 463 U.S. at 96-
97.
Although ERISA’s preemptive sweep is broad, the ‘‘Sav-
ings Clause’’ contained in 20 U.S.C. § 1144(b)(2)(A), which
saves from preemption state laws that regulate insurance, is
stated almost as broadly. This clause preserves for state regula-
tion any law ‘‘which regulates insurance banking, or securi-
ties.”’ 29 U.S.C. § 1144(b)(2)(A) (emphasis added). In Metropol-
itan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739-40 (1985),
the Supreme Court construed the Savings Clause to apply only to
state laws regulating core insurance issues. Considering a com-
plex state statutory scheme which regulated, among other things,
the substantive content of health insurance policies, the Supreme
Court held that state insurance regulations that mandate particu-
lar policy benefits are saved from preemption by the Savings
Clause. It concluded that Congress intended to save from pre-
emption only those state laws that regulate the traditional busi-
ness of insurance to the extent that it involves contractual
arrangements for protection against financial loss through the
spreading of risk. To guide this inquiry, the Court put forth the
following three-part test deweloped under the McCarran-
Ferguson Act:
20a
[F]irst, whether the practice has the effect of transferring or
spreading a policyholder’s risk; second, whether the prac-
tice 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.
471 U.S. at 743 (quoting Union Labor Life Ins. Co. v. Pireno,
458 U.S. 119, 129 (1982)). Thus, a claim based on state law or
regulation that regulates the business of insurance as defined by
Metropolitan Life’s three-part test is ‘‘saved’’ from preemption
by virtue of the Savings Clause, § 1144(b)(2)(A), even if the
claim ‘‘relates to’’ an employee benefit plan within the meaning
of § 1144(a).
ERISA takes the further step of limiting the Savings Clause
by stating that an employee welfare benefit plan itself is not,
under state law, to be ‘‘deemed’’ an insurance company for pur-
poses of the Savings Clause. This so-called ‘‘Deemer Clause’’
provides:
Neither an employee benefit plan...nor any trust estab-
lished under such a plan, shall be deemed to be an insur-
- ance company, or other insurer . . . or to be engaged in the
business of insurance or banking for purposes of any law or
[sic] any State purporting to regulate insurance companies,
insurance contracts....
29 U.S.C. § 1144(b)(2)(B) (emphasis added). The Deemer
Clause has been interpreted by the Supreme Court ‘‘to exempt
self-funded ERISA plans from state laws that ‘regulat[e] insur-
ance’ within the meaning of the saving clause.’’ FMC Corp. v.
Holliday, 498 U.S. at 61. The Court reasoned that ‘‘[b]y forbid-
ding States to deem employee benefit plans ‘to be an insurance
company or other insurer . . . or to be engaged in the business of
insurance,’ the deemer clause relieves plans from state laws pur-
porting to regulate insurance.’’’ Jd. Thus, ‘‘[s]tate laws that
directly regulate insurance are ‘saved’ but do not reach self-
1 Mele venlscg !
eb a. 206
2la
funded employee benefit plans because the plans may not be
deemed to be insurance companies, other insurers, or engaged in
the business of insurance for purposes of such state laws.’’ Jd.
While Metropolitan Life placed state insurance regulations
mandating particular insurance policy benefits within the area
preserved for state regulation, the Supreme Court in Pilot Life
Ins. Co. v. Dedeaux, 481 U.S. 41 (1987), held that state insur-
ance law regulating claims processing did not regulate the *‘bus-
iness of insurance’’ and therefore, was not saved from preemp-
tion. In Pilot Life, an injured employee sued the insurance
company that issued and administered his employer’s disability
plan, asserting improper acts in connection with the processing
of a claim for benefits. The suit was based on state common law
tort and contract principles. The Supreme Court concluded as a
first step that ‘‘common law causes of action raised in Dedeaux’s
complaint, each based on alleged improper processing of a claim
for benefits under an employee benefit plan, undoubtedly meet
the criteria for pre-emption under § 514(a) [29 U.S.C.
§ 1144(a)].’’ Id. at 48. The Court then proceeded to determine
whether such claims against an insurance company for improper
claims processing fell within the Savings Clause. Applying the
test of Metropolitan Life, the Court concluded that such claims
were not made under state laws regulating the core insurance
business and therefore were not saved by the Savings Clause.
Consequently, the state law claims were held to be preempted.
481 U.S. at 57.
In Custer v. Pan American Life, supra, we applied the Pilot
Life holding to conclude that the West Virginia Unfair Trade
Practices Act, which regulates insurance companies by prohibit-
ing certain unfair trade and settlement practices, was not saved
from preemption. Accordingly, we held that claims made under
the West Virginia law relating to an insurance company’s
improper claims processing or administration of an employee
22a
benefit plan were preempted. The West Virginia Supreme Court,
also relying on Pilot Life, had earlier reached the same conclu-
sion. See Ball v. Life Planning Services, Inc., 421 S.E.2d 223,
227 (W. Va. 1992) (holding that an action under subsection 9 of
West Virginia Code 33-11-4 is preempted under ERISA). See
also Powell v. Chesapeake & Potomac Telephone Co., 780 F.2d
419, 423-24 (4th Cir. 1985), cert. denied, 476 U.S. 1170 (1986)
(concluding, in a case decided before Pilot Life but consistent
with it, that an action alleging improper claims processing is not
saved from preemption because it does not regulate the business
of insurance under ERISA).
With these principles in mind, we turn to the issues before
us.
iil
Tri-State contends that the state law claims alleged in its
complaint are not preempted by ERISA, relying on two different
theories. First, it argues that it is a ‘‘mere purchaser’’ of insur-
ance and that therefore the claims arising from its status as a
mere insurance purchaser are not ‘‘related to’’ an employee ben-
efit plan within the preemption clause of ERISA, 29 U.S.C.
§ 1144(a). Tri-State also argues that since its claims arise under
the West Virginia Unfair Trade Practices Act, which regulates
insurance companies, they are preserved to state regulation under
the Savings Clause of ERISA, 29 U.S.C. § 1144(b)(2)(A). To
support its second argument, Tri-State points to W. Va. Code
§ 33-11-1, which states that the purpose ‘‘of this article . . . [is]
to regulate trade practices in the business of insurance’’ (empha-
sis added).
Tri-State’s first argument will not detain us long, since the
broad sweep of 29 U.S.C. § 1144(a) provides for preemption of
claims under any state law that ‘‘relate to any employee benefit
plan.’’ No serious argument is made that the package of health
23a
care benefits provided by Tri-State to its employees through the
policy purchased from Nationwide Life is not a plan. In addition
to the fact that the plan’s language announces participants’ rights
under ERISA, the nature of the arrangement, which provides
benefits paid for by the employer to employees and their benefi-
Ciaries in connection with their employment, meets the criteria
defining a plan under ERISA. See 29 U.S.C. § 1002(1); Custer,
12 F.3d at 417.
Moreover, there can be little doubt that the claims relate to
the plan. Tri-State’s complaint particularizes a list of wrongs
committed by Nationwide Life, including its paying claims to
wrong medical providers, issuing coverage cards in the names of
employees never associated with Tri-State, charging claims to
accounts of individuals who had not submitted claims, paying
claims not covered, denying claims that were covered, and
delaying processing of claims in a year when the stop-loss limit
had been reached in order to deflect them into a new policy year
to be charged against Tri-State under its self-funding obligations.
All of these allegations are essentially complaints about the pro-
cessing of claims under an employee benefit plan and, therefore,
relate to the plan in the common sense meaning of that phrase.
Indeed the Supreme Court in Pilot Life specifically stated: ‘“The
common law causes of action raised in Dedeaux’s complaint,
each based on alleged improper processing of a claim for bene-
fits under an employee benefit plan, undoubtedly meet the crite-
ria for preemption under § 514(a).’’ 481 U.S. at 48 (emphasis
added). See also Custer, 12 F.3d at 420.
Concluding that Tri-State’s claims relate to an employee
benefit plan and thus fall under ERISA’s broad preemption pro-
vision of 29 U.S.C. § 1144(a) does not, hcwever, end the
inquiry. Tri-State’s second argument is that because its claims
fall under the West Virginia Unfair Trade Practices Act, W. Va.
Code §§ 33-11-1 through 33-11-10, establishing unfair trade
24a
practices in the business of insurance, its state law claims are
preserved from federal preemption under the Savings Clause.
The question thus presented is whether the trade practices identi-
fied in the West Virginia Act regulate the business of insurance
as that phrase is used in ERISA, 29 U.S.C. § 1144(b)(2)(A), and
interpreted in Metropolitan Life, 471 U.S. at 743 (establishing
the three-prong test for determining whether a state law regulates
the business of insurance).
The Unfair Trade Practices Act, Article 11 of the Insurance
chapter of the West Virginia Code, specifically attempts to place
itself within the meaning of ‘‘business of insurance’’ as defined
by the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seg. The
first section of the article statés:
The purpose of this article is to regulate trade practices
in the business of insurance in accordance with the intent of
Congress as expressed in the act of Congress of March
ninth, one thousand nine hundred forty five (Public Law fif-
teen, seventy-ninthb Congress) [the McCarran-Ferguson
Act], by defining, or providing for the determination of, all
such practices in this State which constitute unfair methods
of competition or unfair or deceptive acts or practices and
by prohibiting the trade practices so defined or determined.
W. Va. Code § 33-11-1. Since the term ‘‘business of insurance’’
in the McCarran-Ferguson Act has been adopted as the basis for
defining the scope of the Savings Clause of ERISA, Metropoli-
tan Life, 471 U.S. at 743, Tri-State argues that the West Virginia
regulation of insurance fits into the exception to ERISA’s broad
preemption, even though the West Virginia Act, having been
enacted before the federal statute, is not adopted in response to
ERISA. Although the argument has some logical appeal, further
analysis reveals a superficiality that fails to take into account the
substance of the Unfair Trade Practices Act.
25a
The Act provides a long list of prohibited acts in the mar-
keting, selling, and administering of insurance in West Virginia.
It prohibits false or misleading statements or advertising as to the
contents of a policy and also prohibits engaging in unfair settlé-
ment practices, in an apparent effort to provide truth in insurance
advertising and fairness in insurance administration. See, e.g., W.
Va. Code §§ 33-11-3 & 33-11-4. The Act prohibits many of the
practices alleged by Tri-State in its complaint to constitute
improper claims processing. But this type of regulation is not
unique to the business of insurance, and it does not target, at
least in these provisions, the core business of insurance which
involves contracts of protection under which risk is spread
among policy holders.
We recently interpreted this precise statute and concluded
that since the West Virginia Unfair Trade Practices Act does not
simply regulate the business of insurance as defined in Metropol-
itan Life, it is not saved from preemption in connection with
claims relating to an employee benefit plan. See Custer, 12 F.3d
at 419-421. In Custer, an insurance company issued a policy to
an employer and administered it as part of an employee benefit
plan. When the plaintiff sued the insurance company for denying
benefits and canceling the policy, allegedly in violation of West
Virginia law, we concluded that the claims were preempted,
holding ‘‘that Custer’s claims under West Virginia law relating
to improper claims processing or administration are not saved
from preemption by the savings clause.’’ 12 F.3d at 420. We
concluded that our decision was directly controlled by the
Supreme Court’s holding in Pilot Life, 481 U.S. at 50 (holding
that state law improper claims processing actions are not directed
at the insurance industry alone and do not relate to the spreading
of risk), and this court’s holding in Powell, 780 F.2d at 423-24
(concluding that an action alleging improper claims processing is
26a
not saved from preemption because it does not regulate the busi-
ness of insurance under ERISA).
The holding in Custer applies here to require a determina-
tion that Tri-State’s claims are also not saved from preemption
under § 1144(b)(2)(A). See also Ball v. Life Planning Services,
Inc., 421 S.E.2d 223, 227 (W. Va. 1992) (holding that West Vir-
ginia Code § 33-11-4(9) relates to unfair claims settlement prac-
- tices and therefore is the same type of claim that the Supreme
Court found to be preempted by ERISA in Pilot Life).
The district court also found an alternative basis to hold that
Tri-State’s state law claims were preempted. It concluded that
even if Tri-State’s claims fell within the Savings Clause, the
employee benefit plan involved here would be regulated by
ERISA, and not state law, under the Deemer Clause. The district
court concluded that the group health insurance plan issued by
Nationwide Life and sponsored by Tri-State was a self-funded
plan, and thus under the Deemer Clause of ERISA, it was not
subject to regulation under state law purporting to regulate the
business of insurance. See FMC Corp., 498 U.S. at 61. It appears
from our review of the plan documents that the plan was indeed
a self-funded one for the most part, with stop-loss insurance to
cover an individual’s claims in excess of $25,000. Tri-State’s
complaint alleges as much: ‘‘Under the policy, Tri-State was
self-insured for certain portions of benefits payable under the
group health insurance plan.’’ Complaint $8. We have held pre-
viously that the purchase of stop-loss insurance does not convert
a self-funded plan to an insured plan for preemption purposes.
See Thompson v. Talquin Building Products Co., 928 F.2d 649,
653 (4th Cir. 1991). Accordingly, the district court correctly held
that the plan was self-funded and that the Deemer Clause of
ERISA would also apply to preempt Tri-State’s claims.
Nee a ee aan
27a
IV
Finally, Tri-State contends that the district court ‘‘improp-
erly dismissed Tri-State’s suit in its entirety because Tri-State’s
complaint must necessarily state a cause of action under ERISA
or federal common law.’’ The difficulty with the contention is
the underlying assumption that somehow Nationwide Life or the
district court was required to identify and define Tri-State’s
claim when Tri-State itself refused to do so over a two-year
period. The district court carefully reviewed the procedural steps
taken by Tri-State and concluded, in essence, that Tri-State sim-
ply failed to prosecute its case under ERISA. On a review of the
record, we cannot say that the district court abused its discretion
in bringing this tortured pleading battle to an end.
After the case was removed from state court on the basis of
diversity jurisdiction and ERISA preemption, Tri-State sought to
remand the action. When the district court denied its motion, Tri-
State filed a motion for partial summary judgment declaring that
ERISA did not preempt Tri-State’s state law claims. By a Mem-
orandum Opinion and Order dated September 23, 1991, the dis-
trict court concluded that the state law claims were preempted
and denied Tri-State’s motion to declare otherwise. Shortly
thereafter, Tri-State filed a motion for reconsideration and
requested, alternatively, that the court make the necessary find-
ing to permit it to seek appellate review under 28 U.S.C.
§ 1292(b). The district court denied the motion for reconsidera-
tion, observing that nothing new had been presented by Tri-
State, but it did give Tri-State the opportunity to seek leave to
appeal under 28 U.S.C. § 1292(b). In its petition for permission
to appeal, Tri-State claimed that its case was ‘‘simply a breach of
contract and an independent tort case’’ and ‘‘Never did the plain-
tiff [Tri-State] intend to involve, nor does the complaint affect,
ERISA issues.’’ When this court summarily denied permission
to appeal, Tri-State petitioned the district court to vacate and re-
28a
enter its order denying reconsideration of its ERISA preemption
ruling, believing that Tri-State’s late filing of a petition to appeal
was the basis for denial of permission. The district court refused
Tri-State’s request and ordered that Tri-State inform the court
whether it intended to pursue an action under ERISA. On June 8,
1992, plaintiff filed a notice in which it informed the court that
Tri-State ‘‘intends to pursue this action under ERISA.”’ Tri-
State, however, did not file an amended complaint to state any
claim under ERISA. Rather, over five months later, it filed
another motion to obtain from the court a certification under
Federal Rule of Civil Procedure 54(b) that the district court’s
preemption ruling was final. At that time, Tri-State again argued
the preemption issue and sought to amend three paragraphs of its
complaint to enhance its effort to circumvent ERISA preemp-
tion. The amendments sought were not substantive and would
only have altered Tri-State’s characterization of the parties’
roles. Because Tri-State failed to prosecute the case through the
filing of an ERISA claim, and only pursued alternative avenues
to challenge the district court’s ruling, the district court con-
cluded, again reviewing the merits of the preemption issue:
In that this issue [ERISA preemption] has been repeatedly
and exhaustively briefed, in that Tri-State has fully
defended and has presented all material pertinent to its
claim, and since Tri-State has failed to seek leave to amend
its complaint to assert an ERISA claim, the Court hereby
GRANTS summary judgment sua sponte for Nationwide,
and hereby DISMISSES this action.
Against this procedural history, the district court had a well-
founded basis to conclude that Tri-State was only interested in
obtaining appellate review of the preemption issue and that, by
not pursuing an ERISA claim, Tri-State was staking the success
of its action solely on the question of whether its state law claims
survived. The district court’s decision to dismiss the complaint in
rs Rae a ea
29a
these circumstances was not an abuse of discretion. Accordingly,
we affirm.
AFFIRMED
LUTTIG, Circuit Judge, dissenting:
The majority holds that the unfair trade practices article of
the West Virginia insurance code, which was enacted ‘‘to regu-
late trade practices in the business of insurance,’’ W. Va. Code
§ 33-11-1, is not a state ‘law... which regulates insurance,”’
29 U.S.C. § 1144(b)(2)(A). Thus, it concludes, Tri-State’s
improper claims processing action under that statute is not saved
from preemption. According to the majority, this result is dic-
tated by our recent decision in Custer v. Pan American Life Ins.
Co., 12 F.3d 410 (4th Cir. 1993), in which we interpreted the
Supreme Court’s decision in Pilot Life Ins. Co. v. Dedeaux, 481
U.S. 41 (1987), as holding that all state improper claims process-
ing actions filed against an insurance company are not saved
from preemption. In my view, Pilot Life did not sweep quite so
broadly, and applying here the saving clause analysis undertaken
by the Supreme Court in Pilot Life requires us to hold that Tri-
State’s state action is saved from preemption. Accordingly, I
dissent.
In Pilot Life, the Supreme Court addressed whether ERISA
preempts a beneficiary’s or participant’s cause of action for
improper claims processing brought under Mississippi’s com-
mon law of bad faith, holding that the action was not saved from
preemption under ERISA’s ‘‘saving clause,’’ 29 U.S.C.
§ 1144(b)(2)(A). In reaching this conclusion, the Court first
determined that a ‘‘common-sense understanding’’ of the lan-
guage of the saving clause confirms that a state law only ‘‘regu-
lates insurance’’ when it is ‘‘specifically directed toward th{e
insurance] industry.’’ 481 U.S. at 50. Applying this common-
sense understanding of the clause’s text, it concluded that the
30a
Mississippi common law of bad faith does not regulate insur-
ance, because it is rooted in general principles of Mississippi tort
and contract law. Jd. It next reviewed Mississippi’s bad faith
doctrine under the three criteria the Court employs to interpret
the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., and found
that these factors also did not support a conclusion that the Mis-
sissippi law ‘‘regulates insurance.’’ 481 U.S. at 50-51. And
finally, the Court looked to the ‘‘role of the saving clause in
ERISA as a whole,”’ id. at 51, concluding that Congress intended
as exclusive the civil remedies that ERISA provides to benefi-
ciaries and participants alleging improper claims processing. Jd.
at 52-57.
Only last term, in Custer, we considered whether ERISA
preempted a beneficiary’s improper claims processing action
brought under West Virginia’s insurance code, see W. Va. Code
§ 33-11. In that case, we assumed, mistakenly I believe, that
Pilot Life broadly held that all ‘‘state cause[s] of action for
improper claims processing filed against an insurer [are] not
saved from preemption under § 1144(a).’’ 12 F.3d at 420. Pro-
ceeding on this assumption as to the scope of Pilot Life, we rea-
soned that Pilot Life directly controlled Custer’s West Virginia
action, which was filed against an insurance company for
improper claims processing, and, without even engaging in the
actual Pilot Life analysis, held that Custer’s state action was not
saved from preemption.*
* We aiso concluded in Custer that the case was controlled by our deci-
sion in Powell v. Chesapeake & Potomac Telephone Co. of Virginia, 780 F.2d
419, 423 (4th Cir. 1985), cert. denied, 476 U.S. 1170 (1986). In Powell, we
addressed a beneficiary’s state law claims against her former employer and the
insurance company that administered the employer’s uninsured ERISA plan for
maladministration of her benefits claims. We held that each of Powell’s state
law claims related to the employer’s ERISA plan, and were therefore pre-
empted. In a passage relied on by the majority for the proposition that improper
claims processing actions are pre-empted, ante at 9-10, we rejected Powelli’s
(Continued on next page)
3la
Now, relying on Custer’s assumption that the Pilot Life
holding extended to all state law improper claims processing
actions, and again largely ignoring the three-step saving clause
analysis employed by the Court in Pilot Life, the majority sum-
marily concludes in this case that Custer requires a holding that
Tri-State’s improper claims processing action is not saved from
preemption.
In my view, the Supreme Court did not hold in Pilot Life
that all state actions for improper claims processing fall outside
the saving clause. The only question before the Court in Pilot
Life was whether a claim by a beneficiary or a participant under
a state common-law doctrine of bad faith (indeed, only Missis-
sippi’s law) was saved from preemption. In deciding that it was
not, the Supreme Court neither addressed state improper claims
processing actions by parties other than beneficiaries and partici-
pants or different actions brought under other state laws.
In Custer, our mistake was immaterial because the benefici-
ary’s cause of action there in question was one specifically iden-
tified by the Court in Pilot Life as governed exclusively by
(Continued)
argument that her claim against Connecticut General, the plan’s administrator,
was saved from pre-emption because it was brought under a state law that regu-
lated insurance. Id. at 423-24. Although Connecticut General is, in fact, an
insurance company, we held that, in its capacity as administrator, it was not all
engaged in the ‘‘business of insurance’’ but rather served purely administrative
functions, and therefore that the state law, as applied to Connecticut General,
did not constitute a state regulation of insurance that was saved from pre-emp-
tion. Id.
Oui holding in Powell turned, therefore, on the fact that Connecticut Gen-
eral was not engaged in the business of insurance, rather than on the fact that
Powell’s action was for improper claims processing. That an insurance com-
pany that administers but does not insure an ERISA plan is not engaged in the
business of insurance for purposes of the saving clause hardly bears on this
case, since Nationwide, which provided Tri-State with stop-loss insurance,
obviously was engaged in the business of insurance.
32a
ERISA. 481 U.S. at 56. Thus, our holding that Custer’s cause of
action was preempted was correct notwithstanding our misappre-
hension of the contours of the Pilot Life holding and our attend-
ant failure to engage in the full inquiry undertaken by the Court
in Pilot Life. Here, however, the majority is not saved by
happenstance.
Unlike in Pilot Life, a ‘‘common-sense understanding’’ of
the statutory text, 481 U.S. at 50, does support the argument that
the West Virginia law before us ‘‘regulates insurance.’’ If any
law can be said to be ‘‘specifically directed toward th[e insur-
ance] industry,’’ id., it is this statute, which, by terms, was
enacted to, and does, ‘‘regulate trade practices in the business of
insurance... .’’ W. Va. Code § 33-11-1.
Also here, unlike in Pilot Life, the West Virginia statute as
applied to Tri-State’s action (and, in my view, to the action in
Custer) regulates ‘‘the business of insurance’’ under the
McCarran-Ferguson Act. 15 U.S.C. § 1012. Tri-State alleges that
Nationwide violated the West Virginia insurance code by delib-
erately and fraudulently delaying its charging of benefit claims
against Tri-Sate’s account in order to avoid coverage .or those
claims under its stop-loss policy with Tri-State. See Appellant’s
Br. at 5. Applying the West Virginia statute to regulate the deter-
mination of which claims are covered under Tri-State’s stop-loss
insurance policy with Nationwide certainly affects an ‘‘integral
part of the policy relationship between the insurer and the
insured,’’ Pilot Life, 481 U.S. at 48-49 (quoting Union Labor
Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)), since it cer-
tainly would ‘‘define the terms of the relationship between the
insurer and the insured,’’ Pilot Life, 481 U.S. at 51. It also
would, by regulating when and how liability on benefit claims
would be transferred from Tri-State to Nationwide, directly
involve, if not actually ‘‘effect[,] a spreading of [Tri-State’s]
risk.’’ Jd. at 50. And, as noted above, the statute by terms is
33a
“specifically directed toward [the insurance] industry.” Id. Tri-
State’s action plainly does, therefore, regulate ‘‘the business of
insurance’ in accordance with the McCarran-Ferguson Act. See
United States Dept. of Treasury v. Fabe, 113 S. Ct. 2202, 2209
(1993) (‘*There can be no doubt that the actual performance of
an insurance contract falls within ‘the business of insurance’ (for
purposes of McCarran-Ferguson Act]....’’); SEC v. National
Securities, Inc., 393 U.S. 453, 460 (1969) (‘‘The relationship
between the insurance company and the insured, the type of pol-
icy which could be issued, its reliability, interpretation and
enforcement—these were the core of the ‘business of insurance’
[that Congress addressed in the McCarran-Ferguson Act].’’
(Emphasis added)).
Finally, and most importantly, Tri-State’s state action does
not, as the state actions in both Custer and Pilot Life did, run
afoul of ‘‘the legislative intent concerning the [exclusivity of
the] civil enforcement provisions provided by ERISA § 502(a),
29 U.S.C. § 1132(a).’’ Pilot Life, 481 U.S. at 52. While it is plain
that the remedies provided in section 502(a) to beneficiaries and
participants were intended to be exclusive, and therefore pre-
empt state actions such as those in Pilot Life and Custer, it is
equally plain that that section does not expressly provide any
remedy to employers such as Tri-State, let alone one that Con-
gress clearly intended to be exclusive.
In sum, I believe that we misassessed the reach of the Pilot
Life holding in Custer and therefore failed to engage in the full
Pilot Life analysis. We ultimately reached the correct conclusion
in Custer, but for reasons that we never considered. However,
for the same reasons that we did not consider in Custer, we, as a
court, are incorrect here.
34a
Because, in my view, Tri-State’s state cause of action alleg-
ing that Nationwide fraudulently processed claims to avoid cov-
erage on those claims is, under Pilot Life, saved from preemp-
tion, I cannot join the majority’s opinion holding otherwise.
I also disagree with the majority’s alternative holding that,
because the ERISA plan here was essentially self-funded, the
deemer clause applies to preempt Tri-State’s claims. Ante at
10-11. The deemer clause, by its terms, only applies to
‘employee benefit plan[s]’’ and ‘‘trust[s] established under such
[]plan{s],’’ 29 U.S.C. § 1144(b)(2)(B). It does not speak at all to .
insurance companies such as Nationwide or claims against them.
‘*By forbidding States to deem employee benefit plans ‘to be an
insurance company or other insurer... or to be engaged in the
business of insurance,’ the deemer clause relieves plans from
state laws ‘purporting to regulate insurance.’’’ FMC Corp. v.
Holliday, 498 U.S. 52, 61 (1990) (emphasis added). Nationwide
obviously is not an ‘‘employee benefit plan,’’ and the deemer
clause has no application to Tri-State’s claims against it. Powell
v. Chesapeake & Potomac Telephone Co. of Virginia, 780 F.2d
419, 423 (4th Cir. 1985), cert. denied, 476 U.S. 1170 (1986)
(‘‘Since Connecticut General [Life Insurance Company] is not
an ‘employee benefit plan,’ the deemer clause is inapplicable to
it.’’); see FMC Corp., 498 U.S. at 61 (“‘An insurance company
that insures a plan remains an insurer for purposes of state laws
‘purporting to regulate insurance’ after application of the deemer
clause.’’). Thus, the district court’s holding that the deemer
clause preempts Tri-State’s claims is, I believe, incorrect.
Accordingly, I dissent from the majority’s affirmance of that
holding as well.
CERTIFICATE OF SERVICE
I hereby certify that, in accordance with Rule 29 of the
Rules of the Supreme Court of the United States, three true and
correct copies of the within Petition were sent on November 28,
1994 by first class mail, postage pre-paid, to all of the parties
required to be served as follows:
i |
Attorney for Respondent:
Gregory D. Port
Chorpenning, Good & Mancuso
Co., L.P.A.
77 E. Nationwide Boulevard
Columbus, Ohio 43215
Telephone (614) 469-1301
/s/ DAVID B. FAWCETT, [Ii
David B. Fawcett, III
Attorney for Petitioner
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.