From Casetext: Smarter Legal Research

Kanne v. Connecticut General Life Ins. Co.

United States Court of Appeals, Ninth Circuit
Jun 4, 1987
867 F.2d 489 (9th Cir. 1987)

Summary

holding that plaintiffs' "state statutory claims for compensatory and punitive damages" were preempted under Pilot Life even if the statute fell within ERISA's saving clause

Summary of this case from Hangarter v. Provident Life and Acc. Ins. Co.

Opinion

Nos. 85-5641, 85-5642.

Argued and Submitted April 7, 1986. Withdrawn from Submission July 2, 1986.

Resubmitted and Filed June 4, 1987. Petition for Rehearing Granted and Opinion Withdrawn from Submission July 23, 1987.

Argued and Resubmitted November 23, 1987.

Decided October 4, 1988. As Amended on Denial of Rehearing and Rehearing En Banc February 2, 1989.

Leonard Sacks, Encino, Cal., Carol A. Hay, and Andrew O. Feringa, Lakewood, Cal., for plaintiffs-appellees-appellants.

James S. Cline, Suzette Clover, David L. Bacon, and Bruce A. Beckman, Los Angeles, Cal., for defendants-appellant-appellee.

Appeal from the United States District Court for the Central District of California.

Before FLETCHER and PREGERSON, Circuit Judges, and WILKINS, District Judge.

Hon. Philip C. Wilkins, Senior United States District Judge for the Eastern District of California, sitting by designation.


Connecticut General Life Insurance Co. (Connecticut General) appeals from a judgment awarding Theodore and Beatriz Kanne $252,234 in compensatory damages and $500,000 in punitive damages. The Kannes cross-appeal the denial of attorneys fees.

This action arises out of Connecticut General's medical coverage of the Kannes' son Jonathan. The Kannes seek reimbursement for an airline fare to transport Jonathan from the Netherlands to the United States for surgery, and compensation for the emotional distress caused them by the delay in payments for the airline, physician, and hospital bills. The Kannes based their claims on a number of theories and prevailed on three causes that are at issue on appeal: two state common-law causes of action (breach of contract, and breach of the duty of good faith and fair dealing) and one statutory cause of action under the California Insurance Code for failure to pay claims reasonably promptly.

The Kannes also claimed breach of fiduciary duty, fraud, and failure to adopt reasonable standards for the processing of claims. See Cal.Ins. Code § 790.03(h)(3). They do not appeal the denial of those claims.

We withdrew the case from submission pending the Supreme Court's decision in Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987), in the expectation that Pilot Life would resolve the threshold issue of whether the Kannes' state-law claims are preempted by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. After Pilot Life and a companion case, Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987), were decided, we resubmitted the case and reversed the district court's conclusion that the claims were not preempted. Kanne v. Connecticut General Life Ins. Co., 819 F.2d 204 (9th Cir. 1987).

ERISA's relationship to state laws is governed by § 514 of the Act, 29 U.S.C. § 1144. The pertinent subsections of § 514 provide:

(a) Except as provided in subsection (b) of this section, the provisions of [these subchapters] shall supersede any and all State laws insofar as they . . . relate to any employee benefit plan. . . .

(b)(2)(A) Except as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.

(d) Nothing in this subchapter shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States. . . .

We subsequently withdrew the opinion, 823 F.2d 284, granting the Kannes' request for rehearing, to consider two specific issues: (1) whether the insurance policy in question is a plan governed by ERISA; and (2) whether Cal.Ins. Code § 790.03(h)(2) is preempted by ERISA. We now conclude both that the Kannes' insurance policy is an ERISA plan and that their claims against Connecticut General are preempted.

DISCUSSION

I. Whether the Insurance Policy is Part of an ERISA Plan

The parties at trial apparently assumed that the insurance policy was covered by ERISA. Little or no attention was paid to the issue. The plan brochure, introduced by Connecticut General as an exhibit at trial, describes the plan as an ERISA plan. The Associated Builders and Contractors (ABC), an employer group to which Harlow Carpets belongs, is described as the Administrator of the plan. Harlow Carpets subscribed to the group health insurance plan administered by ABC. Pursuant to the requirements of ERISA, the plan was established as a trust entity, called the ABC Trust. It purchased a policy of group health insurance from Connecticut General. Theodore Kanne was an employee of Harlow Carpets and was covered by the policy.

Prior to 1981, Harlow Carpets had subscribed to an insurance plan directly with Connecticut General, but then changed to the ABC plan.

Under ERISA § 3(1), 29 U.S.C. § 1002(1), an "employee welfare benefit plan" or "welfare plan" is:

(1) a "plan, fund or program" (2) established or maintained (3) by an employer or by an employee organization, or by both, (4) for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits (5) to the participants or their beneficiaries.

Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir. 1982) (en banc).

The existence of an ERISA plan is a question of fact, to be answered in light of all the surrounding facts and circumstances from the point of view of a reasonable person. Credit Managers Ass'n v. Kennesaw Life Accident Ins. Co., 809 F.2d 617, 625 (9th Cir. 1987). At trial, the parties did not contest the issue of whether the ABC Trust was an ERISA plan. However, in the wake of the broad holding of Pilot Life, that ERISA preempts state law causes of action pertaining to improper handling of insurance claims under an employee benefit plan, the question of whether the policy here is governed by ERISA takes on vital importance to the Kannes, who now contest that an ERISA plan existed.

The Department of Labor has issued regulations excluding certain group insurance programs from ERISA's definition of "employee welfare benefit plan":

(j) Certain group or group-type insurance programs. For purposes of Title I of the Act and this chapter, the terms "employee welfare benefit plan" and "welfare plan" shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which

(1) No contributions are made by an employer or employee organization;

(2) Participation in the program is completely voluntary for employees or members;

(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, or administrative services actually rendered in connection with payroll deductions or dues checkoffs.

29 C.F.R. § 2510.3-1(j) (1987). A bare purchase of insurance, without any of the above elements present, does not by itself constitute an ERISA plan (although it may be evidence of the existence of an ERISA plan). See Donovan v. Dillingham, 688 F.2d at 1375. An employer has not established an ERISA plan if it merely advertises a group insurance plan that has none of the attributes described in 29 C.F.R. § 2510.3-1(j). See Credit Managers Ass'n, 809 F.2d at 625.

The Kannes argue that, in respect to the group insurance at issue here, there is no evidence of the existence of the four criteria under 29 C.F.R. § 2510.3-1(j), any one of which would prevent the exclusion of the insurance plan from ERISA coverage. It is true that the record is ambiguous as to whether Harlow Carpets ever contributed any payments towards Theodore Kanne's insurance coverage or whether Kanne's participation was voluntary or automatic. Harlow Carpets' function with respect to the program was minor and ministerial, and no evidence indicates whether the plan was administered by a profit-making concern.

Because Connecticut General's claim of ERISA preemption is a federal defense in this lawsuit, Metropolitan Life Ins. Co. v. Taylor, 107 S.Ct. at 1546, the burden is on the defendant to prove the facts necessary to establish it.

However, the problem with the Kannes' argument is their apparent assumption that Harlow Carpets' functions with respect to the plan determine ERISA coverage. According to ERISA § 3(5):

The term "employer" means any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan and includes a group or association of employers acting for an employer in such capacity.

29 U.S.C. § 1002(5) (emphasis added). Under this definition, ABC can be an ERISA employer for purposes of our analysis.

The plan brochure submitted by Connecticut General as an exhibit at trial describes the plan as an ERISA plan, evidencing the intent of ABC to create an ERISA plan. It is clear that, at a minimum, ABC does not merely advertise the group insurance, but rather, as the administrator of the plan, "endorses" it within the meaning of 29 C.F.R. § 2510.3-1(j)(3). Thus the ABC plan is not one of the group insurance programs excluded by ERISA under the regulations. Because ABC is more than a mere advertiser of group insurance, there need not be employer contributions or automatic employee coverage to bring the plan within ERISA. See Credit Managers Ass'n, 809 F.2d at 625.

II. Whether ERISA Preempts the Kannes' State Law Claims

In Pilot Life, the Supreme Court held that state common law causes of action arising from the improper processing of a claim are preempted by federal law. The Kannes' claims arising out of delay in payment are claims for improper processing and therefore are preempted. Accordingly, the judgment insofar as it awards compensatory and punitive damages arising out of the common law claims for delay in payment must be vacated.

We must also decide whether ERISA preempts the Kannes' state statutory claims for compensatory and punitive damages arising from delay in payment. California Insurance Code § 790.03(h) prohibits various "unfair insurance practices" having to do with the processing of claims. Among these unfair practices is an insurer's failure "to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies." § 790.03(h)(2). At the time relevant to this appeal § 790.03(h) created a private right of action. Royal Globe Ins. Co. v. Superior Court, 23 Cal.3d 880, 886, 153 Cal.Rptr. 842, 846, 592 P.2d 329 (1979), overruled by Moradi-Shalal v. Fireman's Fund Ins. Co., 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58 (1988). The district court found that Connecticut General had violated subsection (h)(2), giving rise to a cause of action in the Kannes.

The Moradi-Shalal court held that the Royal Globe rule would continue to apply to all cases filed prior to the Moradi-Shalal decision. 46 Cal.3d at 292, 250 Cal.Rptr. 116, 758 P.2d 58.

The Kannes and numerous amici argue vigorously that § 790.03(h) is not preempted by ERISA because § 790.03(h) is a law regulating insurance within the meaning of the so-called "savings clause," § 514(b)(2)(A) of ERISA, 29 U.S.C. § 1144(b)(2)(A), which provides:

Except as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.

The Kannes and the amici point out that the preempted common law causes of action for bad faith in Pilot Life were held not to be laws regulating insurance within the savings clause. They argue that because § 790.03(h) regulates insurance, the savings clause saves that provision from preemption. We can assume, without deciding, that § 790.03(h) is a law regulating insurance under the savings clause. Nevertheless, under Pilot Life we find the conclusion inescapable that the private right of action for violation of § 790.03(h) is preempted by ERISA.

A handful of cases in federal district courts in California have by now been decided, reaching different results. We find ourselves most in agreement with the well-reasoned opinion in Roberson v. Equitable Life Assurance Soc., 661 F. Supp. 416, 423-24 (C.D.Cal. 1987). We express no opinion as to whether the substantive provisions of § 790.03(h) are themselves preempted so as to bar administrative enforcement by California's Insurance Commissioner.

The Kannes' argument asks us to limit Pilot Life's preemption holding to only those state laws which do not fall within the savings clause. To accept this argument, however, we would have to ignore the second half of Pilot Life, 107 S.Ct. at 1555-58, in which the Court made abundantly clear that its preemption holding was equally based on its acceptance of the Solicitor General's view that "Congress clearly expressed an intent that the civil enforcement provisions of ERISA § 502(a) be the exclusive vehicle for actions by ERISA-plan participants and beneficiaries asserting improper processing of a claim for benefits." Id. at 1555. The Court stated:

In sum, the detailed provisions of § 502(a) set forth a comprehensive civil enforcement scheme that represents a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans. The policy choices reflected in the inclusion of certain remedies and the exclusion of others under the federal scheme would be completely undermined if ERISA-plan participants and beneficiaries were free to obtain remedies under state law that Congress had rejected in ERISA.

Id. at 1556. We do not find it possible to read this language in a way that permits a state statute like § 790.03(h) to supplement the ERISA civil enforcement provisions available to remedy improper claims processing. Accordingly, the Kannes' state statutory cause of action for mishandling of their insurance claim is also preempted.

Finally, we must consider whether the Kannes' claim for reimbursement of transportation costs is preempted. Because the claim "relate[s] to an employee benefit plan," see Metropolitan Life, 107 S.Ct. at 1546 (citing section 514(a), 29 U.S.C. § 1144(a)), it is preempted unless it is based on a law that "regulates insurance." Section 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A). The Kannes' claim for reimbursement is premised on the interpretation of their insurance contract. However, California's common law of contract interpretation is not "specifically directed toward [the insurance] industry." See Pilot Life, 107 S.Ct. at 1555; see also Metropolitan Life, 107 S.Ct. at 1546. Nor generally does it effect risk spreading or concern the policy relationship between the insurer and the insured beyond that to which the parties have agreed in the insurance contract. Pilot Life, 107 S.Ct. at 1554-55. Accordingly, we conclude that California's common law of contract interpretation is not a law that "regulates insurance," and therefore is not saved from preemption. The district court's judgment based on the Kannes' claim for transportation costs must also be vacated.

Because we find that the law on which this claim is based does not regulate insurance, we need not consider whether the claim is in any event preempted because of the deemer clause or because it is based on a law that conflicts with federal law.

Finding these claims to be preempted, we do not consider the other issues that Connecticut General has raised on appeal.
The Kannes have appealed the district court's denial of their request for attorneys' fees. The California Code of Civil Procedure, section 1021, states as a general rule that parties shall bear their own costs of legal representation. See Brandt v. Superior Court, 37 Cal.3d 813, 820, 210 Cal.Rptr. 211, 214, 693 P.2d 796 (1985). The general rule may be altered by agreement of the parties. Id. Because the contract does not provide for the payment of attorneys fees for claims brought under state law, whether meritorious or not, we affirm this part of the district court's decision.

CONCLUSION

We find that the Kannes' group health insurance policy with Connecticut General is part of an ERISA plan. We hold that each of their state common-law and statutory causes of action is preempted by ERISA. Accordingly, we VACATE the judgment of the district court insofar as it awards damages in favor of the plaintiffs.


Summaries of

Kanne v. Connecticut General Life Ins. Co.

United States Court of Appeals, Ninth Circuit
Jun 4, 1987
867 F.2d 489 (9th Cir. 1987)

holding that plaintiffs' "state statutory claims for compensatory and punitive damages" were preempted under Pilot Life even if the statute fell within ERISA's saving clause

Summary of this case from Hangarter v. Provident Life and Acc. Ins. Co.

holding that a California law prohibiting unfair insurance practices was preempted by 29 U.S.C. § 1132

Summary of this case from Elliot v. Fortis Benefits Ins. Co.

holding that the plaintiffs' state common law causes of actions for breach of contract and breach of the duty of good faith and fair dealing, as well as a statutory cause of action for unfair insurance practices under the California Insurance Code were preempted by ERISA

Summary of this case from Bast v. Prudential Inurance Co. of America

holding that plan sponsored by Associated Builders and Contractors was an ERISA plan

Summary of this case from Steen v. John Hancock Life Insurance Company

holding that an employer group crossed the line when it established a trust entity in its name for purposes of plan administration

Summary of this case from Johnson v. Watts Regulator Co.

holding that state-law claims arising from delayed insurance payments "are claims for improper processing and therefore are preempted"

Summary of this case from Davidson v. Hewlett-Packard Co.

holding that state-law claims arising from delayed insurance payments "are claims for improper processing and therefore are preempted"

Summary of this case from Davidson v. Hewlett-Packard Co.

holding that plaintiff's common law claims for breach of contract and breach of the duty of good faith and fair dealing were preempted by ERISA

Summary of this case from Cox v. Reliance Standard Life Ins. Co.

holding that employer endorsed plan within the meaning of 29 CFR § 2510.3-1(j) by preparing a plan brochure describing its plan as an ERISA plan

Summary of this case from Williamson v. Life Ins. Co. of North America

holding that "California's common law of contract interpretation is not a law that `regulates insurance,' and therefore is not saved from preemption."

Summary of this case from Hansen v. Unum Life Insurance Co.

holding that an employer group crossed the line when it established a trust entity in its name for purposes of plan administration

Summary of this case from Rubin v. Guardian Life Insurance Company of America

holding that state law claims of breach of contract, breach of fiduciary duty and unfair insurance practices are preempted by ERISA

Summary of this case from Brandner v. Unum Life Ins. Co. of America

holding that where employer established plan as a trust entity, it was "more than a mere advertiser of group insurance"

Summary of this case from O'Reilly v. Hartford Life Accident Ins. Co.

finding that California law of contract interpretation is not saved under McCarran-Ferguson analysis nor is its unfair insurance practice law

Summary of this case from Security Life Insurance Co. of Am. v. Meyling

finding that insurance contract interpretation is "not `specifically directed toward [the insurance] industry.'"

Summary of this case from Security Life Insurance Co. of Am. v. Meyling

finding that ERISA preempted employee's claim against insurer for breach of contract because it was premised on improper processing of benefits claim

Summary of this case from Fonseca v. Hewlett-Packard Co.

finding that ERISA preempted employee's claim against insurer for breach of contract because it was premised on improper processing of benefits claim

Summary of this case from Scripps Health v. Schaller Anderson, LLC

finding that employer's intent to create ERISA plan amounted to "endorsement" for purposes of prong

Summary of this case from Cronin v. Zurich Amertican Insurance Company

ruling that § 1132 barred a claim under a California statute deemed to fall within the saving clause

Summary of this case from Franklin H. Williams Ins. Trust v. Travelers

explaining that a brochure describing a plan as an ERISA plan evidences the intent of the employer to create an ERISA plan, but the same may not be said of the filing of a tax return

Summary of this case from Johnson v. Watts Regulator Co.

In Kanne, we held that state laws of insurance policy interpretation do not qualify for the saving clause exception and are preempted. If we were to preserve 50 different state laws of insurance policy interpretation as federal common law, we would in effect add an item to the saving clause which we have already said that Congress did not mean to include.

Summary of this case from Evans v. Safeco Life Ins. Co.

In Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489, 492 (9th Cir. 1988) (per curiam), cert. denied, ___ U.S. ___, 109 S.Ct. 3216, 106 L.Ed.2d 566 (1989), we stated that "[a]n employer has not established an ERISA plan if it merely establishes a group insurance plan that has none of the attributes described in [the regulation]."

Summary of this case from Hansen v. Blue Cross of California

defining "employee welfare benefit plan" as " a plan, fund, or program established or maintained by an employer or by an employee organization, or by both, for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits to participants or their beneficiaries"

Summary of this case from Gray v. Reliance Standard Life Ins. Co.

stating "[i]t is clear that, at a minimum, [employer] does not merely advertise the group insurance, but rather, as the administrator of the plan, 'endorses' it within the meaning of 29 C.F.R. § 2510.3-1(j)"

Summary of this case from Criswell v. Aetna Life Ins. Co.

In Kanne, for example, the court held that the defendant insurance company met its burden of showing that the third provision of the safe harbor regulation was not met. Kanne, 867 F.2d at 493.

Summary of this case from Galloway v. Lincoln National Life Insurance Co.
Case details for

Kanne v. Connecticut General Life Ins. Co.

Case Details

Full title:THEODORE KANNE AND BEATRIZ KANNE, PLAINTIFFS-APPELLEES, v. CONNECTICUT…

Court:United States Court of Appeals, Ninth Circuit

Date published: Jun 4, 1987

Citations

867 F.2d 489 (9th Cir. 1987)

Citing Cases

Stuart v. Unum Life Ins. Co. of America

It is well settled that when an employer provides a group insurance plan to its employees and satisfies all…

Johnson v. Watts Regulator Co.

To that extent, the existence of an ERISA plan becomes primarily a question of fact. See Wickman v.…