Gilbert v. Alta Health & Life Insurance

Citation: 276 F.3d 1292Docket: No. 01-10829

Court: Court of Appeals for the Eleventh Circuit; December 26, 2001; Federal Appellate Court

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The appeal examines state law preemption under the Employment Retirement Income Security Act of 1974 (ERISA). Two primary questions arise: whether ERISA’s saving clause applies to Alabama’s bad faith law, thereby protecting it from preemption, and whether a sole shareholder of a corporation qualifies as a 'beneficiary' under ERISA. The court determined that Alabama’s bad faith law is not protected by the saving clause and that a sole shareholder can be considered a 'beneficiary,' making them subject to ERISA preemption. 

The factual background involves Bill Gilbert, the sole shareholder of Winfield Monument Company, which had a health insurance policy from Alta Health Life Insurance Company. Following a surgical procedure, Gilbert incurred medical expenses of $10,729, but Alta only partially covered the costs, leading Gilbert to sue for fraud, breach of contract, and bad faith denial. After Alta paid the full medical bill, they removed the case to federal court, asserting that state law claims were preempted by ERISA. The district court ruled that Gilbert was a 'beneficiary' under ERISA, thus subject to preemption, dismissed his breach of contract and fraud claims, but initially allowed Alabama’s bad faith law to proceed based on the saving clause. This interlocutory appeal addresses the preemption of Alabama’s bad faith law and the classification of Gilbert as a 'beneficiary' under ERISA, which defines 'beneficiary' as a person entitled to benefits under a plan and allows them to file lawsuits for benefits or enforce rights under ERISA.

ERISA’s preemption clause (29 U.S.C. 1144(a)) limits the causes of action and remedies available under its civil enforcement scheme by generally superseding state laws related to employee benefit plans, with exceptions outlined in the saving clause (section 1144(b)(2)(A)). This clause permits state laws that regulate insurance to coexist with ERISA, but only if they are not otherwise preempted. For an ERISA plan participant or beneficiary to pursue a cause of action, it must either be explicitly provided in ERISA or fall under a state law preserved by the saving clause. The analysis of the saving clause includes examining congressional intent and the overall regulatory framework of ERISA.

In Pilot Life Ins. Co. v. Dedeaux, the Supreme Court determined that Mississippi's bad faith law was not exempt from ERISA preemption, highlighting a similar situation with Alabama's bad faith law regarding insurance claims. The court emphasized that the saving clause is part of a broader legislative intent to establish ERISA’s civil enforcement provisions (29 U.S.C. 1132(a)) as the sole recourse for claims processing and benefits disputes. The Supreme Court noted that variations in state laws could impose burdens that ERISA preemption aims to eliminate, asserting that allowing state remedies rejected by Congress would disrupt the intended balance of prompt claims settlement and the promotion of employee benefit plans. Thus, ERISA's civil enforcement scheme takes precedence over any state law remedies.

Congress’ intent establishes the framework for the saving clause test in Metropolitan Life, which includes two prongs: (1) assessing whether the law 'regulates insurance' from a commonsense perspective, and (2) evaluating if the McCarran-Ferguson Act factors support the assertion that the law 'regulates insurance.' 

1. **Common-Sense View**: For a state law to meet the first prong, it must be 'specifically directed' at the insurance industry rather than merely impacting it. This determination involves examining whether the law is rooted in general state tort and contract principles or if it establishes a mandatory rule for insurance contracts. A law is deemed specifically directed at the insurance industry if it forms part of a comprehensive regulatory scheme for insurance. The analysis of Alabama's bad faith refusal to pay law aligns with the precedents established in Pilot Life, confirming that it shares roots in tort and contract law, similar to findings in prior cases.

2. **McCarran-Ferguson Factors**: The evaluation of whether a state law regulates the 'business of insurance' considers three factors: (1) the law’s effect on transferring or spreading a policyholder’s risk; (2) its integral role in the insured-insurer relationship; and (3) whether it pertains exclusively to entities in the insurance industry. These factors are guides and not definitive requirements. The analysis indicates that Alabama’s tort does not facilitate the spreading of policyholder risk and has an 'attenuated' connection to the insured-insurer relationship, as it does not define contractual terms but allows for punitive damages under certain breach conditions. This conclusion follows the rationale of Pilot Life, indicating no significant distinction in these aspects compared to Mississippi law.

The third factor regarding whether the tort of bad faith refusal to pay benefits is limited to the insurance industry does not satisfy the criteria necessary to demonstrate that it "regulates insurance." This tort has evolved from general tort and contract principles, thus meeting only one of the McCarran-Ferguson factors. The analysis must consider ERISA's exclusive civil enforcement scheme, which indicates that Alabama's tort does not fit within the saving clause of ERISA, similar to Mississippi's law. The critical precedent from Pilot Life highlights Congress's intent for ERISA’s exclusivity. Additionally, the Eleventh Circuit's binding precedent confirms that the saving clause does not extend to this tort as established in cases like Amos and Belasco. The district court's reliance on the Northern District of Alabama's decision in Hill, which suggested reevaluating the tort's applicability to the insurance industry, is flawed. The Hill court neglected to consider the Alabama tort's origins and binding precedent that aligns it with general tort principles, akin to the Mississippi tort addressed in Pilot Life.

The Hill court incorrectly interpreted footnote 7 in Ward as conflicting with Eleventh Circuit precedent regarding Alabama's bad faith tort. The analysis in Ward is consistent with binding precedents, including Belasco and Amos, and does not address ERISA's exclusive enforcement provisions since the state law rule discussed does not affect ERISA exclusivity. The Hill court's failure to acknowledge the clear congressional intent for ERISA’s civil enforcement scheme to be exclusive undermines its analysis. The Alabama bad faith tort implicated ERISA’s exclusivity similarly to Pilot Life, leading to the conclusion that Gilbert’s state law tort claim is preempted by ERISA, as it does not 'regulate insurance.'

Regarding Gilbert's status as the sole shareholder of Winfield Monument, he argues he cannot be deemed a 'beneficiary' under ERISA, which would exempt state law claims from ERISA preemption. This issue has produced divergent circuit rulings: some courts find a sole shareholder to be a 'participant' or 'beneficiary' if other employees are involved, while others deny this status. Notably, cases like Sipma and Robinson recognize shareholder status as a beneficiary, while Agrawal presents a contrary view. The varying interpretations highlight the complexity of ERISA's application to business owners and their claims.

In Kwatcher v. Mass. Serv. Employees Pension Fund, the court ruled that a sole shareholder qualifies as an 'employer' rather than an 'employee,' disallowing pension benefits under the corporation’s plan. Similarly, in Giardono v. Jones, the court found that ERISA excludes former employees who have become employers from being considered 'participants' in an employee benefit plan. Peckham v. Bd. of Trustees established that sole proprietors are not dual-status 'employees' and therefore ineligible for pension benefits. The current court aligns with these decisions, affirming that a sole shareholder can be a 'beneficiary' under 29 U.S.C. § 1002(8) if entitled to benefits from a qualifying ERISA plan. It emphasized that statutory interpretation starts with the statute’s language, and if clear, no further inquiry is needed. Gilbert’s health insurance policy, which covers more than just himself and his wife, qualifies as an ERISA plan, designating him as a beneficiary. Although Engelhardt v. Paul Revere Life Ins. Co. involved multiple shareholders, it reinforced that policy considerations against business owners being subject to ERISA apply here as well. Gilbert's assertion regarding the Department of Labor regulation exempting sole shareholders from ERISA was found irrelevant, as the regulation pertains to defining 'employee benefit plans' and does not address beneficiary or participant status.

Subsection (c)(1) clarifies that a sole shareholder and their spouse are not classified as 'employees' under ERISA for plan coverage determinations. Since the Alta policy includes additional employees beyond Gilbert and his wife, this provision is irrelevant to the case. The Fourth Circuit has emphasized that once a plan is established, beneficiaries should not be subjected to differing legal obligations. Accepting Gilbert's interpretation would create a disparity in rights between him and other employees under the same plan. As a sole shareholder, Gilbert qualifies as a 'beneficiary' of an ERISA plan, leading to the correct dismissal of his state claims for fraud and breach of contract as preempted by ERISA.

The district court's ruling that Alabama's bad faith law is not exempt from preemption is reversed, while the affirmation that sole shareholders may be considered 'beneficiaries' under ERISA is upheld. The case is remanded for dismissal of the bad faith claim on ERISA preemption grounds. Alabama's bad faith law prohibits insurers from unjustly refusing claims. ERISA allows civil actions by participants or beneficiaries for benefits and rights clarification. The issue of Gilbert's status as a 'participant' was not contested and remains unaddressed. The 'deemer clause' protecting employee benefit plans from being classified as insurance companies is not relevant here. The discussion on preemption and the saving clause reflects Congressional intent, and recent Sixth Circuit guidance suggests that the three McCarran-Ferguson factors are merely guideposts rather than strict requirements, affirming that the common-sense perspective does not support the application of the saving clause.

Binding precedent in this Circuit precludes the need to revisit the roots of the Alabama tort of bad faith. A review of Alabama case law supports the conclusion that this tort shares foundational principles with the Mississippi tort of bad faith, as articulated in Pilot Life. The Supreme Court in Pilot Life emphasized that Mississippi's bad faith law, while associated with the insurance industry, is rooted in broader tort and contract law principles, as seen in cases where breach of contract involved intentional wrongdoing. 

The Alabama tort of bad faith refusal to pay insurance benefits was established in Chavers v. National Sec. Fire & Cas. Co., where the Alabama Supreme Court adopted reasoning from earlier cases, emphasizing that every contract implies a duty of good faith and fair dealing. This rationale aligns with historical Alabama common law, which allows for a tort action independent of the contract when a separate legal duty is breached.

Both Alabama and Mississippi have identified bad faith law with the insurance sector, but Alabama's tort has similar foundational roots in its common law. The decision against revisiting the Belasco ruling is reinforced by the Alabama Supreme Court's recognition in Seafarers' Welfare Plan v. Dixon that the Alabama tort is preempted by ERISA, paralleling the findings in Pilot Life regarding Mississippi's tort. Similar conclusions were reached in subsequent cases, confirming the preemption of Alabama's bad faith tort under ERISA.

UNUM argues that ERISA’s civil enforcement provision (29 U.S.C. § 1132(a)) preempts state law actions regarding plan benefits, specifically the notice-prejudice rule. However, this case does not address the preemptive scope of § 1132(a) since Ward's lawsuit is based on recovering benefits under the plan's terms. The notice-prejudice rule serves as the applicable legal standard for this ERISA claim. The Supreme Court's decision in Pilot Life Ins. Co. v. Dedeaux established that ERISA's exclusivity in enforcement actions does not apply to state laws that are not specifically directed at the insurance industry. The Solicitor General previously supported the notion that § 502(a) is the exclusive remedy under ERISA, but has since modified this view, suggesting that state laws regulating insurance may not be preempted if they provide causes of action or remedies. The insurance savings clause allows state laws that regulate insurance to coexist with ERISA, which is relevant in Ward's pursuit of benefits under § 502(a)(1)(B). The document also notes variations in case law regarding the status of business owners as 'participants' or 'beneficiaries,' particularly in health insurance claims, without needing to differentiate between types of plans. The case is framed within a broader context of legal interpretations involving insurance and pension plans without delving into those distinctions here.

29 C.F.R. 2510.3-3 defines 'employee benefit plan' for Title I of the Act, clarifying that only plans meeting this definition are subject to Title I. Plans without employee participants, except for certain training programs, are excluded from this definition. Additionally, individuals and their spouses who wholly own a trade or business, or partners and their spouses in a partnership, are not considered employees regarding the plan. The interpretation of this regulation does not warrant deference to Department of Labor opinion letters, as the regulation's language is deemed unambiguous. However, such letters do align with the interpretation of 29 C.F.R. 2510.3-3. A 1992 opinion letter indicated that a benefit program including common law employees alongside individuals defined in 2510.3-3(c) qualifies as an employee benefit plan, making it subject to ERISA's claims procedures. The letter further clarifies that a sole shareholder's status does not affect ERISA application if they are a beneficiary of a plan that is otherwise subject to ERISA.