Dana Laventure v. The Prudential Insurance Company of America
Docket: 99-55990
Court: Court of Appeals for the Ninth Circuit; January 19, 2001; Federal Appellate Court
Dana LaVenture appeals a district court's summary judgment favoring Prudential Life Accident Insurance Company regarding the denial of her disability income insurance benefits. The district court concluded that LaVenture's disability policy was part of an ERISA benefits plan, leading to the dismissal of her claims for breach of contract and insurance bad faith under state law due to ERISA preemption. The case is remanded for further proceedings.
The facts indicate that LaVenture and her husband, Thomas, are the sole shareholders of Pacific Graphics, Inc. (PGI), which purchased a health insurance policy for themselves in 1992. In 1994, they applied for disability insurance through the Printers Disability Trust (PDT) for coverage effective November 1, 1994. During the application process, LaVenture's health deteriorated, with a diagnosis of fibromyalgia in November 1994 and Lyme disease in June 1995. She submitted a disability claim in February 1996, citing total disability due to fibromyalgia, Lyme disease, and herniated discs, supported by a physician's statement confirming her condition and disability since November 1994. Since the company's inception, only the LaVentures have been offered disability insurance, with no benefits extended to other employees.
On July 29, 1996, Prudential's Disability Claim Manager, Maureen Majewski, denied a disability benefits claim based on medical records from Dr. James Grimes, which indicated treatments for myalgia/mitositis, back pain, and fibromyosis occurring within 90 days of the coverage effective date. As a result, benefits were deemed ineligible due to the pre-existing condition exclusion. Although the claimant was diagnosed with Lyme Disease in July 1995, the denial was based on the condition as of November 8, 1994, prior to the diagnosis and after leaving work. Prudential reaffirmed the denial on August 4, 1997. In response, LaVenture filed a complaint in California state court on April 16, 1998, alleging emotional distress and breach of contract. Prudential removed the case to federal court, citing federal question jurisdiction under ERISA and diversity of citizenship. Following Prudential's motion for summary judgment, the court granted judgment for Prudential on all claims on May 26, 1999, leading to LaVenture's timely appeal. The case addresses whether a disability insurance policy not initially governed by ERISA becomes an ERISA plan simply due to the employer offering unrelated health insurance. The court concluded that ERISA does not apply in such circumstances, reaffirming that an "employee benefit plan" requires employee participation, and business owners are not classified as employees for this purpose.
The parties agree that the disability policy at issue is not subject to ERISA because it covers only Mr. and Mrs. LaVenture, the business owners. Prudential argues that the policy became an ERISA plan when the LaVentures began providing health benefits to their employees in 1995, after the disability policy took effect in November 1994. They assert that once the business offers any ERISA-governed welfare benefit, all benefits provided by the business are subject to ERISA. Prudential cites Peterson v. American Life & Health Ins. Co. to support its position, but acknowledges that this case is not directly controlling, as it dealt with whether an ERISA plan remains such after the original covered employees leave.
The key issue is whether LaVenture's disability insurance policy, initially non-ERISA, transforms into an ERISA plan due to the separate ERISA-governed benefits provided to employees. The circuit has not definitively ruled on this matter but has indicated that a business can maintain separate ERISA and non-ERISA plans. Other courts have ruled similarly, asserting that a non-ERISA plan does not convert to an ERISA plan solely because it exists alongside an ERISA plan. For example, in Kemp v. Int’l Business Machines Corp., the Eleventh Circuit determined that non-ERISA benefits remain outside ERISA's jurisdiction, even when included in a multi-benefit plan that contains ERISA benefits, emphasizing that a plan qualifies as an ERISA plan only if it is maintained to provide ERISA-protected benefits.
In Slamen, 166 F.3d at 1102, the Eleventh Circuit ruled that Dr. Slamen's disability insurance policy, which solely covered him, was not an ERISA plan. The court found that since no employees received benefits from the disability policy and there was no connection to the health plan established for employees, it did not meet ERISA's criteria. The distinction between the two policies—one covering employees and the other covering only Slamen—was emphasized, as they were purchased separately for different purposes. Similarly, in Robertson, 798 F.2d at 868, the Fifth Circuit determined that a plan covering only partners was not subject to ERISA, as it did not provide benefits to other employee classes, reinforcing the principle that plans limited to owners fall outside ERISA's scope.
The reasoning in these cases was deemed applicable to LaVenture's situation, where only the owners received disability benefits, confirming that ERISA excludes benefit plans that cover owners exclusively. ERISA was enacted to protect employees, who are more vulnerable in employer-employee relationships, indicating little need for regulation when the owner is also the employee. The court concurred with the Eleventh Circuit's view that plans covering only owners should not be integrated into an employer's employee benefit program. Furthermore, Prudential failed to demonstrate that LaVenture's disability policy and health plan were interconnected, as the plans were established at different times and had distinct purposes, with no evidence indicating an intent to create a unified benefit plan.
LaVenture's disability insurance policy is determined not to be part of a common welfare benefit plan under ERISA, thereby allowing LaVenture's cause of action to proceed without ERISA preemption. The district court's granting of summary judgment and dismissal of the complaint was found to be erroneous. Furthermore, inconsistencies were noted in the district court's judgment, which indicated ERISA governance while simultaneously addressing state causes of action, although the official judgment did not reference these causes. Consequently, the findings and conclusions of law from the district court are vacated. The case is reversed and remanded for proceedings consistent with this opinion. The document also includes notes on the LaVentures' business operations, LaVenture's medical condition, and references to relevant legal precedents regarding ERISA's applicability to individual business owners.
