Law and Insurance

Court Lays Out Blueprint for ERISA Preemption of State Court Remedies

Martinez v. Unum Life Insurance Company of America, No. H-07-1988 (S. D. Tex. November 9, 2007)

I do not usually comment on cases featuring health and disability claimants trying to bust through the ERISA-preemption barrier (because it almost never works), but this case so clearly lays out the legal hurtles (in the 5th Circuit at least) that it is worth a look.  As a rule, Judge Atlas's opinions are well reasoned and supported with relevant case authority.

The court notes that Mark Martinez appears to be a sympathetic plaintiff.  He is insured under a Group Long Term Disability Insurance Policy purchased by his employer from Unum Life.  He alleges that he suffers from advanced heart failure and uncontrolled diabetes.  He received benefits for these ailments until they were "arbitrarily terminated" in 2002.  His doctors provided written opinions that he needed intensive medical therapy and could not engage in any productive work.  The insurer refused to reinstate his benefits.  Mr. Martinez sued in state court for negligence and gross negligence, breach of contract, breach of the common law duty of good faith and fair dealing, fraud and misrepresentation, as well as deceptive trade practices under Texas consumer protection provisions in the Insurance Code.

Unum Life removed the case to federal court and asserted that all state law claims be dismissed because the plaintiff's sole remedies are those provided under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sec. 1101("ERISA").  Basically, any health and disability insurance benefits provided under an employment benefit plan are governed by ERISA.  The plaintiff argued that ERISA contains a "savings clause": "Except as provided [elsewhere in the ERISA statute], nothing in this title shall be construed to exempt or relieve any person from any law of any state which regulates insurance . . ."  However, the court says, "Despite the sympathetic facts Plaintiff presents about his condition, Plaintiff's arguments are unavailing."  The court then marshals the following legal precedents that doom the Plaintiff's arguments:

• Section 502 [of ERISA], by providing a civil enforcement cause of action, completely preempts any state cause of action seeking the same relief, regardless of how artfully pleaded as a state action.  McGowin v. ManPower Int'l, Inc., 363 F.3d 556, 559 (5th Cir. 2002);
• ERISA preempts any state laws insofar as they relate to any employee benefit plan, and a claim "relates to a plan" when the claim itself is premised on the existence of an employee benefit plan.  Christopher v. Mobil Oil Corp., 950 F.2d 1209, 1220 (5th Cir. 1992);
• Negligence and gross negligence claims based on a plan administrator's handling of claims are completely preempted by ERISA.  Haynes v. Prudential Health Care, 313 F.3d 330, 336-37 (5th Cir. 2002);
• ERISA preempts claims related to denial of benefits brought under the Texas Deceptive Trade Practices Act and the Texas Insurance Code.  Hogan v. Kraft Foods, 969 F.2d 142, 144-45 (5th Cir. 1992);
• Good faith and fair dealing and fraud/misrepresentation claims are also preempted.  McGowin, 363 F. 3d at 559; Hogan, 969 F.2d at 144-45;
• State law extracontractual claims for punitive damages are preempted by ERISA.  Rogers v. Hartford Life & Accident Ins. Co., 167 F.3d 933, 944 (5th Cir. 1999)

Why do claimants want to break out of ERISA?  Because they must prove that the plan administrator's denial of benefits was arbitrary and capricious (which is tougher to prove than negligence), and if they win, they get the benefits they should have had, plus (maybe) attorneys' fees. 

Texas High Court Subordinates Insured's Right to Receive Full Recovery to Insurer's Contractual Right of Subrogation

Fortis Benefits v Cantu, No. 05-0791 (Tex.June 29, 2007)

 

The Texas Supreme Court has changed (or clarified, depending on one’s point of view) the rule determining  whether the insurer or the insured gets first recovery of settlement or judgment proceeds from third party tortfeasors.  An insured who has been injured or incurred property damage due to the fault of a third party will usually look first to her own first-party insurance to pay for medical bills or repairs and then, if her insurance is not enough to make her whole, pursue legal action against the responsible third party.  Her insurance company, having paid the insured’s claim, will also want to purse its “subrogation” interest against the same tortfeasor that the policy holder is suing.  Who should get paid first from any recovery that is insufficient to fully make the policyholder whole and pay back the insurer? 

 

Up until now, the answer seemed to be that, except for ERISA and other statutory rights, a court applying Texas law will follow the “make whole” doctrine allowing the insured first to recover 100% of her damages before the subrogating insurer begins to recover.  In the Cantu case, the court held that the insurer may enforce a contractual right to subrogation even if the insured has not yet recovered all damages she should recover to be made whole.

 

        Vanessa Cantu sued several parties after she was hurt in an auto accident.  Fortis Benefits intervened and asserted contractual subrogation and reimbursement rights to recoup from Cantu's tort recovery the amount of medical benefits it had paid under the policy. Cantu's policy with Fortis provided, "Upon payment of benefits, We [Fortis] will be subrogated to all rights of recovery a Covered Person [Cantu] may have against any person or organization.  Such right extends to the proceeds of any settlement or judgment; but is limited to the amount of benefits We have paid."

 

        Cantu settled her claims with the defendants before trial for $1.445 million. Cantu and Fortis disputed what portion of the settlement proceeds, if any, should go to Fortis, and Cantu moved for summary judgment, arguing she had not been “made whole” by the settlement. Cantu’s past medical expenses totaled $378,500 (of which Fortis had paid $247,534.14), and her summary judgment evidence included two “life care plans” estimating her future medical expenses at roughly $1.7 million and $5.3 million. She argued that her past and future medical expenses, exclusive of other amounts like pain and suffering, exceeded the amount of the settlement plus what Fortis had already paid. Cantu argued that the “made whole” doctrine precluded Fortis’s contractual claims of subrogation and reimbursement.  The trial court granted summary judgment in favor of Cantu, and a divided court of appeals affirmed

 

        Citing Ortiz v. Great Southern Fire & Cas. Ins. Co., the Court recognized the "made whole" doctrine has been established precedent for 27 years.  There, the Court held, “An insurer is not entitled to subrogation if the insured’s loss is in excess of the amounts recovered from the insurer and the third party causing the loss.”  The Court reasoned that one justification for equitable subrogation was to prevent the insured from receiving a double recovery, first from the insurer, then from the third party.  The Court also recognized, however, that if the insured’s total recovery was less than her losses, equity cut the other way: “when ‘either the insurer or the insured must to some extent go unpaid, the loss should be borne by the insurer for that is a risk the insured has paid it to assume.’” that an insurer is not entitled to subrogation if the insured's loss is in excess of the amounts recovered from the insurer and the third party causing the loss.

 

        The Court distinguished precedent standing for the proposition that "the same principles govern both equitable and contractual subrogation" on the grounds that such precedent was decided prior to Ortiz.  The Court recognized that equitable and contractual subrogation rest upon common principles, but it pointed out that contract rights generally arise from contract language; they do not derive their validity from principles of equity but directly from the parties’ agreement.  Going further, the Court stated that if subrogation arose independent of any contract, then an express subrogation agreement would be superfluous and serve only to acknowledge this preexisting right---a position the Court rejected.   

 

        Citing U.S. Supreme Court and Fifth Circuit case law, the Court found that three varieties of subrogation—equitable, contractual, and statutory—represent three separate and distinct rights that, while related, are independent of each other.  “Equity follows the law,” which requires equitable doctrines to conform to contractual and statutory mandates, not the other way around held the Court.  Where a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy.  The Court then pointed out that it has “long recognized a strong public policy in favor of preserving the freedom of contract."  The Court held that it was inclined to focus on a plain language, "text-based approach."

 

            Invoking the parties’ right to contract, the court held that, under Cantu's policy, Fortis had an unfettered right to recover the proceeds.  Given that most insurance policies contain subrogation clauses, this holding will probably severely limit application of the “make whole” doctrine.

Confusion and Questionable Sales Practices Reported As Private Fee-For-Service Alternatives to Medicare Proliferate

In a New York Times story today by Robert Pear, Methods Used By Insurers are Questioned, a number of state insurance commissioners and others in insurance industry report wide-spread confusion among many elderly, particularly in rural areas, over what is called "Medigap insurance," private fee-for-service plans offered to replace or supplement traditional Medicare policies.  Also, authorities report complaints that insurance salesmen have used fraudulent methods, like forged signatures, and pressure tactics to sell these plans to elderly who often do not understand how they work and what they will cost.  Congress authorized private plans in 1997 at the urging of the insurance industry.  Proponents argue that these plan offer extra benefits, like dental care and eye glasses.  However, some medical professionals report that patients are surprised to learn that their private plan requires immediate and often higher co-pays than traditional Medicare.  There is also an increased cost to the government from private fee-for-service plans, 19% more, according to the Medicare Payment Advisory Commission.  Insurance commissioners in Florida, Louisiana, North Carolina, Kansas, Oklahoma, and Wisconsin are reportedly investigating.