HLD, v. 32, n. 10 (October 2004)
South Carolina Appeals Court Holds ERISA Did Not Pre-Empt Misrepresentation
Claims Against Insurance Agent
The Employee Retirement Income Security Act (ERISA) did not pre-empt
state law claims against an insurance agent for professional malpractice, a
South Carolina appeals court held August 9. The appeals court found that the
claims did not "relate to" an employee benefit plan because they involved allegations
of fraud and misrepresentation against the agent who solicited and enrolled
an employer and its employees in a health insurance plan that was unable to
pay benefits in a timely manner.
Michael Requa is an insurance agent who marketed a health insurance
plan administered by Fidelity Group, Inc. (Fidelity). Requa sent a solicitation
letter to American AVK Company (American AVK) touting the advantages of the
Fidelity plan. American AVK decided to enroll in the Fidelity plan. A few months
later, Fidelity was having problems paying claims on time. Requa also received
a letter from the South Carolina Department of Insurance notifying him that
it was investigating the Fidelity plan and his involvement in marketing the
plan to determine whether Fidelity had complied with state law regarding the
sale of insurance. Requa did not tell American AVK or its employees about Fidelity's
problems. Although Requa later claimed he sent a letter to American AVK and
his other clients advising them of Fidelity's problems, American AVK denied
it received such a letter.
American AVK employee Christopher Holroyd was enrolled in the Fidelity
plan. Holroyd suffered several severe heart attacks and incurred roughly $65,000
in medical costs that Fidelity did not pay. Holroyd and American AVK (plaintiffs)
sued Requa in state trial court for misrepresentation, fraud, and negligence.
The jury returned a verdict in favor of plaintiffs and awarded them $365,000
in actual damages and $180,000 in punitive damages. After the trial court denied
his post judgment motions, Requa appealed.
The South Carolina Court of Appeals affirmed. First, the appeals
court held that ERISA did not pre-empt plaintiff's state law claims. Although
the lower court allowed Requa to refer to the plan as a "group health insurance
plan" at trial, this did not amount to a legal finding that the plan fell within
ERISA's purview as an "employee welfare benefit plan," the appeals court said.
But in any event, the appeals court added, the state law claims at issue here
did not "relate to" an employee benefit plan and therefore ERISA did not pre-empt
them. Instead, the appeals court found plaintiffs' claims of misrepresentation,
fraud, and negligence involved professional malpractice rooted in the common
law of tort liability that did not impact the Fidelity plan's structure or administration.
Moreover, plaintiffs' claims did not seek ERISA benefits, but rather they sought
damages caused by Requa's professional malpractice. "Thus, the connection between
the state law claims and the employee benefit plan is so tenuous such that ERISA
does not pre-empt them," the appeals court held.
The appeals court also rejected Requa's challenge to a number of
evidentiary rulings at trial, including that the trial court improperly admitted
evidence of the amount of premiums paid and of unpaid medical bills for Holroyd
and other American AVK employees enrolled in the plan, allowed testimony regarding
damage to Holroyd's credit rating, and admitted evidence of future damages in
the form of increased premiums for health insurance Holroyd would have to pay
because of Fidelity's failure to pay his legitimate medical expense claims.
Finally, the appeals court held that the damages award was not
grossly disproportionate to the evidence and therefore the trial court did not
abuse its discretion in refusing to grant a new trial. While plaintiffs' unpaid
medical bills may have amounted to only $65,000, they also presented evidence
of embarrassment, credit problems, increased future insurance premiums, stress,
premiums paid, and decreased coverage due to preexisting conditions in a new
policy that warranted the jury verdict of $365,000, the appeals court observed.
Likewise, the appeals court upheld the $180,000 punitive damages award. Accordingly,
the appeals court affirmed the judgment below.
Holroyd v. Requa, No. 3852, 2004 WL 1774216 (S.C. Ct. App.
Aug. 9, 2004). To read the case, go to /Events and Education/Teleconferences/Pages/What_In-House_Counsel_Need_to_Know_about_the_AHLA_ADR_Service.aspx