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South Carolina Appeals Court Holds ERISA Did Not Pre-Empt Misrepresentation Claims Against Insurance Agent


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

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