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U.S. Court In Pennsylvania Holds State Bad Faith Statute For Insurance Claims Was Not Pre-Empted By ERISA


HLD, v. 31, n. 12 (December 2003)

U.S. Court In Pennsylvania Holds State Bad Faith Statute For Insurance Claims Was Not Pre-Empted By ERISA

Plaintiff Joel Rosenbaum sued defendant UNUM Life Insurance Co. of America in the U.S. District Court for the Eastern District of Pennsylvania for wrongfully denying his claim for long term disability benefits under an employee benefit plan that is governed by the Employee Retirement Income Security Act (ERISA). Defendant moved to dismiss, arguing plaintiff's state bad faith insurance claim under 42 Pa. Cons. Stat. � 8371 was expressly pre-empted by ERISA. The court denied the motion on the ground the claim came within ERISA's saving clause. Defendant moved for reconsideration, but while the motion was under consideration the Supreme Court decided Kentucky Ass'n of Health Plans, Inc. v. Miller, 123 S.Ct. 1471 (2003), which changed the analysis for the application of the ERISA saving clause.

Defendant argued � 8371 is expressly pre-empted by ERISA, and even if it is not expressly pre-empted, � 8371 is subject to conflict pre-emption. As an initial matter, the court noted it was not reconsidering the previous findings under the McCarran-Ferguson Act, but was applying the new test under Miller. The court then turned to the issue of ERISA express pre-emption and the saving clause and explained that Miller's two-part test "requires that state legislation: (1) 'be specifically directed toward entities engaged in insurance;' and (2) 'substantially affect the risk pooling arrangement between the insurer and the insured.'" The court looked to the plain language of � 8371 and determined the section is clearly about actions arising under insurance policies, which brings it within the first Miller factor. The court then addressed the second Miller factor and compared the second Miller factor to the first McCarran-Ferguson factor. The second Miller factor requires that the state law "substantially affect" the risk pooling arrangement, while the now defunct McCarran-Ferguson factors requires the state law to "actually spread risk." The court clarified that Miller does not require � 8371 to spread the risk as defendant argued. Applying the second Miller factor, the court determined that "any risk deflection provisions used by an insurer to create limitations on claims and damages are effectively nullified by � 8371," and thus � 8371 "substantially affects the risk pooling arrangement between the insurer and the insured." Therefore, the court found the statute satisfied the Miller test.

Defendant also argued under a theory of conflict pre-emption that allowing an ERISA-related bad faith claim to proceed conflicted with Congress' intent in enacting ERISA and therefore the state claim was pre-empted. The court determined that Congress enacted the saving clause with the intent of excluding state laws that regulate insurance from ERISA pre-emption. Accordingly, the court found that � 8371 satisfied the Miller test and denied defendant's motion for reconsideration.

Rosenbaum v. UNUM Life Ins. Co. of Am., No. 01-6758, 2003 WL 22078557 (E.D. Pa. Sept. 8, 2003).      

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