Apr 22, 2019

ERISA Does Not Preempt Invasion of Privacy Claims

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Brian S. King
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Here’s another in our continuing series of ERISA hits: Dishman v. UNUM Life Ins. Co., 269 F.3d 974 (9th Cir. 2001). Dishman involves the difficult, complex area of ERISA’s preemption of state law claims. ERISA preemption of state law is like a nuclear weapon on the legal landscape: if a state law runs afoul of ERISA preemption, it's like it never existed at all. The reason I file Dishman in the “hit” category is because it uses common sense to provide a bit of remedial protection to consumers dealing with overreaching insurers. John Dishman was the executive director of a law firm when debilitating migraines caused him to have to stop working. He filed a disability claim with the firm’s insurer. However, Dishman had a large monthly benefit and UNUM was concerned about the cost of Dishman’s claim over his lifetime. Let’s just say UNUM dedicated significant resources to making sure Dishman had a meritorious claim. Frankie Puthoff, a member of UNUM’s Complex Claim Unit, retained several private investigators to monitor his activities and investigate his background. Hiring surveillance on disability claims is not at all uncommon for insurers. But in this case Dishman asserted that the investigators went a little beyond the usual tactics. Dishman alleged the gumshoes gained confidential information about him by falsely claiming to be bank loan officers, impersonated him on the telephone to gather information, falsely claimed that he had volunteered to coach a basketball team, and repeatedly called his home phone and hung up when he answered, among other transgressions. Thereafter, without having any physician examine Dishman or even review his records, UNUM suspended Dishman’s monthly benefit. Dishman sued UNUM in federal court to have the monthly benefit reinstated. In addition, he included a non-ERISA, state law claim for invasion of privacy based on the bad acts of the detectives. UNUM immediately moved to dismiss the invasion of privacy claim and the district court granted the motion. Dishman appealed to the U.S. Court of Appeals for the Ninth Circuit. The decision, included in the library, is an excellent primer on ERISA preemption. The line between state law claims that ERISA does and does not preempt is often difficult to define. But the approach the Ninth Circuit takes is sound and recognizes how the real world works. Not all state law claims that may, strictly speaking, “relate to” an ERISA plan can be preempted. Congress certainly did not intend to prevent states from passing and enforcing all laws that even tangentially affect ERISA plans. Dishman was not attempting to get plan benefits when he brought his invasion of privacy claim. That cause of action did not depend on the benefit claim in any meaningful way. The court analogized: “[w]hat if one of UNUM’s investigators had accidently rear-ended Dishman’s car while surveiling him? Would the fact that the surveillance was intended to shed light on his claim shield UNUM and the investigator from liability? . . . To ask the question is to answer it.” The Ninth Circuit reversed the trial court’s dismissal of the invasion of privacy claim. In so doing it made sure that a least some state law remedies are kept in place to police insurer’s from completely abusing their insureds.

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9 Comments to "ERISA Does Not Preempt Invasion of Privacy Claims"

You are correct that the deemer clause says that a self-funded plan is not subject to regulation.
However, Section 514(b)(6)(A)(ii) states " in the case of any other employee welfare benefit plan which is a MEWA, in addition to this title, any law of any state which regulates insurance may
apply to the extent not inconsistent with the preceding sections of the title."

As the DOL booklet on MEWAs states, "If a MEWA is not "fully insured," the only limitation on the applicability of state insurance laws to the MEWA is that the law not be inconsistent with Title 1 of ERISA."

I probably have some cases that you asked about, but, first, I would be interersted in your comments.
By the way, I have tried to contact one of the 2 people at the Utah DOI who handles MEWAs to read the appropriate code sections.
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
The main reason that the MEWA Amendment was passed in 1983, was due to bills that insolvent MEWAs were unable to pay.
To my knowledge, these entities were primarily self funded, so the 1983 legislation would apply primarily to them.
Fully insured MEWAs need not be licensed, for that is provided by the insurers themselves. It was the unlicensed MEWAs that provided the bulk of the unpaid claims.
Why do you think Sec. 514 of ERISA does not apply to self funded MEWAs?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Your description of MEWA regulation in Utah is very surprising to me.
Is there any way you can provide the specific provision of the Utah code allowing self-funded MEWAs to be unregulated.
Does this mean they are unlicensed insurers?
Does this state law conflict with the 1983 provisions which allow states to regulate MEWAs? Do you think it is reasonable for a state to decide it will not regulate them, and still not conflict with the 1983 federal law?

I would assume that MEWAs have a much worse track record than commercial insurers, at least those that were not licensed. It may be interesting to see what the track record of licensed MEWAs is versus those of commercial insurers.
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
I agree with you that insurers are set up to deal with the conflicting state laws, in that they already sell group insurance in the various states anyway.
How might your analysis change if the plan was a self insured MEWA, funded with appropriate stop-loss insurance?
In this case, the extra costs to comply with varying standards are passed on directly to the participants from the trust of the ERISA plan sponsors.
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
I agree with you that the invasion of privacy was tenuously related to the ERISA plan. This allegation could have been made in any insurance claim.

I am wondering what your opinion is regarding the Travelers case, in which was written ERISA preempts state laws that mandate employee benefit structures or their administration. While this would be true for self insured plans, it would not hold true for fully insured plans. However, if an employer was located in more than one state, and the states had different mandated benefits for fully insured plans, would the conflicting directives among the states, as well as a uniform structure of benefits required by Congress, make state regulation of this fully insured plan different, than if the employer was in only one state?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Don, there are two reasons I think Sec. 514 preempts any state regulation of self funded MEWAs. First, the language of Sec. 514(b)(6)(A)(i) specifically refers to state regulation of fully insured MEWAs. The specification of "fully insured" in the language in this part of the statute signals pretty strongly to me that self-funded MEWAs are not subject to state law regulation.

Second, the language of Sec. 514 (b)(2)(A) and (B), read together, make clear that no self funded plan shall be deemed to constitute a plan that is subject to state insurance regulation.

I wish self funded MEWAs were subject to state insurance regulation. But I'm pretty confident they are not. I'd love to be wrong. Do you know of any case that holds self funded MEWAs are subject to state insurance regulation?
Posted by Brian S. King on November 17, 2008 at 01:47 PM
As to MEWAs specifically, if you do a search of the Utah Code Annotated, references to Multiple Employer Welfare Arrangements come up in only a couple of places and those are in the insurance code. I find very few fully insured MEWAs. And, as you probably know, its pretty clear under federal case law that even self funded plans that have low attachment points for stop loss coverage (thus being fully insured for all intents and purposes) are considered self-funded rather than fully insured for purposes of ERISA preemption under Sec. 514. The effect of having self funded MEWAs and PEOs escape state regulation ends up being exactly as you state: they are relatively unregulated, at least in Utah, and effectively act as insurers.

I have spoken to several folks in the state Dept. of Insurance in the past who have expressed frustration about this. In fact, in the last ten years one of our prominent state legislators had an ownership interest in a PEO. Around the same time legislation was passed that actually reduced the regulation and oversight for PEOs. I have sued probably a half dozen little scam PEO operations in this state in the last half dozen or so years. It's always a struggle to get anything out of them.

MEWAs are subject to state regulation only if they are fully insured as I read Sec. 514 of ERISA. And most MEWAs are self funded from what I've seen.
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Don, sorry for my delay in responding to your last comment. I think you touch on a very problematic angle of ERISA preemption when you bring up MEWAs. The extent to which these arrangements for providing welfare benefits fall outside the scope of state laws regulating insurance is troubling to me. I've dealt with insolvent professional employer organizations (PEOs), a cousin if not twin to MEWAs, on a number of occasions in the past. At least in Utah, the express terms of the state insurance code exclude these critters from regulation by the Department of Insurance. They are treated no differently than self-funded plans and are, under the deemer clause, entirely exempt from regulation by state laws that relate to ERISA plans. That is great for employers who don't want to deal with the costs of complying with state insurance law. But I would be interested in seeing how the default rate for MEWAs and PEOs compares to insolvency rates of insurers. I have a strong feeling that a lot more participants and beneficiaries are left holding the bag when dealing with MEWAs and PEOs than when dealing with insurers. Do you know of any comparisons between the two?
Posted by Brian S. King on November 17, 2008 at 01:47 PM
From what I've seen, insurers who do business in more than one state draft their policies to comply with the mandated insurance benefit laws of each state in which they do business. There is certainly an argument that could be made to the effect that requiring insurers to act in such a way runs afoul of one of ERISA's purposes: a uniform national method of regulating insurers. But the Supreme Court already has mentioned in several cases, Kentucky Association of Health Plans v. Miller is a recent one, that when Congress carved out state laws regulating insurance from ERISA preemption, it implicitly acknowledged that insurers were used to dealing with the different state laws and regulations of all the states in which they did business and that would continue under ERISA.
Posted by Brian S. King on November 17, 2008 at 01:47 PM

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