In another case examining the scope of ERISA’s savings clause, the U.S. Court of Appeals for the Fifth Circuit decided Benefit Recovery, Inc.v. Donelon yesterday. You can find the decision here as linked to from the Fifth Circuit website.
In 2003, the Louisiana Insurance Commissioner issued a directive to all insurers in that state prohibiting them from asserting subrogation or reimbursement claims at any time before the insured was made whole. The notice also required insurers to include language in their policies stating that the insurer agreed to proportionately share in the attorney fees and costs a person incurred in obtaining a recovery from a third person.
Benefit Recovery submitted a policy without the required language and the Louisiana insurance commissioner disapproved it. Benefit Recovery then sued the insurance commissioner arguing that the directive regarding the made whole rule and proportionate contribution toward attorney fees and costs was preempted by ERISA. The federal district court ruled in favor of the Louisiana insurance commissioner and Benefit Recovery appealed to the Fifth Circuit. The Fifth Circuit affirmed.
The decision makes short work of Benefit Recovery’s argument. The decision focuses on whether the action by the Louisiana Insurance Commissioner is saved from ERISA preemption as a state law that "regulates insurance" under 29 U.S.C. §1144(b)(2)(A). Laws that regulate insurance fall under this "savings clause" of ERISA’s preemption section and are fully enforceable against insurance companies.
The Fifth Circuit dispensed with a preliminary argument by ruling that the Commissioner’s directive prohibiting certain language in policies sold in Louisiana is a state law that is subject to ERISA’s savings clause. Next, the decision analyzes whether the directive satisfies the two prongs of the savings clause analysis set forth by the Supreme Court in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003).
The first element of that test is whether the state law is directed toward entities engaged in insurance. This was easily satisfied because the rule "specifically requires insurance companies to include certain terms in their contracts." The second element of the test is that the state law must "substantially affect the risk pooling arrangements of insurer and insured." Likewise, the Fifth Circuit had no problem with this question: ". . . [the insurance directive] certainly alters the permissible bargains between insurers and insureds by telling them what bargains are acceptable." Consequently, the court ruled that the directive affected risk pooling and insurers in Louisiana are obligated to include language in their policies that complies with the directive.
The Fifth Circuit analysis is straightforward and fits comfortably within Supreme Court and Circuit cases in holding that insurance benefit mandates are not preempted by ERISA. Insurers don't like this aspect of ERISA case law. But it is well settled and hard to see how the language of the statute doesn't dictate the result the Fifth Circuit reaches in this case. The recent cases upholding the right of insurance commissioners to ban discretionary authority clauses are close cousins to the issue in this case.