Mar 30, 2017

Squabbles Between ERISA Plan Sponsors & Stop Loss Carriers


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11/17/2008
Brian S. King
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A couple of days ago the U.S. Court of Appeals for the Fifth Circuit gave us an opinion that explores at some length the degree to which ERISA preempts state law claims for breach of contract, detrimental reliance and misrepresentation brought by an employer sponsoring an ERISA plan against a stop loss carrier hired by the employer. For a more detailed summary of the case, Bank of Louisiana v. Aetna, 2006 U.S. App. LEXIS 25798, take a look at Roy Harmon's comment about it over at his Health Plan Law blog. The topic of ERISA preemption has occupied many lawyers, judges and law clerks for the past 25 years. At 29 U.S.C. Sec. 1144, ERISA preempts all laws that "relate to" an ERISA plan. Except state laws that "regulate insurance" and except from that exception self funded plans which are not considered to be engaged in the business of insurance even though self funded plans are often 90% insured using stop loss insurance, which may not really be insurance at all but looks a lot like it. Ignore the last sentence in that last paragraph. It simply illustrates why ERISA preemption is a Serbonian Bog in legal geography. Back to the Fifth Circuit. ERISA preemption at its core is a fight about the degree to which federal law trumps state law as those laws have some effect on ERISA plans. The Supreme Court has said that state laws that have an "indirect" effect on ERISA plans are not preempted. But, as with so many other formulations, this type of language doesn't get us much farther down the analytical road than discussing what state laws "relate to" an ERISA plan. There isn't much substitute for simply handling these issues on a case by case basis. In Bank of Louisiana, the Fifth Circuit rules that the burden of demonstrating a state law is preempted is on the party arguing for preemption. That party must show, first, that the state law claim "addresses an area of exclusive federal concern." Second, it must prove that "the claim directly affects the relationship among traditional ERISA entities--the employer, the plan and its fiduciaries, and the participants and beneficiaries." Aetna partially satisfied the first element of the test but failed the second element. Aetna's actions in negotiating stop loss coverage for the employer, representing to the employer that its excess losses would be paid under the stop loss coverage and performing its duties as stop loss carrier were not fiduciary acts. The case illustrates the continued movement by federal courts toward preserving a larger body of state law from ERISA preemption. Up until the mid '90s it seemed like ERISA preemption swallowed a progressively larger portion of state law with each passing Supreme Court case. I mean, what state laws don't relate to an ERISA plan sooner or later? Then the Supreme Court issued N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995) and a number of other cases in short order that pretty clearly put a stop to ERISA mission creep. Of course, the ERISA preemption war is immense and Bank of Louisiana is one battle among many. But the move toward allowing state law to indirectly affect and, to some extent, regulate ERISA plans is generally positive for plan participants and beneficiaries and consumers generally in allowing for greater protection of their rights. UPDATE: I've channeled Janell Grenier's comment, at least with regard to the "ERISA preemption is a Serbonian Bog" angle. But I came by it innocently as opposed to plagiaristically. Honest. I take this as a sign it's time to retire Justice Cardozo metaphors

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4 Comments to "Squabbles Between ERISA Plan Sponsors & Stop Loss Carriers"

Brian:
Can you provide more specifics as to why it would not be preempted?
Could it be partially preempted, say to 5 years?
Could the Department of Insurance, use the 10 years as a guideline, rather than as a literal commandment?
Can you provide an example of an excessive state protection that would probably be preempted?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Brian:
The preemption cases I have reviewed over the last several years seem to look at state versus federal regulation as mutually exclusive. What is more reasonable, is to look at state regulation to see how it impacts on Congress' objectives for ERISA, two of which are to encourage employers to establish and maintain benefit plans, and to make sure that claims are paid on a timely basis.
Certainly states have the obligation to protect consumers, and generally, states can provide greater protections than the federal laws allow for.
But, here is an example, I believe, of excessive protection.
Washington state says that for a self-funded MEWA to offer insurance, the association must have been in existence for 10 years. And, regardless of the liabilities assumed, the MEWA must have $1million in surplus.
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
It is much easier to say why it almost certainly would be preempted. The MEWA is self funded. As I read Sec. 514, states may regulate MEWA's only to the extent they are fully insured. In that sense, any state law that "relates to" an ERISA plan, as the law you describe certainly does, will be preempted if the plan is self funded. It clearly presents barriers to the formation of employee welfare benefit plans contrary to ERISA. The only reason I say it may not be preempted is because lawyers can make creative arguments that are sometimes successful.

As for an example of a state law that provides greater protection for consumers that would probably be preempted, your example is as good as any.
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Don, I agree there are state laws that provide protection to consumers above and beyond ERISA that nonetheless should be preempted. The example you provide sounds like it would not have much chance of surviving an ERISA preemption challenge.
Posted by Brian S. King on November 17, 2008 at 01:47 PM

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