JurisdictionUnited States


Preemption and the Power to Control Insurance

Since the enactment of the McCarran-Ferguson Act in 1945, the business of insurance is regulated solely by the states. The provisions of the act specify that:

“[t]he business of insurance” shall be recognized as a subject of state regulation, 15 U.S. C. 1012(a), which will be good against preemption by federal legislation unless that legislation “specifically relates to the business of insurance . . .”1

The policy behind 15 U.S.C. 1012 is that “continued regulation and taxation by the several States of the business of insurance is in the public interest” and “silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.”

As you read the following case, determine if McCarran-Ferguson comes into play and whether the rules followed by the state of California are preempted by the enactment of ERISA by the U.S. Congress.

Unum Life Ins. Co. v. Ward
526 U.S. 358 (1999)

Ginsburg, J., delivered the opinion for a unanimous Court.

This case, brought under 502(a) of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 891, as amended, 29 U.S. C. 1132(a), concerns ERISA’s preemption and saving clauses. The preemption clause, 514(a), 29 U.S.C. 1144(a), broadly states that ERISA provisions “shall supersede . . . State laws” to the extent that those laws “relate to any employee benefit plan.” The saving clause, 514(b)(2)(A), 29 U.S. C. 1144(b)(2)(A), phrased with similar breadth, exempts from preemption “any law of any State which regulates insurance.” The key words “regulates insurance” in 514(b)(2)(A), and “relate to” in 514(a), once again require interpretation, for their meaning is not “plain”; sensible construction of ERISA, our decisions indicate, requires that we measure these words in context. See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47 (1987) (noting that repeated calls for interpretation are not surprising in view of “the wide variety of state statutory and decisional law arguably affected” by ERISA’s preemption and saving clauses).

The context here is a suit to recover disability benefits under an ERISA-governed insurance policy issued by defendant-petitioner UNUM Life Insurance Company of America (UNUM). Plaintiff-respondent John E. Ward submitted his proof of claim to UNUM outside the time limit set in the policy, and UNUM therefore denied Ward’s claim.

Ruling in Ward’s favor, and reversing the District Court’s summary judgment for UNUM, the Court of Appeals for the Ninth Circuit relied on decisional law in California, the State in which Ward worked and in which his employer operated. The Ninth Circuit’s judgment rested on two grounds. That court relied first on California’s “notice-prejudice” rule, under which an insurer cannot avoid liability although the proof of claim is untimely, unless the insurer shows it was prejudiced by the delay. The notice-prejudice rule is saved from preemption, the Court of Appeals held, because it is “law . . . which regulates insurance.” See Ward v. Management Analysis Co. Employee Disability Benefit Plan, 135 F. 3d 1276, 1280 (1998).

The Court of Appeals announced a further ground for reversing the District Court’s judgment for UNUM, one that would come into play if the insurer proved prejudice due to the delayed notice. Under California’s decisions, the Ninth Circuit said, the employer could be deemed an agent of the insurer in administering group insurance policies. Ward’s employer knew of his disability within the time the policy allowed for proof of claim. The Ninth Circuit held that the generally applicable agency law reflected in the California cases does not “relate to” employee benefit plans, and therefore is not preempted. See Id., at 1281-1283, 1287-1288.

We granted certiorari, 525 U.S. (1998), and now affirm the Court of Appeals’ first Disposition, and reverse the second. California’s notice-prejudice rule, we agree, is a “law . . . which regulates insurance,” and is therefore saved from preemption by ERISA. California’s agency law, we further hold, does “relate to” employee benefit plans, and therefore does not occupy ground outside ERISA’s preemption clause.


UNUM issued a long-term group disability policy to Management Analysis Company (MAC) as an insured welfare benefit plan governed by ERISA, effective November 1, 1983. The policy provides that proofs of claim must be furnished to UNUM, at the latest, one year and 180 days after the onset of disability.

Ward was employed by MAC from 1983 until May 1992. Throughout this period, premiums for the disability policy were deducted from Ward’s paycheck. Under the admitted facts of the case, Ward became permanently disabled with severe leg pain on the date of his resignation, May 5, 1992. See 135 F. 3d, at 1280.

Ward’s condition was diagnosed as diabetic neuropathy in December 1992. In late February or early March 1993, he qualified for state disability benefits and thereupon informed MAC of his disability and inquired about continuing health insurance benefits. In July 1993, Ward received a determination of eligibility for Social Security disability benefits and forwarded a copy of this determination to MAC’s human resources division. See Id., at 1279. In April 1994, Ward discovered among his papers a booklet describing the long-term disability plan and asked MAC whether the plan covered his condition. When MAC told him he was covered, Ward completed an application for benefits and forwarded it to MAC. In turn, and after filling in the employer information section, MAC forwarded the application to UNUM. UNUM received proof of Ward’s claim on April 11, 1994. See Ibid. This notice was late under the terms of the policy, which required submission of proof of claim by November 5, 1993. See Id., at 1280. By letter dated April 13, 1994, UNUM advised Ward that his claim was denied as untimely. See Id., at 1279.

In September 1994, Ward filed suit against the MAC plan under 502 of ERISA, 29 U.S. C. 1132, to recover the disability benefits provided by the plan. UNUM appeared as a defendant and answered on behalf of itself and the plan. See 135 F. 3d, at 1279. To the District Court, Ward argued that under Elfstrom v. New York Life Ins. Co., 67 Cal. 2d 503, 512, 432 P. 2d 731, 737 (1967) (en banc), a California employer that administers an insured group health plan should be deemed to act as the agent of the insurance company. Therefore, Ward asserted, his notice of permanent disability to MAC, in February or March 1993, sufficed to supply timely notice to UNUM. See App. to Pet. for Cert. 30a. The District Court rejected this argument, concluding that the agency rule announced in Elfstrom “relate[s] to” ERISA plans; hence it is preempted under 514(a), 29 U.S. C. 1144(a). See App. to Pet. for Cert. 30a. The District Court further held that the Elfstrom rule is not saved from preemption as a law that “regulates insurance” within the compass of ERISA’s insurance saving clause, 514(b)(2)(A), 29 U.S. C. 1144(b)(2)(A). App. to Pet. for Cert. 31a. Accordingly, the court rendered summary judgment in UNUM’s favor. See Id., at 33a.

The Court of Appeals for the Ninth Circuit reversed, identifying two grounds on which Ward might prevail. First, following the Ninth Circuit’s recent decision in Cisneros v. UNUM Life Ins. Co., 134 F. 3d 939 (1998), the appeals court held that California’s notice-prejudice rule is saved from ERISA preemption as a law that “regulates insurance”; under the notice-prejudice rule, Ward’s late notice would not preclude his ERISA claim absent proof that the insurer suffered actual prejudice because of the delay. See 135 F. 3d, at 1280. Second, and contingently, the Ninth Circuit held that the Elfstrom rule, under which the employer could be deemed an agent of the insurer, does not “relate to” employee benefit plans, and therefore is not preempted by reason of ERISA. See 135 F. 3d, at 1287 (internal quotation marks omitted). The court accordingly remanded the case to the District Court for a determination whether UNUM suffered actual prejudice on account of the late submission of Ward’s notice of claim; and if so, whether, under the reasoning of Elfstrom, Ward could nevertheless prevail because he had timely filed his claim. See 135 F. 3d, at 1289.


California’s notice-prejudice rule prescribes:

“[A] defense based on an insured’s failure to give timely notice [of a claim] requires the insurer to prove that it suffered actual prejudice. Prejudice is not presumed from delayed notice alone. The insurer must show actual prejudice, not the mere possibility of prejudice.” Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 760-761, 15 Cal. Rptr. 2d 815, 845 (1st Dist. 1993) (citations omitted). 2 The parties agree that the notice-prejudice rule falls under ERISA’s preemption clause, 514(a), as a state law that “relate[s] to” an employee benefit plan. Their dispute hinges on this question: Does the rule “regulat[e] insurance” and thus escape preemption under the saving clause, 514(b)(2)(A). 3

Our precedent provides a framework for resolving whether a state law “regulates insurance” within the meaning of the saving clause. First, we ask whether, from a “common-sense view of the matter,” the contested prescription regulates insurance. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740 (1985); see Pilot Life, 481 U.S., at 48. Second, we consider three factors employed to determine whether the regulation fits within the “business of insurance” as that phrase is used in the McCarran-Ferguson Act, 59 Stat. 33, as amended, 15 U.S. C. 1011 et seq.: “first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance...

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