Chapter 22 - § 22.2 • NO ERISA PREEMPTION UNLESS CLAIMANTS ARE "EMPLOYEES"

• Jurisdiction: Colorado

§ 22.2 • NO ERISA PREEMPTION UNLESS CLAIMANTS ARE "EMPLOYEES"

Pierce v. Capitol Life Insurance Co., 806 P.2d 388 (Colo. App. 1990), was another bad faith case arising out of an insurer's failure to pay health insurance benefits. In December 1987, the plaintiffs, Mr. and Mrs. Pierce, became insured, up to a maximum of $500,000 per person, under a group medical insurance policy issued by the defendant, Capitol Life. The group policy was issued to a business the Pierces had recently established.

Not long after the policy was issued, Mrs. Pierce was seriously injured in an automobile accident and began making claims for medical payments under the policy. The policy contained a provision for a 31-day "grace period" for late payment of monthly premiums. It also provided that the policy would terminate automatically at the end of the grace period following the due date of any unpaid premium.

On at least 15 occasions between January 1978 and February 1983, the Pierces made their premium payment after the expiration of the grace period. However, on each of these occasions Capitol accepted the late payments and continued to pay claims under the policy. On March 30, 1983, one day before the end of the grace period, the Pierces submitted a premium payment. Capitol did not receive the payment before the end of the grace period, and on April 4, 1983, advised the Pierces that it was terminating coverage as of April 1, 1983. The Pierces then sued Capitol for bad faith and sought compensatory and punitive damages. The jury returned a verdict in favor of the Pierces for $25,000 in compensatory damages and $400,000 in punitive damages. Capitol then appealed.

Capitol's principal argument on appeal was that the Pierces' bad faith claim was preempted by ERISA. The court noted that for a plaintiff's state law bad faith claim to be preempted, the plaintiff must be entitled to bring an ERISA claim. To be entitled to make an ERISA claim, a person must be a participant in or a beneficiary of a plan. A participant is an employee who may become eligible to receive a benefit under an employee benefit plan. Id. at 390. The court stated that under the applicable federal regulations, however, an individual and his or her spouse are not deemed to be employees of a business they own. Therefore, the court concluded the Pierces were not employees and were not entitled to make an ERISA claim. Because ERISA was inapplicable, the state district court was not divested of jurisdiction to decide the Pierces' bad faith claim.

Potts v. CitiFinancial, Inc., 863 F. Supp. 2d 1121 (D. Colo. 2012), arose from the plaintiff's hospitalization on January 13, 2008, during which he received treatment for acute diabetic ketoacidosis. Id. at 1123. During his hospitalization, the plaintiff believed he had been insured by PacifiCare of Colorado, Inc. through his employer, CitiFinancial, Inc. However, PacifiCare paid only a portion of the plaintiff's medical expenses, and the plaintiff alleged that he had been informed that his medical coverage had been denied. As a result of the alleged nonpayment by PacifiCare, the plaintiff could not pay his outstanding medical bills, and he had...