Chapter 22 - § 22.3 • APPLICATION OF THE "SAVING CLAUSE" TO COLORADO'S LAW OF BAD FAITH

• Jurisdiction: Colorado

§ 22.3 • APPLICATION OF THE "SAVING CLAUSE" TO COLORADO'S LAW OF BAD FAITH

In Kelley v. Sears, Roebuck & Co., 882 F.2d 453 (10th Cir. 1989), the court held that the "saving clause" contained in 29 U.S.C. § 1144(b)(2)(A) did not apply to Colorado's law of insurance bad faith. Therefore, the court reversed the trial court's judgment awarding compensatory and punitive damages for bad faith to the plaintiff, Norman Kelley, against Allstate Insurance Company, which, as part of an employee benefit package, provided long-term disability insurance to employees of Sears, Kelley's employer.

The Tenth Circuit agreed with Allstate that ERISA preempted Kelley's suit because 29 U.S.C. § 1144(a) preempts "all state laws that 'relate to' any employee benefit plan." Id. at 456. A state law relates to an employee benefit plan if it has a connection with or reference to such a plan. The "saving clause" contained in 29 U.S.C. § 1144(b)(2)(A) saves from preemption causes of action under state laws that "regulate" insurance. Citing Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987), the Tenth Circuit held that determining whether a state cause of action regulates insurance involves the application of three criteria: "(1) whether the state law has the effect of transferring or spreading a policyholder's risk; (2) whether the state law is an integral part of the policy relationship between the insurer and the insured; and (3) whether the state law is limited to entities within the insurance industry." Kelley, 882 F.2d at 456. Kelley's bad faith claim against Allstate was based, in part, upon allegations that Allstate violated the provisions of the Unfair Claims Settlement Practices Act (UCSPA), C.R.S. § 10-3-1104(1)(h).

The Tenth Circuit noted that in a federal district court case, Denette v. Life of Indiana Insurance Co., 693 F. Supp. 959, 966 (D. Colo. 1988), the court found that UCSPA was very similar to the Mississippi law at issue in Pilot Life. The Denette court concluded that while the UCSPA is a statute that only applies to the insurance industry, the statute did not satisfy two of the three criteria articulated in Pilot Life. The Tenth Circuit agreed with the analysis in Denette and found that the UCSPA "does not spread policyholder risk; rather, it prevents and remedies unfairness in the insurance industry." Kelley, 882 F.2d at 456. Further, the UCSPA "is not integral to the insurance relationship, since it does not control the substantive terms of the insurance contract itself." Id. For similar reasons, the Tenth Circuit also found that Colorado's common law of bad faith does not regulate insurance. "It neither spreads policyholder risk nor controls the substantive terms of the insurance contract . . . ." Id. Thus, because ERISA preempted Kelley's bad faith cause of action, the Tenth Circuit reversed the judgment for both compensatory and punitive damages against Allstate.

In Halprin v. Equitable Life Assurance Society, 267 F. Supp. 2d 1030 (D. Colo. 2003), the court likewise held that the savings clause did not shield the plaintiff's common law bad faith claim from preemption by ERISA. The plaintiff, Dr. Halprin, was employed as a gastroenterologist by Southern Colorado Clinic, P.C. (SCC) from 1979 to 1999. In addition to a comprehensive package of insurance benefits provided by SCC, Dr. Halprin had a disability policy administered by Equitable. The Equitable plan consisted of 19 individual policies issued to 19 doctors employed by SCC. Premium payments were deducted from each shareholder's income distribution.

After Dr. Halprin was accused in 1997 of improper sexual relations, he became depressed, started seeing a psychiatrist, and stopped practicing medicine. In 1998, he requested disability benefits under the Equitable policy, but the claim was denied because Equitable concluded there was no objective evidence of severe depression. Dr. Halprin then brought suit against Equitable for breach of contract, willful and wanton breach of contract, bad faith, violation of the Colorado Consumer Protection Act (CCPA), and negligence. The district court granted Equitable's motion for judgment on the pleadings as to Dr. Halprin's second and fifth claims, and granted summary judgment in favor of Equitable on the remaining claims.

The court rejected Dr. Halprin's argument that ERISA does not preempt state law claims for insurance bad faith. Dr. Halprin relied upon Colligan v. UNUM Life Insurance Co. of America, 2001 U.S. Dist. LEXIS 8103 (D. Colo. April 23, 2001), to argue that Kelley was no longer good law. However, the court found that Kelley was still controlling. Like the court in Kelley, the Halprin court concluded that Colorado's law of insurance bad faith does not...