Finding the Right Insurance Policy: a Uniform Set of Guidelines for Applying the Burford Abstention Doctrine in Cases Involving State Insurance Insolvency Proceedings

JurisdictionUnited States,Federal
Publication year2017
CitationVol. 34 No. 1

Finding the Right Insurance Policy: A Uniform Set of Guidelines for Applying the Burford Abstention Doctrine in Cases Involving State Insurance Insolvency Proceedings

Benjamin A. Ries

FINDING THE RIGHT INSURANCE POLICY: A UNIFORM SET OF GUIDELINES FOR APPLYING THE BURFORD ABSTENTION DOCTRINE IN CASES INVOLVING STATE INSURANCE INSOLVENCY PROCEEDINGS


Abstract

When a party moves for a federal court to invoke the Burford abstention doctrine to stay a case or remand it to state court, the court must determine if hearing the case will substantially disrupt a state's efforts to achieve a goal of public importance through a complex administrative scheme. Federal courts often reject motions to abstain from hearing a case on Burford grounds due to the compelling nature of mandatory jurisdiction. Accordingly, the United States Supreme Court has characterized the doctrine of abstention as "an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it."

However, there is one area of law where courts often apply Burford abstention: cases involving a party undergoing a state insurance insolvency proceeding. This tendency for federal courts to stay or remand cases in deference to state proceedings in the insurance insolvency context derives from a longstanding Congressional policy of allowing states to regulate the insurance industry as embodied by the McCarran-Ferguson Act and the exclusion of insurance companies from the Bankruptcy Code.

This Comment will examine the processes used by different courts to determine whether to invoke Burford abstention and propose the adoption of a formula that builds upon a set of factors developed by the Tenth Circuit Court of Appeals to also address additional concerns. The proposed formula draws from case law and the policy goals underlying Burford abstention while emphasizing the role of avoiding the disruption of a state's efforts to establish insolvency proceedings for insurance companies. Through a six-part test, Courts can properly navigate the application of the "troublesome and enigmatic " Burford abstention doctrine.

[Page 166]

INTRODUCTION

Imagine that you are badly injured following a serious car accident and desperately need the coverage that you are entitled to under your health insurance policy. Unfortunately, your insurance company, which is based in Georgia, is undergoing a state insolvency proceeding following financial difficulty. The Georgia Life & Health Guaranty Association covers a maximum of $300,000 per individual when an insurance company cannot provide coverage due to insolvency,1 but you need significantly more than that to pay your medical bills. Suddenly, a third party files a lawsuit in federal court against your insurance company through diversity jurisdiction. If the case proceeds, a verdict for the plaintiff could jeopardize the ability of your insurance company to provide for your expenses. However, there is a solution: the federal court could apply the rarely-invoked Burford abstention doctrine, dismissing the lawsuit or staying it until the insolvency proceeding has ended, which potentially frees up the funds necessary to pay for your expenses.

The Supreme Court established the Burford abstention doctrine in 1943,2 but for many years courts rarely invoked it.3 However, there is an exception: federal courts often apply Burford abstention in cases involving an insurance company undergoing a state insolvency proceeding.4 One factor favoring federal abstention in this context is the McCarran-Ferguson Act, which provides that the states handle the regulation of "the business of insurance."5 Another factor is the exclusion of insurance companies from the Bankruptcy Code, which reinforces the significance of the development and administration

[Page 167]

of insolvency-related insurance regulation by the states.6 Nonetheless, different federal courts often use different approaches to determine whether to abstain from hearing a case involving a party undergoing a state insurance insolvency proceeding on Burford grounds.7

To address the problematic inconsistency resulting from the application of these alternate methodologies, this Comment proposes that federal courts deciding whether to abstain on Burford grounds apply a set of factors that builds upon the formula used by the Tenth Circuit Court of Appeals in Grimes v. Crown Life Ins. Co. to address diversity and equity concerns. This approach entails the evaluation of six questions: (1) whether the cause of action is entirely federal; (2) whether resolving the suit requires the court to interfere with state policies related to insurance insolvency proceedings; (3) whether the state procedures indicate the presence of a state forum to adjudicate these issues; (4) whether difficult or unusual state laws are at issue; (5) whether the court is sitting in equity; and (6) whether, in a case brought to a federal court through diversity jurisdiction, the state that would hear it on a remand has a vested interest in its specific outcome.

I. Background

A. Insurance Regulation on the State Level

In 1869, the Supreme Court first adopted the view that states are responsible for regulating the insurance industry in Paul v. Virginia.8 Seventy-five years later, the Supreme Court changed direction in United States v. South-Eastern Underwriters Ass'n, holding that the business of insurance constituted interstate commerce subject to federal regulation. 9 In response to

[Page 168]

the threat of federal antitrust actions against insurance companies brought about by this holding, the National Association of Insurance Commissioners helped formulate and successfully push for Congress to pass the McCarran-Ferguson Act to keep the regulation of the insurance industry at the state level.10 The McCarran-Ferguson Act reads:

Declaration of policy - The Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that 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.11

Despite some calls to repeal the McCarran-Ferguson Act to allow for more federal regulation,12 its embodiment of Congress's policy of leaving states to regulate "the business of insurance" remains intact.13

Judicial interpretations of the savings clause of the Employee Retirement Income Security Act of 1974 ("ERISA")14 illustrate how the courts have acknowledged Congress's policy to have states control the regulation of the insurance industry.15 ERISA includes notoriously complex pre-emption provisions declaring that it supersedes conflicting state laws,16 but it also contains a savings clause ensuring that "nothing in this title shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities."17 However, referencing language from the McCarran-Ferguson Act,18 ERISA prohibits certain employee benefit plans from qualifying as engaged in the "business of insurance" and thus are exempt from pre-emption.19

[Page 169]

The Supreme Court construed the ERISA savings clause broadly in Metropolitan Life Insurance Co. v. Massachusetts, establishing the use of three criteria for determining if a particular practice falls within the "business of insurance" for the purposes of the McCarran-Ferguson Act. These factors relate to whether the practice (1) transfers or spreads a policyholder's risk, (2) is an integral part of the insurer-insured policy relationship, and (3) is limited to entities in the insurance industry.20 This relatively rigid framework fits with the narrow interpretations of the "business of insurance" for the purposes of ERISA preemption exemptions in several earlier Supreme Court cases.21

Over twenty years after Metropolitan Life, however, the Supreme Court revised its approach, making "a clean break from the McCarran-Ferguson factors."22 Instead, the Supreme Court held that a state law qualifies for an ERISA pre-emption exemption on insurance grounds if it is: (1) specifically directed towards entities engaged in insurance, and (2) substantially affects the risk pooling arrangement between the insurer and the insured.23 This open-ended, two-step process not only follows Congress's desire to have the states regulate insurance companies, but demonstrates the Supreme Court "loosening the tight grip on what is considered a state insurance regulation."24

B. Exclusion of Insurance Companies from the Federal Rules of Bankruptcy

Historically, there has been no original or exclusive mention of insurance companies in the Federal Rules of Bankruptcy Procedure or the Code. Congress's power to regulate bankruptcy originates in the Constitution, which declares that Congress shall have the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States."25 After several short-lived and ineffective attempts at establishing uniform federal bankruptcy provisions, Congress passed the Bankruptcy Act of 1867 in the turmoil that followed the Panic of 1857 and the American Civil War.26 The Bankruptcy Act

[Page 170]

of 1867 applied to insurance companies,27 but the 1898 Bankruptcy Act's reworking of bankruptcy law did not include insurance companies in its list of eligible businesses and corporations.28

Twelve years later, a 1910 amendment added language allowing insurance companies to be eligible to file for bankruptcy.29 Bankruptcy laws were revised yet again in the 1938 Chandler Act, which established the chapters that categorized types of bankruptcy over the next forty years.30 The next major relevant development occurred in 1944's United States v. South-Eastern Underwriters Ass'n, where the Supreme Court reversed Paul v. Virginia31 to hold that the insurance industry is engaged in interstate commerce.32

The decision to hold insurance industry practices as...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT