Pilot Life pushed ERISA's preemption pendulum to the top of its arc, but didn't suspend the law of gravity.

• Author: Mazer, Jason S.

Congress' stated purpose for enacting the Employee Retirement Income Security Act of 1974, 29 U.S.C. [section] 1001 et seq. (ERISA), was to "protect... participants in employee benefit plans and their beneficiaries,.., by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the federal courts." (1) Following the U.S. Supreme Court's decision in Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987), the vast majority of lower courts have held state bad faith laws preempted by ERISA. This landmark decision removed the spectre of extracontractual damages as a remedy for bad faith conduct on the part of ERISA plan insurers, dramatically altering the remedies available to policyholders in disputes with group health and disability insurers. This federal statute has also been employed by health maintenance organizations (HMOs) to preempt state causes of action for medical negligence, while providing no corresponding federal remedy permitting an award of compensatory damages. (2) Recent decisions by the Supreme Court and, the author suspects, the proliferation of unprincipled claims handling resulting from the judicial insulation of the insurance industry from state bad faith claims (and their associated extracontractual remedies) have led some lower courts to reevaluate ERISA's preemptive reach. This article will plumb the current ERISA preemption landscape and conclude with an examination of Florida's unique "bad faith" statute. We begin, however, with some generally applicable principles.

Preemption, for the moment, depends upon 1) the field of operation of the particular state bad faith law, 2) its effect on risk pooling, and 3) whether the law duplicates a cause of action available under ERISA or provides different or additional remedies for ERISA-protected rights. These guidelines were derived from both ERISA's express preemption provisions and any implied preemption accomplished by the "exclusivity" of ERISA's civil enforcement scheme.

Express Preemption: A Study in Congressional Drafting & Judicial Vacillation

Whether a state law is subject to express preemption under ERISA requires analysis of three statutory provisions: 29 U.S.C. [section]1144(a) ("preemption clause"); 29 U.S.C. [section]1144(b)(2)(A) ("saving clause"); and 29 U.S.C. [section]1144(b)(2)(B) ("deemer clause"). These provisions operate as follows: If a state law "relates to" employee benefit plans, it is preempted by ERISA's broad preemption clause. The saving clause, in turn, excepts from preemption state laws that "regulate insurance." Finally, the deemer clause makes clear that a state law that "purports to regulate insurance" cannot deem an employee benefit plan to be an insurance company. Pilot Life, 481 U.S. at 45.

Following more than a decade of judicial experimentation concerning the scope of the saving clause, a unanimous Supreme Court in UNUM Life Ins. Co. of America v. Ward, 526 U.S. 358 (1999), again sought to "clarify" the framework for determining whether a state law "regulates insurance" and thus escapes preemption under ERISA's saving clause. This framework, which the Court drew from earlier decisions, required resolution of whether, from a "common-sense view of the matter," the contested state law regulates insurance. Ward, 526 U.S. at 367, citing Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740 (1985). A state law that "controls the terms of the insurance relationship" by "homing in" on the insurance industry (rather than merely having an impact on that industry) regulates insurance as a matter of common sense. Ward, 526 U.S. at 368.

This common sense conclusion, said Ward, is next verified by determining whether the state law regulates the "business of insurance" within the meaning of the McCarran-Ferguson Act, 15 U.S.C. [section]1011 et seq. Whether a particular practice falls within the "business of insurance" required consideration of the following three criteria: First, whether the practice has the effect of transferring or spreading a policyholder'a 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 industry.

Metropolitan Life, 471 U.S. at 743 citing Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982).

Ward, however, announced for the first time that a state law need not satisfy all three McCarran-Ferguson factors in order to verify the common sense conclusion that it regulates insurance for purposes of ERISA's saving clause. Ward, 526 U.S. at 373. Ward cast the three factors as "guideposts" or "considerations to be weighed." Id. The Supreme Court in Ward thus reinvigorated the saving clause, presumed dead by many lower courts after Pilot Life, by reiterating its earlier declination to impose "any limitation on the saving clause beyond those Congress imposed in the clause itself and in the 'deemer clause' which modifies it." Metropolitan Life, 471 U.S. at 746. (3)

Ward's "clarification" was shortlived. It seems that eons have passed since this Court could claim a "strict constructionist" moniker, so perhaps it was no surprise when it (again) reconfigured ERISA saving clause analysis in Kentucky Association of Health Plans, Inc. v. Miller, 123 S. Ct. 1471 (2003). Miller involved a challenge to Kentucky's "Any Willing Provider" (AWP) statutes, which prohibit a health insurer or health benefit plan from discriminating against any local provider willing to meet the terms and conditions for participation established by the health insurer. Id. at 147374. The HMOs challenged the Kentucky laws because they impair the HMOs' ability to limit the number of providers with access to their networks, and thus their ability to offer high patient volume as the quid pro quo for the discounted rates that network membership entails. Id. at 1474. The Supreme Court granted certiorari to decide whether ERISA preempts these AWP statutes.

Speaking for another unanimous Supreme Court in Miller, Justice Scalia declared a"clean break" from the Court's prior saving clause jurisprudence and held that for a state law to be deemed a "law... which regulates insurance," it must now satisfy two requirements. First, the state law must be specifically directed toward entities engaged in insurance. Id. at 1479. Second, the state law must substantially affect the risk pooling arrangement between the insurer and the insured. Id. (4) Only time will tell whether this new test for application of ERISA's saving clause provides the "clear guidance" to the lower courts envisioned by Miller. Id. at 1478. Given the marked departure from prior saving clause precedent, however, Florida courts may now be inclined to revisit the issue of ERISA preemption of F.S. [section]624.155. In order to be saved from preemption, then, [section]624.155 must be "specifically directed toward entities engaged in insurance." Id. at 1479.

When Is a State Law Specifically Directed at the Insurance Industry?

At first blush, this inquiry seems straightforward. The Mississippi law of bad faith was held not to be saved from ERISA preemption in Pilot Life because it was not specifically directed at the insurance industry, but rather a law of general application available in any Mississippi breach of contract case. Pilot Life, 481 U.S. at 51. The Supreme Court later advised that a state law regulates insurance as a matter of common sense where it "controls the terms of the insurance relationship" by "homing in" on the insurance industry. Ward, 526 U.S. at 368. (5)

Despite that pronouncement, some lower courts have continued to rely on Pilot Life to preempt even those state bad faith laws codified to apply specifically to the insurance industry as laws nevertheless "rooted in the common law of contract and tort." See, e.g., Walker v. Southern Co. Svcs., Inc., 279 F.3d 1289, 1293 (llth Cir. Ala. 2002). According to the llth Circuit, Alabama's bad faith statute (6) is not "specifically directed" at the insurance industry under the following test:

To determine whether a law is "specifically directed" at the insurance industry, we look at whether the roots of the law are "firmly planted" in the general principles of the state's tort and contract law, or whether the law sets forth "a rule mandatory for insurance contracts, not a principle a court may pliably employ when the circumstances so warrant."

Gilbert v. ALTA Health & Life Ins. Co., 276 F.3d 1292, 1297 (11th Cir. Ala. 2001) (citations omitted). The Gilbert panel then wrote that the "roots of the Alabama tort of bad faith are found in the Alabama case law and common law indicating that under certain circumstances a separate and independent duty can arise in the context of a contract . . . , which duty can give rise to a tort action separate and independent from...