Differences in Handling Insurance Claims under State Law vs. ERISA
A Difference of Kind, Not Degree
By Joseph Clark

For example, we will not discuss in detail how one would prove a state cause of action for insurance bad faith. Nor will we examine in detail the nuances of judicial review of a denial under the arbitrary and capricious standard applied in most ERISA cases. Given the forum, I will try to the best of my ability to simply set out my understanding of the law without any editorial comments. Anyone who knows my feelings on this particular issue will recognize how difficult that might be. However, it appears that the facts will speak for themselves.

Development of State Insurance Law

The regulation and taxation of the business of insurance has traditionally been a matter left to the states. In Paul v. Virginia,1 the U.S. Supreme Court held that the issuance of a policy of insurance was not a transaction of interstate commerce even though the parties were domiciled in different states but was a simple contract of indemnity against the loss and subject to regulation by the state. Based on this case, it was severally assumed that federal regulations of the insurance business was improper because it should rest exclusively with the states.

That assumption was dealt a significant blow in the case of United States v. South-Eastern Underwriters Assoc.2 That case held that a fire insurance company that conducted a substantial part of its business across state lines was engaged in interstate commerce and, thus, the commerce clause of the federal constitution applied to that interstate commerce. The case followed up stating that because the Sherman Act did not intend to exempt insurance companies, the anti-trust laws set out in the Sherman Act applied to insurance companies.

In the following year, the U.S. Congress responded with the McCarran-Ferguson Act3 which declares in § 1011 its policy as “[t]he Congress hereby declares that the continued regulation and taxation by the several states of the business of insurance is in the public interest, ...” Thus, up and until the time of the passage of the Employee Retirement Income Security Act,4 insurance law and its regulation have been essentially a matter of state law.

All three branches of state government have been involved in the regulation and taxation of the insurance industry.  It appears every state has a Department of Insurance or an insurance commissioner as part of its administrative branch. The Oklahoma Insurance Department and insurance commissioner are established in 36 O.S.§ 301 et. seq. The insurance code provides that the insurance commissioner must examine the books of foreign insurance corporations periodically, license foreign insurance corporations to do business in the state of Oklahoma and serves as foreign insurance corporations’ registered service agent.

We also see that there is significant regulation of the insurance industry by the Legislature. Title 36 of the Oklahoma Statutes is entirely dedicated to the insurance industry. In addition to establishing the Department of Insurance and the Office of the Insurance Commissioner, it provides for such things as guaranty funds, types of insurance, licensor, mandated insurance coverage, required policy provisions and unfair claims procedures. The list could go on and on, but the point is that every facet of the insurance industry is statutorily regulated.

Perhaps most important to the practitioner is the formulation of common law regulating the insurance industry by the courts. The nature of state insurance regulation was recognized by the Oklahoma Supreme Court in the seminal insurance bad faith case of Christian v. American Home Assur. Co.5 In that case, the court stated the following:

“We have recognized the quasi-public nature of insurance companies and the need to subject the companies to state control for the protection and benefit of the public. Oklahoma Benefit Life Ass’n v. Bird, 192 Okl. 288, 135 P 2nd 994 (1943).Perusal of our insurance code, Title 36 of the Oklahoma Statutes, reveal extensive government regulation of the industry in this state.”6

In regulating the quasi-public industry of insurance, the state courts in general, and Oklahoma in particular, have developed a body of common law which favors the insureds, beneficiaries and coverage, rather than the insurers, denials and exclusions. For example, in the case of Aetna Ins. Co. v. Zoblotsky,7 the Oklahoma Supreme Court stated:

“[w]e have held that contracts of insurance will be liberally construed in favor of the objects to be accomplished, and that if the provisions of a policy of insurance are capable of being construed in two ways, that interpretation should be placed upon them which is more favorable to the insured. Continental Casualty Company v. Veaty, Okl., 455 P.2nd 684.” At 481 P.2nd At 764. The case of Phillips v. Estate of Greensfield, 1993 Okla. 110, 859 P.2nd 1101, goes even further and tells us “[w]hen and insurance contract is susceptible of two meanings, i.e., if it is subject to an ambiguity, the familiar rule of insurance contract interpretation applies and words of inclusion are literally construed in favor of the insured and words of the exclusion are strictly construed against the insurer.”8

Then we have the development of bad faith. In some states this is the result of a statutory regulation, but in most states, and in particular in Oklahoma, it is a development of the common law. In Christian, supra, the Supreme Court stated,“[w]e approve and adopt the rule that an insurer has an implied duty to deal fairly and act in good faith with its insured and that the violation of this duty gives rise to an action in tort for which consequential and, in proper cases, punitive damages may be sought.”9 It is not the purpose of this paper to delve deeply into what is and is not insurance bad faith. The importance for this paper is that it exists and it provides additional remedies to an insured or beneficiary aggrieved by a breach of the obligation of good faith and fair dealings by the insurer and in addition the sanctions of punitive damages when the conduct of the insured so warrants.

The point relevant to this paper is that state insurance law is skewed in favor of the insured and coverage rather than in favor of the insurer and denials. Most, if not all states, will have some extracontractual damages and/or sanctions when the conduct of the insurer warrants imposition of those damages and/or sanctions under the appropriate state law.

Development of ERISA

On Labor Day 1974, President Ford signed ERISA into law, codified at 29 USC §§ 1001 et seq. A full discussion of the scope and breadth of ERISA is beyond the topic covered in this paper. It has been stated that “[t]he basic goal of ERISA was the protection and enhancement of the delivery of promised benefits.”10 ERISA was designed to regulate pension and retirement funds, particularly to address the funding of such plans. In order to effectuate a uniformed regulation, ERISA superseded or pre-empted all state law in so far as they may now or hereafter relate to any employee benefit plan. This pre-emption clause is found at 29 USC § 1144 (a). Any state law which regulates insurance, banking or securities was “saved” from that pre-emption.11 Finally, there is what has been referred to as the “deemer” clause which tells us that any employee benefit plan established to provide certain benefits will not be deemed to be an insurance company or other insurer for the purposes of the savings clause.12 Briefly, as I understand it, the federal law pre-empts all state law except insurance, banking or security laws. But, that any employee’s benefit plan is not subject to state laws proporting to regulate insurance companies, insurance contracts, banks, trust companies or investment companies.

The savings clause had what appeared to be a good start in the case of Metropolitan Life Ins. Co., v. Massachusetts.13 That case involved an action brought by Massachusetts’ attorney general against insurer to force Massachusetts’ statute setting forth mandatory minimum health care benefits. In ruling in favor of the state court regulations, the Supreme Court made the following ruling:

“We therefore decline to impose any limitation on the savings clause, beyond those Congress imposed in the clause itself and in the ‘deemer clause’ which modifies it. If a state law ‘regulates insurance,’ as mandated-benefit laws do, it is not pre-empted. Nothing in the language, structure or legislative history of the act supports a more narrow reading of the clause, whether it be the supreme judicial court’s attempt to save only state regulations unrelated to substantive provisions of ERISA, or the insurer’s more speculative attempt to read the savings clause out of the statute.”14

The case that first got me involved in ERISA was Pilot Life Ins. Co. v. Dedeaux.15 That case stated that Mississippi’s insurance bad faith law was directly pre-empted by ERISA because it was not a law that was directed solely to the insurance industry. In reading that case, it appears that Mississippi recognizes that punitive damages are available in a contract case when the breach of contract also involves conduct that amounted to an independent tort. In that case, the solicitor general argued that Congress clearly expressed an intent that the civil enforcement provision of ERISA be the exclusive vehicle for actions by an ERISA plan participants and that allowing state court causes of action would pose an obstacle to the purposes and objectives of ERISA. The court agreed but this constituted dicta in the case because the ultimate holding was that Mississippi’s bad faith laws simply was not an insurance law directed to regulate the insurance industry.

In regards to the Pilot Life case, I would make the following two observations. In the 1974 U.S. Code and Administrative News, the final report on ERISA stated the following:

“The enforcement provisions have been designed specifically to provide the secretary and participants and their beneficiaries with broad remedies for readdressing or permitting violations of the Retirement Income Security for Employees Act as well as the amendments made to the Welfare Pension Disclosure Act. The intent of the committee is to provide the full range of legal and equitable remedies available both in state and federal courts and to remove jurisdictional and procedural obstacles which in the past appeared to have hampered effective enforcement of fiduciary responsibilities under state law for the recovery of benefits due to participants.”16

At 29 U. S. C. § 1132 we have the civil enforcement section of ERISA. This particular statute provides for a variety of causes of action to effectuate ERISA’s scheme. The actions that a beneficiary or participant would file against an insurance company to collect benefits is set out in 29 U.S.C. § 1132 (a)(1)(B).  At 29 U.S.C. § 1132 (e)(1) we have the jurisdictional statute. It tells us:

“Except for actions under subsection(a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions, under this subchapter brought by the secretary, participant, beneficiary, fiduciary, or any other person referred to in § 1021 (f)(1) of this title. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of this section.”

It was because of the Pilot Life case that I first became involved in ERISA. I believed then, and I believe now, that a cause of action under Christian v. American Home Assur. Co.17 was a law directed toward the insurance industry only and a common law method to regulate the insurance industry. I felt that it met the McCarren-Ferguson test. Because of that belief, I set out to prove that you could have an Oklahoma insurance bad faith cause of action in ERISA. It is not the purpose of this particular article to rehash that argument but my reasoning was brilliantly restated by Judge Sven Holmes in the case of Lewis v. Aetna U.S. HealthCare Inc.18 After that decision, my arguments were rejected in the case of Conover v. Aetna U.S. HealthCare Inc.,19 and certiorari to the U.S. Supreme Court in that case was denied. Other subsequent cases have also upheld the idea that Oklahoma’s bad faith cause of action is not saved from ERISA pre-emption.

A case that I thought would breathe life into my bad faith argument and further the argument that state common law insurance rules of interpretation were saved from ERISA pre-emption is Unum Life Ins. Co. of America v. Ward.20In that case, the U.S. Supreme Court ruled that California’s notice-prejudice rule regulated insurance within their meaning of ERISA’s savings clause. This appeared to be important at the time because the notice-prejudice rule was a law that was developed under a common law scheme or case law scheme rather than through some legislation or administrative dictates. Also important was that the notice-prejudice rule had general contractual law principals regarding forfeiture but was a specific application of that general contractual law directed solely toward insurance. It was thought that this same reasoning could apply to that entire body of insurance law that, for example, took the general contract rule that states a contract is to be construed against the maker and hones it into a different rule that terms of inclusion are to be broadly interpreted and terms of exclusion are to be narrowly interpreted. As we will see in a moment, that appears to be an argument that has been generally rejected.

Unum, supra. is interesting from another standpoint. In this case, as set out in footnote 7 of the opinion, the solicitor general argued that there is nothing in the enforcement provision that would require a state law that regulates insurance and as such saved is never the less pre-empted if it provided a state-law cause of action or remedy. Again, the court did not have to get to that particular issue because the solicitor general’s current argument was that Ward had sued under the enforcement provision for benefits due and sought only the application of the state insurance law as a relevant rule of decision in that action.

The Supreme Court then decided the case of Rush Prudential HMO Inc. v. Moran.21  In that case, the court found that an Illinois statute requiring HMOs to provide independent review of disputes between primary care physicians and HMO to determine whether or not a procedure was medically necessary was a saved state insurance law. The court recognized that the state law may well settle the fate of a benefit claim but it does not enlarge the claim beyond the benefits available in an action brought under ERISA’s enforcement scheme. The court also noted that an insurance regulation is not pre-empted merely because it conflicts with substantive plan terms.

Rush also pointed out that if a state law provided additional remedies outside of ERISA’s enforcement scheme that it would likely be declared pre-empted. That issue was finally reached in the case of Aetna Health Inc. v. Davila.22 That case involved the Texas Health Care Liability Act (THCLA) which provided bad faith type damages for a wrongful denial of healthcare benefits.  That case finally turned the Pilot Life, dicta reasoning into a binding holding. Finding that any state court cause of action that provides remedies outside of ERISA’s enforcement scheme completely pre-empted, even if it were a saved state insurance state law.

What about state laws concerning insurance contract interpretation? I believe the following quotation sets out pretty much what most courts would rule in this particular area.

“Are state laws governing insurance policy interpretation preserved under ERISA? Like the other circuits which have already addressed this issue, we think not. See Sampson v. Mutual Benefit Life Ins. Co., 863 F.2d 108, 110 (1st Cir.1988); McMahan v. New England Mutual Life Ins. Co., 888 F.2d 426, 429-30 (6th Cir.1989); Brewer v. Lincoln National Life Ins. Co., 921 F.2d 150, 153 (8th Cir.1990); Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1440-41 (9th Cir.1990). We cannot imagine any rational basis for the proposition that state rules of contract interpretation “regulate insurance” within the meaning of § 1144(b)(2). Of course, these decisional laws affect the way plan benefits may ultimately be distributed, but that’s a far cry from stating that they have “the effect of transferring or spreading a policyholder’s risk.” In our view, they simply force the insurer to bear the legal risks associated with unclear policy language. See Brewer, 921 F.2d at 153; McMahan, 888 F.2d at 429.

Even more importantly, a contrary answer would fly in the face of Congressional intent. ERISA’s legislative history, discussed in a plethora of ERISA pre-emption cases, undeniably demonstrates that Congress expects uniformity of decisions under ERISA. See Pilot Life, 481 U.S. at 56, 107 S.Ct. at 1557 (1987) (“The uniformity of decision which the Act is designed to foster will help administrators, fiduciaries and participants to predict the legality of proposed actions without the necessity of reference to varying state laws.”); Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 9, 107 S.Ct. 2211, 2216, 96 L. Ed.2d 1 (1987) (ERISA’s pre-emption provision was designed to eliminate the “threat of conflicting or inconsistent State and local regulation of employee benefit plans.”). That expectation would almost certainly be defeated were we to preserve 50 different state laws of insurance policy interpretation under the guise of federal common law. We therefore conclude that ERISA pre-empts state decisional rules, and that any ambiguities in ERISA plans and insurance policies should be resolved by referring to the federal common law rules of contract interpretation. Hammond v. Fidelity and Guar. Life Ins. Co. 965 F.2d 428, 430 (C.A.7 (Ill.),1992).”

Differences Between Litigating An Insurance Claim In State Court Under State Law Versus Litigating The Same Insurance Claim Under ERISA In Federal Court

Introduction

The main purpose of this article is to show the striking difference between litigating an insurance claim under state law and under ERISA. The contrast will be shown first procedurally and then second substantively. Several assumptions are going to be made regarding this particular purchase of insurance. First, we will have a situation where in most instances, the insurance was purchased by the insured using post-tax dollars. Claims will be for benefits, either under a disability policy or a life insurance policy and will be considered a first-party action against the insurance company. That is a policy where either the insured or the beneficiary is bringing an action directly against the insurance company for policy benefits. The employer will not be a party to this lawsuit. The only real difference between the two actions is that the one is brought under state law will not be governed by ERISA and the second policy will. Either the first policy was purchased privately outside of the employment arena or, if purchased as part of a group policy, ERISA does not apply because the employment involved government or church employment or the safe harbor provision of ERISA applies. Exceptions to ERISA go beyond the scope of this article.

Further, because anyone who is the least bit interested in this subject should be familiar with a normal civil court proceeding, it is unnecessary to set out the statutory or case law authority for the state court proceeding.

State Court Procedure

Any reader the least bit interested in this topic knows what happens in a civil action on an insurance contract. The insured, beneficiary or claimant will typically be the plaintiff in the lawsuit, although an insurer could file a declaratory judgment action. It is possible that the state court action could be removed to federal court on diversity but it would still proceed under the substantive law of the appropriate state. Procedurally, the federal action and the state action would be quite similar as our state pleading code and the discovery code are modeled after the federal acts.

Regardless of what court actually hears the matter, both courts would allow extensive discovery on all relevant issues. The parties would have available to them paper discovery such as requests for admission, interrogatories and motions to produce. Depositions of witnesses and parties would be allowed.

The parties would be allowed to confront and test the witnesses against them. For example, if a record review was done by a doctor for the insurance company, the plaintiff would be allowed to examine the doctor and his or her relationship with the insurance company. Is the doctor a full-time employee or is the doctor’s practice dedicated to doing this type of work or is the doctor engaged in the practice of medicine and this is simply a facet of that doctor’s business? Of course, the same would be true of the defendant. They could examine the doctor supporting the plaintiff’s claim and determine whether or not they have some sort of ongoing relationship with the plaintiff’s counsel and if these claims are a substantial part of the doctor’s business.

Of course, we are all familiar with motion practice and both parties would have available to them motions for summary judgment or partial summary judgment to either eliminate or narrow the issues to be tried.

Ultimately, the parties would be entitled to a trial by jury if the court determined that there are factual issues on either the contract claim for benefits and/or an issue of bad faith denial.

Federal Court Procedure

The “civil action” brought pursuant to 29 U.S.C. § 1132(a) (1)(B) “to recover benefits due [to the participant or beneficiary] under the terms of his plan, to enforce his rights under the terms of his plan or to clarify his rights to future benefits under the terms of the plan” is much different than the typical civil action that we outlined above.

There is generally no discovery allowed, particularly on the issue of entitlement to benefits. Sometimes there can be ancillary issues such as whether or not ERISA applies or the scope of review but that is generally the exception rather than the rule.

Basically what happens is the parties enter into a scheduling order where they submit an administrative record. Generally, the administrative record is limited to the paper documents that were reviewed by the insurance carrier in making its claims determination. In the case of a disability claim that would include medical records, Social Security records, workers’ compensation records, other retirement benefits, functional capacity examinations and their results, Psychological examinations and their results, peer review reports, job classifications, correspondence between the parties and provider, the plan or insurance policy, and other claims forms. The typical administrative record will not necessarily include all of these documents but those would be the documents that you would typically see. Sometimes there may be something other than paper documents such as surveillance film, and I have started to make it a practice in some cases of submitting my own video recorded statement of the claimant if I get the case during the administrative process.

As stated in the typical case, no discovery is done. So, for example, if a doctor conducts an independent medical examination at the request of the insurer, or does what is called a peer review which is a review of the medical records and other documentation conducted by a doctor, the same inquiries concerning relationship between the doctor conducting the IME or peer review cannot be done in the ERISA case.

Not only are the parties not allowed to confront the witnesses against them, but they are not able to present the witnesses who support their claim. For example, as a plaintiff you might only have available to you the medical records of a treating physician. You would not be able to present that doctor in a trial setting where you could ask the doctor those magical questions that would turn the doctor’s expressions in the medical records into relevant, admissible and credible expert testimony.

After an administrative record is submitted and agreed to between the parties, some form of briefing schedule will occur. This varies from court to court, but the two most common briefing schedules are where the parties file simultaneous opening briefs and simultaneous answer briefs, or the plaintiff having the burden of proof files an initial brief in chief with the defendant filing an answer brief, and the plaintiff entitled to a reply brief. The case is then taken under advisement and the court, in due time, will issue an opinion and a judgment and order.

The parties are not entitled to a jury trial. In this circuit, we have the case of Adams v. Cyprus Amax Mineral Company,23 where it was ruled that an action brought pursuant to 29 U.S.C. § 1132 (a)(1)(B) was one seeking equitable relief rather than a suit at law.

That appears to me to be in conflict with the U.S. Supreme Court case of Great-West Life & Annuity Insurance Company v. Knudson.24 That was an action where the insurance company was bringing an action for money damages seeking subrogation under the terms of an insurance policy. That action was brought under another section of the enforcement section, 29 U.S.C. § 1132(a) which the Supreme Court interpreted as only allowing a fiduciary to bring an action that would recognized in a court of equity. The court pointed out, “A claim for money due and owing under a contract is quintessentially at action at law.”25

In Great-West Life & Annuity Insurance Company v. Knudson, supra, the U.S. Supreme Court went on to point out the following:

“In the very same section of ERISA as Section 502 (a)(3), Congress authorized ‘A participant or beneficiary’ to bring a civil action ‘to enforce his rights under the terms of the plan,’ without reference to whether the relief sought is legal or equitable. 29 U.S.C. § 1132(a)(1)(B) (1994 Ed). But Congress did not extend the same authorization to fiduciaries. Rather, Section 502(a)(3), but its terms only allow for equitable relief. We will not attempt to adjust ‘carefully crafted and detailed enforcement scheme’ embodied in the test that Congress has adopted. Mertens, supra, at 254, 113 S.Ct. 2036. Because petitioners are seeking legal relief — the imposition of personal liability of respondents for a contractual obligation to pay money — Section 502(a)(3) does not authorize this action. Accordingly, we affirm the judgment of the Court of Appeals.”26

It appears that every federal Circuit Court of Appeals that has addressed the issue of right to trial by jury has determined that no such right exists, although some district courts have allowed jury trials.27 It does not appear that there have been any recent decisions by circuit courts allowing jury trials and the U.S. Supreme Court has yet to rule on this specific issue.

State Substantive Law

Again, an insurance case can proceed either in state or federal court under diversity but will proceed in federal court under state law. There are potentially some significant differences even though the federal action is under state law, the two most prominent being that under state law if an action includes both a contract cause of action and an action for bad faith, it cannot be bifurcated for trial in state court but can in federal court.28 Some also think that the summary judgment standard is different in state and federal courts.

The basic lawsuit from a substantive view would still be the same, regardless of in what court it proceeded. The primary issue in the state court cause of action would be whether or not the insured or beneficiary is disabled under the terms of the contract. The plaintiff would have the burden of proving this by a preponderance of the evidence. The fact finder, typically a jury, would be instructed on the relevant state court rules of interpretation outlined above such as the reasonable expectation doctrine, rule that terms of inclusion are broadly interpreted and terms of exclusion are narrowly interpreted, and any other such rules of contract interpretation as the facts might warrant.

Of course, if there was evidence that the defendant breached the obligation of good faith and fair dealing, then that cause of action would be available to the plaintiff with its additional elements of damages.

Absent issues that would warrant a reversal and retrial on appeal, the trier of fact would ultimately decide the rights of the parties. Either the plaintiff would prevail on some or all of his or her causes of action or the defendant would prevail. There would be appropriate post-judgment motions for attorney fees and/or costs but a trial would ultimately result in a final resolution of this matter. This is significant as we will see in a moment.

Insurance Claims under ERISA Substantive Law

I will first remind the reader that in this instance we are talking only about a direct action against an insurer under ERISA. In our case we will assume that the insurer is both the underwriter and the entity making the claims determination so there is what is referred to as an inherent conflict of interest. In the 10th Circuit, the standard of review in these cases is presently found in the case of Fought v. Unum Life Ins. Co. of America.29 This sets out the standard of review in the 10th Circuit, at least at this point. A recent Supreme Court case, Metropolitan Life Ins. Co. v. Glenn 128 S. Ct. 234 (June 15, 2008), appears to require a more favorable review from the claimant’s perspective of considering the entire record.

Because this article simply points out the differences between an insurance claim under ERISA and one under state court law, I will not go into great detail on the standard of review and how it developed. This entire bar journal article could be devoted to that single issue. The law, as I understand it, is basically when an insurance company who has an inherent conflict of interest denies a claim under ERISA, it has the burden of proving its denial was reasonable under a substantial evidence standard. Substantial evidence has been determined to be more than a scintilla but less than a preponderance of the evidence.

ERISA law has developed where most ERISA claims are reviewed under an arbitrary and capricious standard. This is the result of the U.S. Supreme Court’s decision in Firestone Tire & Rubber Co. v. Bruch.30 Although that decision stated that the de novo standard of review was the appropriate standard for reviewing an employer’s denial of benefits, because of what the court went on to say, that standard is not the one typically employed. In a de novo review, it is up to the court to determine the proper interpretation of the plan terms and not for the fiduciary. However, the court went on to state that where discretion is conferred upon the trustee, the trustee’s interpretation will not be disturbed if reasonable. Not surprisingly, all insurance policies and other plan documents confer a grant of discretion which changes the standard of review from de novo to one of arbitrary and capricious. A good example of how that works in a practical situation is the Oklahoma Supreme Court case of Cranfill v. Aetna Life Ins. Co.31 Cranfill involves an accidental death policy where the insured died in a single vehicle accident where the insured was well above the legal limits of intoxication. It was argued by the insurance carrier that this was not an accident under the terms of the insurance policy. I will not go into the entire reasoning of the case but simply point out the following quotation from the opinion which succinctly as possible points out the differences between a case decided under state law and ERISA:

“Aetna asserts there is a split of authorities on this issue and further asserts that the majority of jurisdictions, as well as the more recent decisions, support its denial of Mrs. Cranfill’s claim. As it turns out, the split is between the federal courts on one hand and state courts on the other. Aetna urges us to adopt the federal rationale that is used to resolve insurance disputes that are governed by ERISA.FN4 We decline to do so for two reasons. First, federal courts are entirely free to choose the meaning that is to be given to the critical terms in contest (i.e., the word “accident” and the phrase “intentionally self-inflicted injury”).FN5 We, in contrast, are bound by Oklahoma’s common-law jurisprudence. Second, in most ERISA cases, the federal courts must affirm the denial of benefits unless the decision to deny benefits was arbitrary and capricious.FN6 We are not persuaded by the federal scheme. Instead, we are persuaded by the reasoning of other state courts which have overwhelmingly held that an insured’s death, in circumstances similar to the circumstances of this case, is accidental and is not intentionally.”32

This case points out as well as any the differences between deciding a case under state insurance law and under ERISA’s common law scheme. We have the same factual situations, and the same insurance policy and yet the result is predictable in both courts and totally different. Under state law, the policy benefits are payable and, quite frankly, with the Cranfill, supra, decision, I believe a denial would be in bad faith and yet under federal law, the predicted result would be that the insurance carrier’s denial would be upheld because its interpretation of an accidental death policy and the word “accident” and “unexpected, unintended and unforeseen in the eyes of the insured” is not unreasonable.

The final and significant difference would be that there is a third option under the ERISA scheme of things for the court to decide. In addition to determining whether or not the beneficiary is entitled to benefits or actually whether or not the denial was arbitrary and capricious, the court can remand the action back to the plan administration for further determination.33 It further appears, at least in most instances, such a remand is a non-appealable order.

Conclusion

Given that this is an article in the Oklahoma Bar Journal, I have attempted, to the best of my ability, to simply present the differences in how an insurance claim differs when state law applies and when ERISA’s common law scheme applies. It is evidence that the differences are one of a kind rather than degree and substantially affect the rights of the parties. If this analysis is correct, it does beg the question of the purpose of the insurance savings clause in ERISA.

1. 75 U.S. 168 (1869).
2. 322 U.S. 533 (1944).
3. 15 U.S.C. §§ 1011-1013.
4. 29 U.S.C. § 1001, et. seq.
5. 1977 Okl. 1471, 577 P.2nd 899.
6. At 902.
7. 1971 Okl. 20, 481 P.2nd 761.
8. 859 P.2nd At 1104.
9. 577 P.2nd At 904.
10. Erisa Practice and Litigation, § 1:1
11. 29 USC § 1144 (b)(2)(A).
12. 29 USC § 1144 (B).
13. 471 U. S. 724 (1985).
14. 471 U.S. At 746-747.
15. 481 U.S. 41 (1987).
16. 1974 U.S. Code and Administrative News, page 4655.
17. 1977 Okl. 1471, 577 P 2nd 899.
18. 78 F.Supp. 2nd 1202 (N. D. Okl.1999).
19. 320 F. 3rd 1076 (10th Cir. 2003).
20. 526 U. S. 358 (1999).
21. 536 U.S. 355 (2002).
22. 542 U.S. 2000 (2004).
23. 149 F.3d 1156 (10th Cir. 1998).
24. 122 S.Ct. 708 (2002).
25. At 713 (internal quotes omitted).
26. At 718 (Emphasis Court’s).
27. See Zimmerman v. Sloss Equipment Inc., 72 F.3d 822 (C.A. 10, 1995).
28. See Buzzard v. McDaniel, 1987 Ok. 28, 736 P.2d 157 and Oulds v. Principal Mut. Life Ins. Co., 6 F.3d 143 (C.A. 10, 1993).
29. 379 F.3d 997 (C.A. 10, 2004).
30. 489 U.S. 101 (1989).
31. 2002 Ok. 26, 49 P.2d 703.
32. 49 P.3rd At 707.
33. See Graham v. Hartford Life & Accident Insurance Company, 501 F.3d 1153 (10th Cir. 2007).

About The Author

Joseph F. Clark Jr. practices in the law firm of Clark & Warzynski PA in Tulsa. Since being admitted to practice on April 26, 1974, his practice has focused primarily in insurance law as a defense attorney for the first 15 years of his practice and then representing insureds and third-party claimants for the past 19 years. He has lectured on various CLE topics involving insurance and ERISA issue.

Differences in Handling Insurance Claims under State Law vs. ERISA
A Difference of Kind, Not Degree
Published 79 OBJ 1793 (August 9, 2008)