Disability insurance claimant’s allegation of bad faith against Unum Provident is disallowed due to ERISA regulations

A federal district court in California recently ruled that a disability claimant could not recover on his state-law claim for breach of implied covenant of good faith and fair dealing. This specific count is also known as “Bad Faith”. The court found that the disability plan at issue fell under the federal ERISA statute, and, as such, his state-law claim was preempted by ERISA. ERISA prohibits bad faith claims, which is why every insurer always wants a claim to be governed by ERISA. Check out our video on why ERISA is an unfair law. This case is a good summary of the law in California regarding when a disability policy may be exempt from ERISA. The California disability insurance attorneys that filed this ERISA disability lawsuit did a good job in trying to make this case exempt from ERISA. Let’s take a closer look to understand why the court found that the disability plan fell under the ERISA statute and why they ruled that his bad faith allegation was dismissed. .

Ruben Gonzales worked as a sales team manager for Starwood Hotels and Resorts. During his employment with Starwood, Gonzales elected to participate in the Voluntary Workplace Disability Plan (the “VW Plan”). The VW Plan was a short-term disability plan that provided benefits in the amount of $5,000 per month for a maximum benefit period of six months. The Plan was issue by Provident.

Gonzales suffered a disability on June 8, 2007 following an operation for coronary artery disease. He applied for and was approved for benefits on August 6, 2007. However, in December of 2007, Provident stopped paying benefits under the VW plan. Gonzales’ first appeal was denied, and he never received a decision on his second appeal.

After not receiving word on his second appeal, Gonzales filed suit in the United States District Court of the Southern District of California. Gonzales filed two causes of action against Provident:

  1. a claim for benefits denied under the VW Plan; and
  2. a state-law claim for breach of the implied covenant of good faith and fair dealing.

Provident moved for summary judgment against the second claim.

Summary Judgment Standard

Summary judgment is a vehicle in which one of the parties can ask for a final judgment before a full trial is held. The party asking for summary judgment must demonstrate that there are no genuine issues of material fact requiring a trial, and they must also show that when you apply these undisputed facts to the law, their side is clearly entitled to a judgment.

Provident’s Argument

In its motion for summary judgment, Provident argued that the VW Plan qualifies as an employee welfare benefit plan, and as such, it falls under the regulatory regime of ERISA. Under ERISA, state-law claims for breach of the implied covenant of good faith and fair dealing are preempted if the claim is governed by ERISA.

In order for Provident’s argument to be successful, the Court must be convinced that the VW plan qualifies as an employee benefit plan in order to determine if ERISA applies.

The California Court’s Analysis

In order to determine whether the VW plan qualified as an employee benefit plan, the Federal Court first looked to the Act itself for the definition of an employee welfare benefit plan. The Act defines it as:

Any plan, fund, or program… established or maintained by an employer or employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, medical, surgical, or hospital care or benefits, or benefits in the events of sickness, accident, disability, death, or unemployment…

The Court noted that an employer can establish an ERISA plan rather easily. Establishing one requires nothing “more than arranging for a group-type insurance program. See, Credit Managers Ass’n of S. Cal v. Kennesaw Life & Accident Ins. Co. The Court observed that Starwood selected Provident’s short-term disability insurance coverage and made the plan available to its employees for supplemental coverage. Essentially, the court said, it arranged for a group-type insurance program, which, according to the Ninth Circuit in the Kennesaw Life case, is enough to establish a plan.

Although the Court was quick to determine that the VW Plan fell under what is considered an employee welfare benefit plan, the VW Plan may still be excluded from ERISA under the so-called “safe harbor” regulations. A plan will not be governed by ERISA if the plan meets all four elements of the safe harbor regulation. The safe harbor regulation provides that:

The terms ‘employee welfare benefit plan’ and ‘welfare plan’ shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which:

  1. No contributions are made by an employer or employee organization;
  2. Participation in the program is completely voluntary for employees or members;
  3. The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
  4. The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

The parties agreed that the VW Plan satisfied each element of the safe harbor except one: the third element.

The third element, as mentioned above, requires a factual showing that the employer was substantially involved in the creation or administration of the plan. See, Thompson v. American Home Assur. Co. If an employer is more than a mere advertiser of group insurance, the plan is outside of the safe harbor provision. See, Kanne v. Conn. Gen. Life Ins. Co.

Here, Starwood did more than collect premiums and let Provident advertise. The facts showed that a vice president at Starwood worked with a manager at Provident to develop the benefit package for Starwood employees. Furthermore, Starwood and Provident held meetings to discuss the integration of the VW Plan with other disability programs. Starwood also gave input on the website for the VW Plan and on Provident’s call system for benefits. Finally, Starwood and Provident entered into a Performance Agreement which required both sides to meet certain targets regarding their handling of VW Plan Claims.

The Federal District Court for the Southern District of California found that Starwood’s involvement in the creation and implementation of the VW Plan, as well as the execution of the Performance Agreement was enough to not exempt the VW Plan from ERISA by the safe harbor regulation.

As state-law claims are completely preempted by ERISA, and because the VW Plan fell under ERISA, the Federal Court dismissed Gonzales’ claim for breach of the implied covenant of good faith and fair dealing. The Court also struck Gonzales’ demand for extra-contractual and punitive damages, as well as his request for a jury trial, as all are not available under ERISA. This case will continue with the one remaining count, which is the way most ERISA disability insurance cases are handled.

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