United States Supreme Court Decision In Unum V. Ward

Supreme Court Announces Twin Erisa Holdings: Employer Is Not Insurance Company Agent, But Insurer Is Subject To California Notice-Prejudice Rule

In UNUM Life Ins. Co. of America v. Ward, No. 97-1868, 1999 WL 224560 (U.S. April 20, 1999), a unanimous Supreme Court held that California cannot deem an employer to be an agent of an insurer for purposes of an ERISA-covered plan, because the state employer-agency rule "relates to" ERISA plans and is therefore preempted by ERISA. The Court, however, upheld the decision of the Ninth Circuit that California's notice-prejudice rule is a "law . . . which regulates insurance," thus escaping ERISA preemption to apply to insurers operating in the state.

Participant Challenged Insurer's Denial For Late Filing

John E. Ward was an employee of Management Analysis Company ("MAC"). UNUM issued MAC a long-term group disability policy that was offered to employees under an ERISA-covered welfare benefit plan. In May 1992, Ward became permanently disabled. He informed his employer of this disability in early 1993, but did not file for disability benefits under the plan until April 1994. Because the plan required the filing of a proof of claim within one year and 180 days of the onset of disability, UNUM denied Ward's claim as untimely.

Subsequently, Ward sued to recover the disability benefits provided by the UNUM plan. Ward argued that under California's employer-agency rule (articulated in Elfstrom v. New York Life Ins. Co., 432 P.2d 731, 737 (Cal. 1967)), an employer is the agent of the insurer in performing the duties of administering group insurance policies. He asserted that MAC effectively acted as UNUM's agent, and that his 1993 notice to MAC of his disability constituted a timely proof of claim to UNUM. The lower court granted summary judgment to UNUM, but the Ninth Circuit reversed.

The Court of Appeals held that ERISA does not preempt the employer-agency rule because the rule does not "relate to" employee benefit plans. In addition, the Ninth Circuit held that California's notice-prejudice rule applied to the case, and that the rule escapes ERISA preemption as a law regulating insurance. Under the notice-prejudice rule, an insurer cannot avoid liability merely by showing that a claim is untimely; the insurer must also prove that it suffered actual prejudice from the delay. Accordingly, the court remanded the case to decide if the respondent's filing delay prejudiced UNUM.

California's Employer-Agency Rule "Relates To" ERISA Plans, And Is Therefore Preempted

Reversing the Ninth Circuit, the Supreme Court held that ERISA preempts the California employer-agency rule. Section 514 of ERISA generally provides that ERISA supersedes "any and all State laws insofar as they may now or hereafter be related to any employee benefit plan. . . ." According to the Court, holding a policyholder-employer to be the agent of the insurer would have "a marked effect on [ERISA] plan administration." The Court surmised that forcing the employer into the role of agent would alter the plan's bookkeeping obligations and "regulate the basic services that a plan may or must provide. . . ." Accordingly, the Court found that the employer-agency rule "relate[s] to" ERISA plans, and is preempted.

California's Notice-Prejudice Rule Escapes ERISA Preemption Under The Saving Clause

Affirming the Ninth Circuit view of California's notice-prejudice rule, the Supreme Court held that the rule survives ERISA preemption under the saving clause Section 514(b)(2)(a). The saving clause exempts from preemption "any law of any State which regulates insurance." Using its established two-part framework, the Court examined whether the notice-prejudice rule "regulates insurance." First, the Court asked, from a "common-sense view of the matter," if the rule regulates insurance. Because the notice-prejudice rule is directed specifically at the insurance industry and is applicable only to insurance contracts, the Court held that a common-sense view shows that the rule regulates insurance.

Second, the Court considered three factors used to evaluate whether a state law regulates the "business of insurance" within the meaning of the McCarran-Ferguson Act: (1) whether the practice has the effect of transferring or spreading a policyholder's risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry. Notably, the Court said that these three factors are only "checking points or guideposts," rather than essential elements that all must be satisfied to save a state law from preemption. The Court concluded that "none of these criteria is necessarily determinative in itself."

The Court found that the notice-prejudice rule "is an integral part of the policy relationship between the insurer and the insured," because it effectively creates a new contract term requiring an insurer to prove prejudice before rejecting a claim on timeliness grounds. Next, the Court found that the rule is limited to entities within the insurance industry because it "does not merely have an impact on the insurance industry, it is aimed at it." The Court expressly declined to address whether the notice-prejudice rule transfers or spreads a policyholder's risk because the rule satisfied the other two McCarran-Ferguson factors.

Finally, the Court rejected the argument that the notice-prejudice rule conflicts with the substantive provisions of ERISA. The Court dismissed as making "scant sense" the argument that the rule would require plan fiduciaries to disregard the time limits set forth in their plan documents, concluding that this interpretation would read the saving clause out of ERISA. The Court further found that by allowing a longer period for filing than ERISA's claims procedure, "the notice-prejudice rule complements rather than contradicts ERISA and the regulations."

If you have any questions about the Supreme Court decision in UNUM v. Ward, or the issues raised in this White Paper, please contact our Washington office.

This article is published to inform clients and friends of Morgan Lewis and should not be construed as providing advice on any specific matter.