On Appeal from the United States District Court for the District of New Jersey
Before: SLOVITER, Chief Judge, STAPLETON and ALDISERT, Circuit Judges
In this case raising a question of first impression in the federal courts, we are faced with an apparent conflict between "other insurance" provisions in two self-funded ERISA plans, each of which purports to provide at most secondary coverage to the same claimants.
To resolve the conflict, the district court crafted a federal common law order of benefits determination rule that would impose primary liability on the fund whose participants are the employers of the claimants, in this case the Appellants. Appellants argue that the district court erred by concluding that the two plans are not reconcilable on their terms, that the court should have adopted New Jersey state law as the appropriate rule of decision for resolving any apparent conflict between the plans, and that the federal common law rule settled upon is a poor choice.
A. The Parties and Their Plans
Appellants are the trustees of two self-funded welfare benefit plans of the United Food and Commercial Workers Local 1262 and Employers Welfare Fund and the U.F.C.W. Local 1262 and Employers Health and Welfare Fund (collectively "Local 1262 Funds"), which cover employees of several contributing employers in the supermarket industry. Appellee Teamsters Local 560 Trucking Employees of North Jersey Welfare Fund (the "TENJ Fund") is also a self-funded welfare benefit plan that covers employees of participating supermarkets. The respective plans contain "other insurance" clauses, more particularly referred to as "coordination of benefits" clauses in the group health insurance industry, that set forth circumstances under which the plans will assume primary coverage liability for a claimant who is also covered by another plan.
Group health care insurance plans have increasingly included coordination of benefits clauses because the enlarged number of two-employee families has increased the possibility that a claimant could be covered under more than one plan. By conditioning coverage on specified circumstances, the clauses seek to limit their costs and prevent a claimant from acquiring coverage from multiple plans in excess of the claimant's covered medical expenses. See Jack B. Helitzer, Coordination of Benefits: How and Why it Works, 4 Benefits L. J. 411, 412 (1991).
This dispute concerns the obligation of the plans to certain part-time supermarket employees who are covered under both plans. The Local 1262 Funds describe their coverage obligations to part-time employees under the heading, "Coordination of Benefits":
If a Part-time Member who is a Covered Member . . . is also covered under one or more Other Plans, the Benefits payable under this Plan will be coordinated with Benefits payable under all Other Plans. When there is a basis for a claim under this Plan and the Other Plan, this Plan is a Reimbursement Plan which has its Benefits determined after those of such Other Plan.
As this is a Reimbursement Plan for Part-time Members who are Covered Members . . . payments will be made after all other sources of coverage have been exhausted. App. at 89.
The Local 1262 Funds' Summary Plan Description also states with respect to coverage for part-time employees:
[T]his Plan is always a reimbursement plan; if you are covered under another medical plan, this Plan will only take effect when the limits of your other Plan have been exceeded. This means that, you can receive benefits from this Plan (in the form of reimbursement payments) only after the other plan pays benefits to the full extent of the terms of that Plan.
App. at 143 (emphasis in original). Thus, the Local 1262 Funds attempt to defer any medical payments for their part-time employees until after the employee has exhausted all other possible sources of coverage, and the Funds refer to this proviso alternatively as a "reimbursement clause," an "excess clause," or an "always secondary clause."
The TENJ Fund, in an effort to avoid always being left with a claimant's bill, has a coordination of benefits provision that disclaims liability altogether for employees who are participants in a plan such as that of the Local 1262 Funds. The TENJ Fund plan provides:
In determining whether this plan is primary for a spouse [or dependent] the following will apply:
"The Plan covering the patient as an employee or in which the employee is a participant . . . will be the primary plan. If the primary plan denies coverage because of the application of a Rule which is unique to that Plan and which is not a rule of this Fund, then this Fund will provide only that coverage which it would have provided if the primary plan had granted primary coverage.
This Fund does not afford coverage to a participant's dependent who herself/himself is a participant in a Reimbursement or similar plan that affords coverage only if there is no other health/welfare coverage." App. at 217 (emphasis in original).
In an effort to further clarify the limits of its coverage, the TENJ Fund describes the following hypothetical:
Mr. ABC is a participant under our Welfare Fund. His spouse works for the XYZ company. Under normal coordination of benefits, Mrs. ABC's medical claims are submitted to her company first. After they pay the claim, in accordance with their Plan, she submits the claim with a copy of the explanation of benefits from her Plan to our Fund showing the amount paid. Our Fund then pays our portion of the claim under the coordination of benefits rule as the secondary payor and pays the difference up to the Fund's allowable amount. However, if Mrs. ABC's XYZ Plan rejects her claim because XYZ says its Plan is a Reimbursement Plan and will not pay claims if there is any other coverage, such as her being covered as a dependent under her husband's plan, then our Fund will not pay any portion of Mrs. ABC's claim.
In May 1993, Susan Armstrong, a part-time employee of Shop-Rite Supermarkets, a contributing employer to the Local 1262 Funds, submitted medical expense claims to the Local 1262 Funds in an aggregate amount of $243,993. Because Armstrong's father was a participant in the TENJ Fund, she would ordinarily have also been eligible for secondary coverage as a dependent under the TENJ Fund plan. The Local 1262 Funds denied primary liability for Armstrong's claims on the ground that it was a reimbursement or excess plan only, and instead notified the TENJ Fund that it was primarily liable for paying Armstrong's expenses. In the following months, the Local 1262 Funds received similar claims from Karen Iler, Esther Owens, and Patricia Kelly, all of whom were also part-time employees of contributing employers to the Local 1262 Funds as well as dependents of participants of the TENJ Fund. The Local 1262 Funds similarly denied these claims and sent notification that the TENJ Fund bore primary responsibility.
In response, the TENJ Fund likewise denied primary coverage liability for the four part-time employees' claims. It took the position that, because the Local 1262 Funds provided only a reimbursement plan for the part-time employees, it was relieved from any liability by the express terms of the TENJ Fund. In a letter dated June 4, 1993, the TENJ Fund informed the Local 1262 Funds that "Since TENJ does not cover Susan Armstrong, your fund provides sole coverage." App. at 154.
In order to avoid undue hardship to the claimants throughout the period of time in which the two funds debated their respective liabilities, the Local 1262 Funds paid the claimants' benefits, without prejudice to their right to proceed against and seek reimbursement from the TENJ Fund. The TENJ Fund agreed to pay secondarily for the time being, but also "without prejudice to the rights of either party." App. at 413.
B. District Court Proceedings
On October 26, 1994, the Local 1262 Funds filed an action in the district court in New Jersey seeking a declaration that the TENJ Fund was primarily liable on the contested claims and an order directing the TENJ Fund to reimburse them for money paid to claimants in their assumed role as the primary provider. The Local 1262 Funds argued that the provision of the TENJ Fund plan which disclaims liability entirely if a beneficiary is covered by an alternate reimbursement plan was an invalid "escape clause." They then contended that once the escape clause is read out of the TENJ Fund plan, the remaining terms of both plans assign primary liability to the TENJ Fund plan. In response, the TENJ Fund argued that its plan did not contain an escape clause and that, regardless, the Local 1262 Funds plan was primarily responsible for the claims at issue according to its own coordination of benefits provision because the claimants are employees of participants of that plan.
In a thoughtful opinion, the district court granted the TENJ Fund's motion for summary judgment. See McGurl v. Teamsters Local 560 Trucking Employees of New Jersey Welfare Fund, 925 F. Supp. 280 (D.N.J. 1996). The court agreed that the provision of the TENJ Fund purporting to deny any liability if a beneficiary is separately covered by a reimbursement plan is an escape clause and thus unenforceable. Id. at 286. The court then concluded that the TENJ Fund's remaining coordination of benefits provision and the excess clause in the Local 1262 Funds plan were "mutually repugnant" because both attempted to deny primary coverage to these claimants, and would provide secondary coverage only if the other accepted primary liability. Id. at 289. In rejecting the Local 1262 Funds' suggestion that the remainder of the plans were still reconcilable in favor of the Local 1262 Funds, the court declined to apply the decision in Starks v. ...