United States District Court, Eastern District of Pennsylvania
September 6, 2002
DIANE KIRKHUFF, ET AL.
LINCOLN TECHNICAL INSTITUTE INC., ET AL. ROSS P. BARTIMUS V. LINCOLN TECHNICAL INSTITUTE, INC., ET AL. ROBERT C. RADLE V. LINCOLN TECHNICAL INSTITUTE, INC., ET AL.
The opinion of the court was delivered by: Bartle, District Judge.
These are actions alleging violations of the Employee
Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et
seq. Before the court are motions to amend each complaint to add
a claim for punitive damages under Pennsylvania's bad faith
statute, 42 Pa.Cons.Stat.Ann. § 8371.
Plaintiffs are employees of defendant Lincoln Technical
Institute, Inc. They are participants in an employee welfare
benefit plan providing insurance benefits through a group life
insurance policy issued by defendant The United States Life
Insurance Company in the City of New York. Plaintiffs contend
that certain benefits have been cancelled or deleted in
violation of ERISA.
Plaintiffs' motions to amend were triggered by a recent
decision by our colleague Judge Clarence C. Newcomer in
Rosenbaum v. Unum Life Ins. Co. of Am., Civil Action No.
01-6758 (E.D.Pa.), allowing a bad faith claim to proceed in an
ERISA action. Shortly thereafter, our colleague Judge Ronald L.
Buckwalter reached the opposite result in Sprecher v. Aetna
U.S. Healthcare, Inc., Civil Action No. 02-580 (E.D.Pa.). He
concluded that ERISA preempted such a cause of action.
Rule 15 of the Federal Rules of Civil Procedure provides that
"leave [to amend] shall be freely given when justice so
requires." However, leave should be denied when the amendment
would be futile, that is, when the amendment does not state a
claim for relief. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct.
227, 9 L.Ed.2d 222 (1962).
The Pennsylvania bad faith statute provides:
In an action arising under an insurance policy, if
the court finds that the insurer has acted in bad
faith toward the insured, the court may take all of
the following actions:
(1) Award interest on the amount of the claim
from the date the claim was made by the insured in
an amount equal to the prime rate of interest plus
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees
against the insurer.
42 Pa.Cons.Stat.Ann. § 8371.
ERISA, which expansively regulates employee benefit plans,
contains a broad preemption provision:
Except as provided in subsection (b) of this section,
the provisions of this subchapter and subchapter III
of this chapter shall supersede any and all State
laws insofar as they may now or hereafter relate to
any employee benefit plan . . .
29 U.S.C. § 1144(a).
It is undisputed that the Pennsylvania bad faith statute
relates to employee
benefit plans and thus comes within the embrace of this
preemptive language. Pilot Life Ins. Co. v. Dedeaux,
481 U.S. 41, 47-48, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987). This, however,
does not end our analysis. To complicate matters, ERISA proceeds
to give back part of what it takes away. It exempts from
preemption "any law of any State which regulates insurance."
29 U.S.C. § 1144(b)(2)(A). We must therefore determine whether the
bad faith statute is a law which regulates insurance so as to
survive under this saving clause.
The question of the interplay of the preemption and saving
clauses of ERISA has "occupie[d] a substantial share of [the
Supreme Court's] time." Rush Prudential HMO, Inc. v. Moran,
___ U.S. ___, ___, 122 S.Ct. 2151, 2158, 153 L.Ed.2d 375 (2002).
In a series of opinions, the Court has developed a multi-faceted
test for deciding whether a particular state law is on one side
of the line or the other. E.g., id. 122 S.Ct. at 2159; UNUM
Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 367-68, 119 S.Ct.
1380, 143 L.Ed.2d 462 (1999); Pilot Life, 481 U.S. at 48-49,
107 S.Ct. 1549. In its latest pronouncement on the subject, the
Supreme Court reiterated that we must first start with a
"`common sense view of the matter'" in deciding whether a
particular law is "`specifically directed toward [the insurance]
industry.'" Rush, 122 S.Ct. at 2159. We must then test this
result against the three factors used to determine whether the
state insurance laws are exempt from preemption under the
McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq. The three
(1) whether the practice [or law] has the effect of
transferring or spreading a policyholder's risk;
(2) whether the practice [or law] is an integral part
of the policy relationship between the insurer and
the insured; and
(3) whether the practice [or law] is limited to
entities within the insurance industry.
Id. 122 S.Ct. at 2163; UNUM, 526 U.S. at 367, 119 S.Ct.
1380. The Supreme Court has cautioned that these are merely
"guideposts." Rush, 122 S.Ct. at 2163. None is necessarily
determinative on the issue of preemption. UNUM, 526 U.S. at
373, 119 S.Ct. 1380.
For the reasons stated in Sprecher and Rosenbaum, we agree
that under a common sense view the Pennsylvania bad faith
statute is directed specifically toward the insurance industry.
One need only look at its language. Furthermore, we agree that
the statute does not involve the transferring or spreading of
risks. However, as to the second McCarran-Ferguson factor we
find the reasoning in Sprecher persuasive that the bad faith
statute does not constitute an integral part of the relationship
between the insurer and insured. Finally, we concur with both
Sprecher and Rosenbaum that the statute is limited by its
express terms "to an action arising under an insurance policy,"
and thus to entities within the insurance industry.
Nonetheless, even if the statute would otherwise fit within
the saving clause, preemption still wins the day if "state law
permits claimants to obtain remedies that Congress rejected in
ERISA." Rush, 122 S.Ct. at 2165; Pilot Life, 481 U.S. at 54,
107 S.Ct. 1549. The Supreme Court in Rush specifically
declared that any state law that "added to the judicial remedies
provided by ERISA . . . violates ERISA's policy of inducing
employers to offer benefits by assuring a predictable set of
liabilities, under uniform standards or primary conduct and a
uniform regime of ultimate remedial orders and awards when a
violation has occurred." Rush, 122 S.Ct. at 2166.
Under ERISA, a participant or beneficiary may seek benefits
due; enforce and clarify rights under the plan; and obtain
equitable relief to enjoin or redress violations, or to enforce
provisions of the plan. 29 U.S.C. § 1132(a). In addition, one
may seek to remove a fiduciary, and to recover losses to a plan
resulting from a breach of fiduciary duty. 29 U.S.C. § 1109 and
1132(a). ERISA also permits the awarding of attorney's fees.
29 U.S.C. § 1132(g). Unlike the Pennsylvania bad faith statute,
ERISA nowhere authorizes a participant or beneficiary to obtain
punitive damages or interest 3% above prime. See Pilot Life,
481 U.S. at 54, 107 S.Ct. 1549.
The Supreme Court ruled in Pilot Life, an ERISA case
involving a claim under the Mississippi common law of bad faith
applicable in both the insurance and non-insurance context, that
the remedies set forth in ERISA are exclusive and that a remedy
for punitive damages is not to be implied. The Court held the
Mississippi common law allowing punitive damages to be
preempted. Id. at 57, 107 S.Ct. 1549; see Mass. Mut. Life
Ins. Co. v. Russell, 473 U.S. 134, 147-48, 105 S.Ct. 3085, 87
L.Ed.2d 96 (1985). As Pilot Life made clear, "[t]he deliberate
care with which ERISA's civil enforcement remedies were drafted
and the balancing of policies embodied in its choice of remedies
argue strongly for the conclusion that ERISA's civil enforcement
remedies were intended to be exclusive." Pilot Life, 481 U.S.
at 54, 107 S.Ct. 1549.
The more recent Supreme Court decision in Rush is not to the
contrary. There Illinois state law provided for an independent
medical review of a patient's claim when it is disputed by his
or her health maintenance organization (HMO). The HMO had a
contract to provide medical services under an employee benefit
plan covered by ERISA. Under the ERISA plan, the HMO had the
"broadest possible discretion" in determining whether the
medical services were "medically necessary." The Court ruled
that the state law was merely akin to requiring a second opinion
and nothing more than a procedure for the administrative review
of benefit determinations. In deciding that the Illinois
insurance law in issue was not preempted, the Supreme Court
explained that it "provides no new cause of action under state
law and authorizes no new form of ultimate relief." Rush, 122
S.Ct. at 2167.
In contrast, the Pennsylvania bad faith statute provides a new
cause of action and a new form of ultimate relief. No common law
remedy existed in the Commonwealth for bad faith conduct on the
part of an insurer. D'Ambrosio v. Pa. Nat'l Mut. Cas. Ins.
Co., 494 Pa. 501, 431 A.2d 966, 970 (1981). To rectify what it
saw as a deficiency in the common law, the Pennsylvania General
Assembly enacted the bad faith statute in 1990. Terletsky v.
Prudential Prop. & Cas. Ins. Co., 437 Pa.Super. 108,
649 A.2d 680, 688 (1994). The purpose of the enactment is "`to provide a
statutory remedy to an insured when the insurer denied benefits
in bad faith.'" O'Donnell ex rel. Mitro v. Allstate Ins. Co.,
1999 Pa.Super 161, 734 A.2d 901, 905 (1999). In sum, the
Pennsylvania bad faith statute creates a separate form of relief
not only beyond what had heretofore been available in the
Commonwealth but with its allowance of punitive damages supplies
a remedy not authorized by Congress under ERISA.
We recognize that in Pilot Life the Mississippi common law
of bad faith, unlike its Pennsylvania statutory counterpart,
affected entities beyond the insurance industry. For this
reason, the Mississippi law clearly did not survive under
ERISA's saving clause for laws merely regulating
insurance. However, we do not think this distinction between the
laws of these two states is significant in light of the Supreme
Court pronouncements in that and later cases that the preemptive
effect of ERISA is broad with respect to remedies. In our view,
the Supreme Court's decision would have been the same even if
Mississippi had had a narrower law. Otherwise a state could
easily circumvent Pilot Life and ERISA by passing a specific
statute like the one before us or even by enacting two separate
bad faith statutes, one to deal with recalcitrant insurers and a
similar one to deal with all other malefactors. Such a result
would effectively upset, if not nullify, the nationally uniform
remedies of ERISA.
As the Supreme Court has emphasized in its recent ruling in
Rush, "the civil enforcement provisions [of ERISA] are of such
extraordinarily preemptive power that they override even the
`well-pleaded complaint' rule for establishing the conditions
under which a cause of action may be removed to a federal
forum." Rush, 122 S.Ct. at 2165. Consequently, even though the
Pennsylvania law in issue allowing the award of punitive damages
is directed solely toward the insurance industry, we agree with
Sprecher that it conflicts with the carefully crafted and
exclusive remedial scheme of ERISA and is preempted.
Since pursuit of any claims by plaintiffs under the
Pennsylvania bad faith statute, 42 Pa.Cons.Stat.Ann. § 8371, in
these ERISA actions would be futile, the motions of plaintiffs
to amend their complaints will be DENIED.
AND NOW, this 6th day of September, 2002, for the reasons set
forth in the accompanying Memorandum, it is hereby ORDERED that
the motions of plaintiffs in each of these three actions to
amend their complaints to add a claim under 42 Pa.Cons.Stat.Ann.
§ 8371 are DENIED.
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