Laventure v. The Prudential Ins. Co of Am.

• Citation: 237 F.3d 1042
• Decision Date: 19 January 2001
• Docket Number: No. 99-55990,99-55990
• Parties: (9th Cir. 2001) DANA LAVENTURE, Plaintiff-Appellant, v. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1042

237 F.3d 1042 (9th Cir. 2001)

DANA LAVENTURE, Plaintiff-Appellant, v. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.

No. 99-55990

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted November 16, 2000

Filed January 19, 2001

Jeffrey C. Metzger, Laguna Hills, California, for the plaintiff appellant.

Ronald K. Alberts, Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, Marina Del Rey, California, for the defendant-appellee.

Appeal from the United States District Court for the Central District of California Manuel L. Real, District Judge, Presiding. D.C. No.CV-98-4075 R(Rzx)

Before: Thomas G. Nelson and William A. Fletcher, Circuit Judges, and Edward C. Reed,^* District Judge.

REED, District Judge:

This action arises from the denial of disability income insurance benefits. Dana LaVenture ("LaVenture") appeals the district court's summary judgment order in favor of Appellee Prudential Life & Accident Insurance Company ("Prudential"). The district court determined that LaVenture's disability policy was part of an overall ERISA benefits plan. Therefore, the district court dismissed LaVenture's complaint, which sought damages for breach of contract and insurance bad faith, because ERISA preempts all state law claims. We reverse and remand.

I. FACTS AND PROCEDURAL BACKGROUND

Thomas and Dana LaVenture are husband and wife and the sole shareholders of Pacific Graphics, Inc., ("PGI") a commercial printing company incorporated in 1992.¹

In 1992, the business purchased a health insurance policy covering only Thomas and Dana LaVenture. In the spring of 1994, PGI received a solicitation from Printers Industries of America ("PIA")² for a long-term disability insurance policy issued through the Printers Disability Trust ("PDT"). Mr. LaVenture completed and mailed the application. The disability insurance was to cover only Mr. and Mrs. LaVenture. The application contained the following statement under the heading "how to enroll": "Your insurance will be effective on the first of the month following its acceptance by the administrator."

In October of 1994, Mr. LaVenture received a response letter from PDT, along with a "Participating Agreement," which indicated that the disability insurance coverage would become effective on November 1, 1994.

Between when Mr. LaVenture filed the application and when he received the Participating Agreement, Mrs. LaVenture's health began to decline. In August of 1994, she began experiencing joint pain, discomfort in her left side, depression and anxiety. On November 12, 1994, Dr. Robing Dore, a rheumatologist, diagnosed LaVenture with fibromyalgia and recommended that LaVenture stop working because she was totally disabled.

On May 1, 1995, Mr. and Mrs. LaVenture hired their first full-time employee and provided company paid health insurance to the new employee. They did not, however, offer the new employee disability insurance. Since May of 1995, Mr. and Mrs. LaVenture have hired two additional employees who have also been offered health insurance but not disability insurance. It is uncontroverted that no one associated with the company, other than the LaVentures, has ever been provided any disability benefit or disability insurance policy by PGI.

In June of 1995, Dr. Dore diagnosed appellant with Lyme disease in addition to her fibromyalgia. On February 26, 1996, LaVenture submitted a disability claim to PDT and Prudential on three conditions: fibromyalgia, Lyme disease, and herniated discs.³ The claim included a statement by Dr. Dore dated January 30, 1996. Dr. Dore stated that LaVenture was totally disabled due to fibromyalgia and Lyme disease, and that she had been totally disabled since November 8, 1994.

On July 29, 1996, Maureen Majewski, Disability Claim Manager for Prudential, wrote a letter denying the claim for disability benefits. The letter stated:

Based on medical information submitted by Dr. James Grimes, it was documented that you were treated on August 15, 1994, August 18, 1994, September 21, 1994, September 30, 1994, October 4, 1994, October 18, 1994 for myalgia/mitositis, back pain and fibromyosis. In addition, laboratory testing was performed on August 15, 1994 and September 30, 1994, as well as a chest x-ray and electrocardiogram. Since charges were incurred and treatment was rendered within 90 days of your coverage effective date, benefits are not payable under the policy.

Based on the medical records, you were diagnosed with Lyme Disease in July of 1995. However, the disability determination is based on the information available November 8, 1994. Based on the original information submitted with the claim, the conditions were pre-existing. Lyme Disease was not diagnosed until after you left work. Unfortunately, the claim was submitted late, but the disability determination is based on your condition on November 8, 1994.

On August 4, 1997, Prudential sent a letter reaffirming its decision to deny benefits on the grounds of the preexisting condition exclusion in the policy.

On April 16, 1998, LaVenture filed a complaint in California state court which sought damages for emotional distress, breach of contract, and breach of the implied covenant of good faith and fair dealing. On May 22, 1998, Prudential noticed removal of the action to the United States District Court for the Central District of California. The notice of removal alleged jurisdiction in the district court based on federal question jurisdiction under ERISA as well as diversity of citizenship.⁴

On April 23, 1999, Prudential moved for summary judgment on all of LaVenture's claims. The district court entered an order granting judgment for defendant on all claims on May 26, 1999. The district judge thereafter signed a Statement of Uncontroverted Facts and Conclusions of Law on June 1, 1999. LaVenture timely appealed.

II. DISCUSSION

This case involves an issue of first impression in this circuit ---whether a disability insurance policy, not originally covered by ERISA, is converted into an ERISA plan merely because a company offers its employees unrelated health insurance coverage. We hold that it is not.

A. Applicability of ERISA

ERISA applies where an "employee benefit plan" is in place. See District of Columbia v. Greater Washington Bd. of Trade, 506 U.S. 125, 127 (1992). An employee benefit plan is defined by statute as "an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan." 29 U.S.C. 1002(3). An "employee welfare benefit plan" governed by ERISA is:

any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an 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, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, scholarship funds, or prepaid legal services, or . . . .

Id. 1002(1).

The regulations implementing this section provide that a plan "under which no employees are participants " does not constitute an ERISA employee benefit plan. 29 C.F.R. 2510.3-3(b). An owner of a business is not considered an"employee" for purposes of determining the existence of an ERISA plan. 29 C.F.R. 2510.3-3(c)(1),(2); ⁵ see also Kennedy v. Allied Mut. Ins. Co., 952 F.2d 262, 264 (9th Cir. 1991)(ERISA does not govern a plan whose only fully vested beneficiaries are a company's owners).

The parties agree that if the only policy at issue in this case were the disability policy, it would not be subject to ERISA because the only individuals covered under the policy are Mr. and Mrs. LaVenture, the owners of the business. Prudential maintains that the disability insurance policy became an ERISA employee benefit plan when the LaVentures provided health benefits to their employees in 1995, before LaVenture filed her disability benefits claim. The LaVentures' disability policy became effective in November of 1994. In June of 1995, the LaVentures offered their employees health and dental benefits. The health insurance plan offered to the employees was subject to ERISA. Prudential argues that in June of 1995, the disability policy also became subject to ERISA because once the business offered a welfare benefit plan subject to ERISA all the benefits offered by the business became subject to ERISA. Prudential contends that in determining whether an employee welfare benefit plan exists, a company's entire benefits program must be considered as a whole.

Prudential relies on Peterson v. American Life & Health Ins. Co., 48 F.3d 404 (9th Cir. 1994). In that case, we held that Peterson's health insurance policy "was just one component of [the company's] employee benefit program and that the program, taken as a whole, constitutes an ERISA plan." Id. at 407. However, Peterson addressed a different issue and is therefore not controlling. In Peterson, the issue was whether an ERISA plan ceased being such when the employees it originally covered depart, leaving only the business owner as a participant.

The question before this panel, in contrast, is whether LaVenture's disability insurance policy, which did not originate as an ERISA plan, becomes such a plan when the business provides a separate benefits plan to its employees under a plan that is subject to ERISA. Our circuit has not directly addressed this issue, except to suggest in In re Watson, 161 F.3d 593, 596 (9th Cir. 1998),⁶ that a company may offer more than one benefit plan, one covering only the owner of the business and the other covering the business's employees, and maintain those two plans as independent plans under ERISA.⁷

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