The Meadows v. Employers Health Ins.

• Decision Date: 14 June 1993
• Docket Number: No. CIV 92-1201 PHX PGR.,CIV 92-1201 PHX PGR.
• Citation: 826 F. Supp. 1225
• Parties: THE MEADOWS, Plaintiff, v. EMPLOYERS HEALTH INSURANCE, Defendant.
• Court: U.S. District Court — District of Arizona

826 F. Supp. 1225

THE MEADOWS, Plaintiff, v. EMPLOYERS HEALTH INSURANCE, Defendant.

No. CIV 92-1201 PHX PGR.

United States District Court, D. Arizona.

June 14, 1993.

Christopher D. Payne, Snell & Wilmer, Phoenix, AZ, for plaintiff.

William M. Demlong, Bess & Dysart, Phoenix, AZ, for defendant.

MEMORANDUM AND ORDER

ROSENBLATT, District Judge.

This removed action arises out of an insurance claim made by the plaintiff, The Meadows, under a policy issued by the defendant, Employers Health Insurance (Employers Health). The Meadows, a health care provider, contends that Employers Health wrongfully refused to pay the expenses of two of the Meadows' patients after representing that the patients were covered by an Employers Health insurance policy.

Employers Health has moved to dismiss The Meadows' complaint as preempted by the Employment Retirement Income Security Act (ERISA). The Meadows counters first that the insurance plan is not an ERISA plan; and second that even if ERISA governs the plan, it does not preempt The Meadows' state claims. The Court holds that the insurance plan in question is an employee welfare benefit plan under ERISA, but finds that ERISA does not preempt the Meadows' state-law claims. Accordingly, the Court finds that this action should be remanded to state court.

I. BACKGROUND

The complaint stems from the 1990 hospitalizations of John and Patricia Friedel. John Friedel was an employee of School Services & Leasing, Inc. (School Services). He and his wife were holders of an insurance policy issued by Employers Health. The Meadows claims that as a result of representations by Employers Health that the Friedels were covered by the Employers Health policy, The Meadows admitted the Friedels and provided care for them. Employers Health's failure to pay The Meadows for the Friedels' expenses gives rise to this action.

The Meadows originally filed a three count complaint alleging negligent misrepresentation, promissory estoppel, and breach of contract in Arizona Superior Court in January of 1991. The Meadows asserted these claims both as the Friedels' assignee (for benefits under the plan), and non-derivatively as a third-party (for damages).

Employers Health removed the action to this court on federal question grounds and moved to dismiss contending that ERISA governed the insurance plan and that ERISA preempted the plaintiff's state claims. On April 29, 1991, the Court entered a bench ruling dismissing the action without prejudice. The judgment for dismissal was entered on May 9, 1991.

The Court based the dismissal on the fact that the Meadows, because of the pervasive incorporation language in its complaint regarding the assignment from the Friedels, did not assert its claims independently from the Friedels. The Court explained:

There is no question that taken as a whole, the underlying claim is based on an ERISA plan ... I suspect that had you not ... alleged the assignment and its relationship to the misrepresentations in complaint paragraphs 22, 23 and 24, ... you might have had a claim based simply on the representations that the company made to The Meadows.

Transcript of Proceedings, April 29, 1991, at 13.

In June of 1992, The Meadows filed the present complaint in Arizona Superior Court alleging the same three counts of the original complaint. This time, however, the Meadows did not assert any claims as the assignee or subrogee of the Friedels. Instead, the Meadows sued only as a third-party health care provider contending that its claims were non-derivative and therefore independent to those of the Friedels. The Meadows is thus suing for damages and not for policy benefits.

Employers Health again removed the action on federal question grounds and moved to dismiss on two theories: first, that ERISA preempts the remedies sought by the Meadows; and second, that the suit is barred by the doctrine of res judicata¹. In response, the Meadows moved to remand this action to the state court based on improper removal and lack of subject matter jurisdiction over the state claims.

II. DISCUSSION

A. Existence of an ERISA plan

The Meadows maintains that removal to federal court was improper because the insurance plan purchased by School Services was not an ERISA plan. The Court finds that this action was properly removed because the School Services' group insurance plan did constitute an employee welfare benefit plan within the meaning of ERISA.

The existence of an ERISA plan is a question of fact, to be answered in light of all the surrounding facts and circumstances from the point of view of a reasonable person. Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489, 492 (9th Cir.1988), cert. denied, 492 U.S. 906, 109 S.Ct. 3216, 106 L.Ed.2d 566 (1989). To determine whether an insurance plan is an ERISA plan, a district court should consider 29 U.S.C. § 1002(1), which defines an employee welfare benefit plan, and 29 C.F.R. § 2510.3-1(j), which clarifies the meaning of "establishing and maintaining" such a plan. See Harper v. American Chambers Life Ins. Co., 898 F.2d 1432, 1433 (9th Cir.1990) (citing Kanne, 867 F.2d at 491-93, and Credit Managers Ass'n v. Kennesaw Life & Acc. Ins., 809 F.2d 617, 625 (9th Cir.1987)). 29 U.S.C. § 1002(1) defines an employee welfare benefit plan in part as

any plan, fund or program which ... is ... established or maintained by an employer ... 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.

The group insurance Employers Health provided to School Services constituted a "plan" or "program". School Services was an employer, and maintained its insurance program for the purpose of providing its six employees with medical insurance. The question of whether this plan is governed by ERISA thus turns on whether the plan was "established or maintained" by the employer School Services.

To determine whether an employer has "established or maintained" an insurance plan, a court should consider 29 C.F.R. § 2510.3-1(j). Silvera v. Mutual Life Ins. Co., 884 F.2d 423, 426 (9th Cir.1989). The Department of Labor promulgated this regulation to clarify whether, and under what circumstances, an employer's adoption of a group insurance plan constitutes the establishment of an employee welfare benefit plan under ERISA. Id. 29 C.F.R. § 2510.3-1(j) provides:

For purposes of title I of the Act and this chapter, 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 checkoffs.

The above code section provides a safe harbor for certain group insurance programs, enabling them to remain free of ERISA regulation. However, behavior inconsistent with any one of the four criteria constitutes evidence of the establishment of an ERISA plan. Silvera, 884 F.2d at 426; Kanne, 867 F.2d at 492. Although the evidence regarding School Services' contributions of premium payments on behalf of its employees is ambiguous and disputed, the evidence of record clearly establishes that the plan fails to satisfy either the "voluntariness" or "involvement" prongs of the regulation and is thus an ERISA plan.

1. Participation in the plan was not "completely voluntary" for employees of School Services

If participation in the group insurance plan was not "completely voluntary" for employees, ERISA governs the plan. 29 C.F.R. § 2510.3-1(j)(2). In the group insurance application, School Services agreed to 100% participation of all eligible employees for life and accidental death and dismemberment insurance, and 75% participation of all eligible employees for medical coverage. If participation dropped below 100% of the eligible employees for life and accidental death and dismemberment insurance or below 75% for medical coverage, coverage would terminate.

The Meadows argues that with only six employees (who all allegedly agreed to purchase the insurance) participation was completely voluntary. While this may be true for the original six employees of School Services at the time the plan was purchased, such a "consensus" does not render involvement in the plan completely voluntary for purposes of the regulation. The purpose of the "voluntariness" prong is to identify programs sponsored by the employer and meant to be a benefit of employment. Whatever the intent of the employees, School Services demonstrated its intent to establish an insurance plan for its employees by requiring 100% participation. See Cote v. Durham Life Ins. Co., 754 F.Supp. 18, 21 (D.Conn. 1991).

The administration of an insurance plan alone can cause it to fall within ERISA coverage. Credit Managers Ass'n v. Kennesaw Life & Acc. Ins. Co., 809 F.2d 617, 625 (9th Cir.1987); Cote, 754 F.Supp. at 21. While the intent of the employees may have been just to provide insurance for their families and not to enter into an employee benefit plan, the manner in which School Services administered the plan via the 100% participation agreement renders the plan an involuntary...