901 F.2d 446 (5th Cir. 1990), 89-4054, Gonzales v. Prudential Ins. Co. of America

Docket Nº:89-4054.
Citation:901 F.2d 446
Party Name:Sam C. GONZALES, Plaintiff-Appellant, v. The PRUDENTIAL INSURANCE CO. OF AMERICA, et al., Defendants-Appellees.
Case Date:May 03, 1990
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 446

901 F.2d 446 (5th Cir. 1990)

Sam C. GONZALES, Plaintiff-Appellant,


The PRUDENTIAL INSURANCE CO. OF AMERICA, et al., Defendants-Appellees.

No. 89-4054.

United States Court of Appeals, Fifth Circuit

May 3, 1990

Page 447

Hodge O'Neal, III, McKinley & O'Neal, Monroe, La., for plaintiff-appellant.

Gordon L. James, Hudson, Potts & Bernstein, Monroe, La., F. Drake Lee, Jr., A. Richard Gear, Cook, Yancey, King & Galloway, Shreveport, La., for defendants-appellees.

Appeal from the United States District Court for the Western District of Louisiana.

Before KING, JOLLY, and DUHE, Circuit Judges.

KING, Circuit Judge:

Plaintiff-appellant filed suit against defendants-appellees in state district court, asserting that he was entitled under state law to recover disability payments that he alleged defendants had wrongfully withheld from him and to collect certain penalties for defendants' allegedly wrongful conduct. After defendants removed the case, the federal district court conducted a trial on stipulated facts. The district court found in favor of defendants on the grounds that plaintiff's state law claims

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were preempted by ERISA and that defendants' decision to terminate benefits to plaintiff was not arbitrary and capricious. We affirm the judgment, though on grounds different from those on which the district court relied.


In the mid-1970s defendants-appellees Manville Forest Products Co. (Manville) and The Prudential Insurance Company of America (Prudential) entered into an agreement that set up a long-term disability benefit plan for Manville's employees at its packaging plant in West Monroe, Louisiana. Under that agreement, Prudential insured the plan and assumed responsibility for the administration of employees' claims. Several years later, Manville and Prudential modified their arrangement. Under the new contract, which took effect on January 1, 1980, Prudential was to continue to serve as claims administrator, but was to provide disability insurance payments for only the first year of each disabled employee's disability period unless Manville, at its option, chose to have payments extended for one additional year. Benefits due to a disabled employee after that time were to be paid from a "self-insured" ERISA trust, which Manville was to establish. Still later, Manville and Prudential changed their arrangement again. By an agreement that took effect on April 1, 1984, Prudential's responsibilities under the plan were trimmed to those of claims administration; its disability insurance obligations were terminated entirely. On January 1 of the following year, the parties modified their arrangement for the last time. Prudential was discharged from its duties as claims administrator and the Manville Forest Products Hourly Long Term Disability Plan, now fully self-funded and self-insured, took over responsibility for the payment and administration of all disability claims, including those that arose under the prior disability plan arrangements.

In May of 1977, Manville hired plaintiff-appellant Sam Gonzales (Gonzales) as a "finishing packer" at its West Monroe facility. Gonzales worked there until December 16, 1982, when he suffered a debilitating back injury on the job. At that time, Prudential, in accordance with the terms of the 1980 disability plan, began making weekly benefit payments to Gonzales. When the period during which Prudential was obligated to make payment expired, Manville chose not to extend the expiration date and, instead, began paying the benefits itself. Prudential, of course, continued to administer the claim.

Things went well for Gonzales and his benefit providers until the summer of 1984, when Gonzales became interested in seeking employment. At that time, Gonzales contacted Prudential to inquire how his obtaining a new job might affect his benefits. Prudential, citing the provision of the plan that concerned "rehabilitative employment," 1 informed Gonzales that unless he obtained the permission of the Retirement Committee prior to undertaking a new job, his benefits could be cut entirely, and further that if permission were granted, his benefits would be reduced in an amount equal to eighty percent of his earnings from the job. Ignoring these warnings, Gonzales obtained a clerical job at a local hospital without first informing the committee. When Gonzales later disclosed his employment in a disability reevaluation form, the plan administrator suspended his payments as of May 20, 1986. It did so for two reasons: (i) Gonzales had not obtained the committee's approval before taking the job; and (ii) eighty percent of his monthly wages exceeded the amount of his monthly disability payment.

After unsuccessfully petitioning the administrator for reinstatement of his benefits, Gonzales filed an action in state district court against Prudential and the Manville Forest Products Corporation Employee Disability Plan (the Plan). In that action, Gonzales sought not only the benefits

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that had been withheld from him since May 20, 1986, but also certain penalties imposed on disability insurers under Louisiana Revised Statute 22:657(A) 2 for wrongful delay in the making of such payments. Prudential and the Plan removed the action to the federal district court, asserting both diversity and federal question jurisdiction. 3 Afterward Prudential and the Plan filed an answer in which they alleged that Gonzales' state law claims were preempted by the Employee Retirement Income Security Act of 1974 (ERISA) 4 and that the plan administrator's decision to terminate Gonzales' benefits was not arbitrary and capricious.

After the completion of discovery and the district court's denial of a motion by Prudential and the Plan for summary judgment, the parties agreed that there was no dispute regarding the material facts. The district court then tried the case on the basis of a joint stipulation and the memoranda submitted by the parties. In a memorandum decision dated December 22, 1988, the district court rendered judgment in favor of Prudential and the Plan. The district court dismissed Gonzales' state law claims on the ground that they were preempted by ERISA and, applying standards governing the termination of benefits under that federal statute, concluded that the plan administrator had not abused its discretion in stopping Gonzales' payments.

Gonzales now appeals from the judgment, contending that the district court erred when it ruled that ERISA preempted his state law claims and, further, that under the applicable state law, he was entitled to recover the withheld benefits as well as statutory penalties. Gonzales does not dispute that the plan administrator was justified in terminating his benefits under the bare terms of the agreements that set up the 1980 and subsequent plans. Therefore, he does not challenge the district court's ruling that, under the applicable provisions of ERISA, the plan administrator did not abuse its discretion in terminating his benefits. 5 Rather, he contends that Louisiana insurance law supplants the language of those plans and provides a definition of "total disability" under which he is entitled to additional benefits.


In order to understand the issues presented for our consideration, one must first have a firm grasp of the nature of the state law claims that Gonzales brings against Prudential and the Plan. Accordingly, we begin our discussion with a brief examination of those claims.

Gonzales' argument that he is entitled to recover the disability benefits that

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have been withheld from him since May 20, 1986 as well as certain penalties rests upon two well-settled rules of Louisiana insurance law. The first concerns the interpretation of clauses in health, accident, or disability insurance policies that purport to limit coverage to that period during which the insured suffers from "total disability." In a series of cases stretching back to the Depression Era, Louisiana courts have construed such provisions liberally in favor of the insured. Regardless how the policy itself may define "total disability," the courts have held, the term means the inability of the insured to do substantially all of the material acts necessary to the prosecution of his business or occupation in his usual and customary manner. 6 Consequently, if the insured, after suffering a disabling injury, should take a position in a different business or occupation, his insurer may not withhold his benefits on that basis alone. 7 As Gonzales correctly observes, this putative "interpretive" rule has the effect of requiring the insurer to provide benefits to the disabled insured for as long as he remains unable to fully resume the duties of his former job, 8 provided of course that coverage under the policy is not terminated for some other cause.

The second foundation underlying Gonzales' argument is Louisiana Revised Statute 22:213(B)(7). At the time that Gonzales' right to disability benefits arose, that statute provided as follows:

Cancellation: The insurer may cancel this policy at any time by written notice delivered to the insured ... and shall refund the pro rata unearned portion of any premium paid. Such cancellation shall be without prejudice to any claim originating prior thereto. 9

As the Louisiana Supreme Court recently explained in Soniat v. Travelers Insurance Co., 10 if "the risk for which the insured bargained to receive coverage and for which the insurer bargained to be exposed [i]s realized before the policy [i]s cancelled," then, under the terms of this statute, cancellation of the policy cannot affect the coverage provided against that risk. 11 Thus, if an insurer cancels a policy with full awareness that the insured has a condition entitling him to benefits, the...

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