Bell v. Employee Sec. Ben. Ass'n
| Decision Date | 22 August 1977 |
| Docket Number | No. 77-4066.,77-4066. |
| Citation | 437 F. Supp. 382 |
| Parties | Fletcher BELL, Commissioner of Insurance of the State of Kansas, Plaintiff, v. EMPLOYEE SECURITY BENEFIT ASSOCIATION, an unincorporated association, Duane Tresham, president of Employee Security Benefit Association, Defendants. |
| Court | U.S. District Court — District of Kansas |
COPYRIGHT MATERIAL OMITTED
Michael S. Mullen, Sp. Asst. Atty. Gen., Kansas State Ins. Dept., Topeka, Kan., for plaintiff.
Lyle E. Neeley, Bellevue, Wash., R. Austin Nothern, Topeka, Kan., for defendants.
This case involves an interpretation of the Employee Retirement Income Security Act of 1974 (ERISA), and comes before the Court for a decision on the merits as to plaintiff's prayer for permanent injunctive relief. Jurisdiction is predicated upon 28 U.S.C. § 1337, and venue is proper under 28 U.S.C. § 1391(c).
Plaintiff Bell is the Commissioner of Insurance of the State of Kansas. Defendant Employee Security Benefit Association (ESBA) is an unincorporated association headquartered in Bellevue, Washington. Defendant Tresham is ESBA's president.
ESBA is (or was until this suit was filed) soliciting agents to offer to the working people of Kansas (and other States) what it terms an "employee benefit plan". On April 22, 1977, plaintiff filed a complaint seeking to enjoin ESBA's activities in Kansas until ESBA complies with the statutes and regulations governing the business of insurance in Kansas. Also on April 22, 1977, this Court granted plaintiff's request for a temporary restraining order which enjoined defendants from doing further business in Kansas until a preliminary injunction hearing could be held. On June 24, 1977, this action came before the Court for a hearing as to the merits of the action, the preliminary injunction hearing having been consolidated with the hearing on the merits pursuant to F.R.Civ.P. 65(a)(2). Despite the fact that defendants had received adequate notice of the hearing, they intentionally defaulted by failing to appear. At the hearing, plaintiff presented depositions of several of the principals of ESBA, and the Court considers the evidentiary record before it an adequate basis for the rulings which must be made.
The crux of this case involves interpretation of the provisions of ERISA, 29 U.S.C. § 1001, et seq. Plaintiff argues that defendants' program is a program of "insurance" which is subject to regulation by the Kansas Department of Insurance. Defendants argue that ESBA's program is not "insurance", but an "employee benefit plan" which, under ERISA, is allegedly exempt from all state regulation.
ESBA's brochure announces that ESBA is offering "A New Concept in `MEMBER EMPLOYEE BENEFIT PLANS'". The brochure indicates that the program is a "Major Medical Expense and Graded Death Benefit Plan For Members and Member's Families." By way of further description, the brochure describes the program in these terms:
Article 3, Section 1 of ESBA's Articles of Association indicates that membership in ESBA is available to any employee in reasonably good health who has been employed in a common work unit for at least one month, and who pays a $10 membership fee.
Any fair evaluation of the product offered by ESBA must lead to the conclusion that this "employee benefit plan" is substantially similar to major medical and death benefit coverage offered by insurance companies generally. (See Quine deposition, p. 10)
The organizers of ESBA are individuals with substantial experience in the insurance field. ESBA employs insurance agents to solicit members. ESBA markets its program through D.M.A., Inc., an agency organized by two of ESBA's officers which receives 50% of first year member contributions and 17½% of contributions on renewal of the coverage. Administrative services are provided to ESBA by Benefit Services Corporation, a corporation organized by individuals with substantial ties to the organizers of ESBA. Benefit Services Corporation receives 22% of first year and renewal member contributions as a fee for its services.
In Kansas ESBA has enrolled as members of its plan, individuals from a variety of occupations. For example, ESBA has enrolled a self-employed carpenter, an insurance agent, a domestic, a self-employed truck driver, a teacher's aide, a sewer department employee of a large city, a sole proprietor, and a contractor.
The two legal issues which we feel are of primary importance to the resolution of this dispute are: (1) What is the scope of the ERISA preemption? (2) Is ESBA's program "insurance" or an "employee benefit plan"?
As the culmination of long investigation and study, Congress passed the Employee Retirement Income Security Act of 1974, P.L. 93-406, codified at 29 U.S.C. § 1001 et seq. ERISA was intended to make basic reforms in the area of employee pensions and other employee benefit programs.
Congress has the power, when it desires to exercise it, to occupy a field and, under the Supremacy Clause of the Constitution, preempt application of state law. Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 146-147, 83 S.Ct. 1210, 10 L.Ed.2d 248 (1963).
We believe that such intent is demonstrated by the wording of 29 U.S.C. § 1144:
Despite the apparently clear wording of § 1144(a), an examination of the legislative history behind it may be helpful. We believe that the legislative history indicates that this wording was meant to convey just as broad a concept of preemption as appears on the face of the statute.
The original House and Senate versions of ERISA provided for preemption of state law. But the broader preemption provision which was eventually incorporated into ERISA was developed in conference committee.
The joint explanatory statement of the conference committee indicated just how broad the preemption provision was meant to be:
In introducing the conference report, Senator Harrison Williams, Chairman of the Senate Committee on Labor and Public Welfare, made the following statement:
It should be stressed that with the narrow exceptions specified in the bill, the substantive and enforcement provisions of the conference substitute are intended to preempt the field for Federal regulations, thus eliminating the threat of conflicting or inconsistent State and local regulation of employee benefit plans. This principle is intended to apply in its broadest sense to all actions of State or local governments, or any instrumentality thereof, which have the force or effect of law. 1974 U.S.Code Cong. & Admin. News, pp. 5188-89.
Senator Javits, ranking minority member of the Senate Committee on Labor and Welfare, explained the reasoning of the conference...
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