Demars v. CIGNA Corp.

• Citation: 173 F.3d 443
• Decision Date: 07 January 1999
• Docket Number: No. 98-1962,98-1962
• Parties: 22 Employee Benefits Cas. 2913, Pens. Plan Guide (CCH) P 23954B Jeanne B. DEMARS, Plaintiff, Appellant, v. CIGNA CORPORATION and Insurance Company of North America, Defendants, Appellees. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 443

173 F.3d 443

22 Employee Benefits Cas. 2913,

Pens. Plan Guide (CCH) P 23954B

Jeanne B. DEMARS, Plaintiff, Appellant, v. CIGNA CORPORATION and Insurance Company of North America,

Defendants, Appellees.

No. 98-1962.

United States Court of Appeals, First Circuit.

Heard Jan. 7, 1999.

Decided April 6, 1999.

Kenneth C. Brown, with whom Jared R. Green and Abramson, Reis, Brown & Dugan were on brief, for appellant.

Eleanor H. MacLellan, with whom Sulloway & Hollis, P.L.L.C. was on brief, for appellees.

Before BOUDIN, Circuit Judge, COFFIN, Senior Circuit Judge, and LYNCH, Circuit Judge.

LYNCH, Circuit Judge.

Jeanne B. Demars brought this suit against the Insurance Company of North America ("ICNA"), the provider of her long-term disability insurance, and ICNA's parent corporation CIGNA Corporation ("CIGNA"), after CIGNA--upon reviewing the accuracy of information on a conversion application Demars had submitted seven years earlier--recalculated her disability benefit level and demanded that she remit alleged overpayments totaling more than $70,000. Demars brought state law claims of unfair trade practices, breach of contract, intentional infliction of emotional distress, bad faith breach of contract, and bad faith refusal to pay an insurance claim, as well as a claim for disability benefits under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.

The sole question on appeal is whether ERISA preempts all state law claims related to an individual insurance policy obtained by an employee after termination of employment through the exercise of conversion rights granted by an employee welfare benefit plan. In other words, we consider whether ERISA regulation extends to "conversion policies." The district court found that it does and therefore granted defendants' motion to dismiss Demars's state law claims. We reverse.

I

For the purposes of a motion to dismiss, we accept as true the facts alleged in the complaint. See Duckworth v. Pratt & Whitney, Inc., 152 F.3d 1, 3 (1st Cir.1998). Demars began working as an agent for National Life of Vermont ("National Life") in 1983. As a National Life employee, she was entitled to enroll in a group long-term disability policy underwritten by ICNA. National Life's group policy included a "conversion clause" that permitted employees to convert from group disability coverage to individual policies when their employment with National Life came to an end. Demars initially enrolled in the group disability policy. In 1990, when she left National Life, she elected to convert her group coverage to an individual ICNA policy.

ICNA's conversion application consisted of two pages. The first page, to be filled out by the applicant, asked for general information. The second page was to be completed by Demars's employer. Since Demars had already left National Life, she considered her employer to be Demars Financial Services, Inc., a business that she and her husband ran. Accordingly, in response to a question about her earnings at the time of termination, she did not report her final National Life salary; instead, she reported the gross annual commissions she earned as an employee of Demars Financial Services.

In August 1990, ICNA notified Demars that her application had been approved, sent her a certificate of insurance for the conversion policy, and requested an initial premium payment. Demars paid the initial premium and the quarterly premiums thereafter.

In November 1993, Demars filed a claim with ICNA for long term disability benefits. Her claim was approved in April 1994, and ICNA commenced monthly payments of $1,972 ($3,000 less Social Security disability benefits) in May 1994.

In March 1997, CIGNA requested that Demars forward financial information pertaining to the years 1990 through 1996. After examining this information, CIGNA concluded that Demars had incorrectly reported her income on the conversion application, that she was actually entitled only to a $100 minimum monthly benefit, and that ICNA had therefore overpaid her by more than $70,000 between May 1994 and June 1997. CIGNA sent Demars a letter dated June 26, 1997 that explained these conclusions and informed her that CIGNA would withhold all further monthly benefit payments (now set at $100) until she had repaid the sums allegedly owed. Demars has not received any benefit payments since that date.

Rather than repaying CIGNA the allegedly excessive benefits and accepting the reduction in future benefits, Demars brought suit against CIGNA and ICNA, asserting both diversity and federal question jurisdiction. After Demars stipulated to the dismissal of her ERISA claim and the district court granted the defendants' motion to dismiss her state law claims, judgment was entered against Demars, who now appeals.

II

We review de novo the legal question whether ERISA preemption applies to claims arising from a conversion policy, ¹ see Degnan v. Publicker Indus., Inc., 83 F.3d 27, 29 (1st Cir.1996), and begin with the words of the statute. Section 1144(a) states that ERISA provisions "shall supercede any and all State laws insofar as they may now or hereafter relate to any [ERISA] employee benefit plan." 29 U.S.C. § 1144(a).

We note at the outset that Demars's state law claims clearly "relate to" her conversion policy in the sense intended by § 1144(a), since in order to prevail on those claims Demars would need to prove the existence of, or specific terms of, the conversion policy. See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 140, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990) (stating "relates to" test); see also McMahon v. Digital Equip. Corp., 162 F.3d 28, 38-39 (1st Cir.1998) (applying Ingersoll-Rand test to breach of contract and unfair trade practice claims).

Defendants would like us to complete the analysis by asking "whether the conversion policy is sufficiently connected to[ ] (or related to) the underlying ERISA plan." They argue that the conversion policy and the ERISA plan are clearly "connected" or "related" to each other, since Demars obtained the conversion policy by virtue of rights granted by National Life's group disability benefits plan. We do not disagree with this point; there is obviously a type of "but for" relationship linking Demars's conversion policy and National Life's ERISA plan. But "infinite relations cannot be the measure of pre-emption." New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 656, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995). If a chain of "relates to" links could establish ERISA preemption, then ERISA preemption and ERISA regulation could be separated in an anomalous way. The proper question to ask under § 1144(a) is not whether Demars's claims relate to her conversion policy, which relates in turn to an ERISA plan, but rather whether the conversion policy is itself subject to ERISA regulation as an ERISA plan.

The statute defines an "employee welfare benefit plan" (the type of ERISA plan at issue here, see 29 U.S.C. § 1002(3)) as:

any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer ... for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, ... benefits in the event of sickness, accident, disability, death or unemployment.

29 U.S.C. § 1002(1).

This nearly tautological definition offers little guidance. The key phrase for present purposes is "established or maintained by an employer." Demars's conversion policy was certainly "established" in some sense by her former employer--but was it "established" in the relevant sense? Case law provides no definitive answers. "[N]o single act in itself necessarily constitutes the establishment of the plan, fund, or program," Donovan v. Dillingham, 688 F.2d 1367, 1373 (11th Cir.1982) (en banc), quoted in Belanger v. Wyman-Gordon Co., 71 F.3d 451, 455 (1st Cir.1995), and "[t]here is no authoritative checklist that can be consulted" to determine whether an employer's actions establish an ERISA plan, Belanger, 71 F.3d at 455.

In passing ERISA, Congress's purpose was twofold: to protect employees and to protect employers. See McMahon, 162 F.3d at 35-36. Congress wanted to safeguard employee interests by reducing the threat of abuse or mismanagement of funds that had been accumulated to finance employee benefits, see Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 15, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987), while at the same time safeguarding employer interests by eliminating "the threat of conflicting and inconsistent State and local regulation" of employee benefit plans, Travelers, 514 U.S. at 657, 115 S.Ct. 1671 (quoting 120 Cong. Rec. 29197 (1974)).

Neither concern seems to be strongly implicated here. There is little threat of abuse of funds in the ERISA sense. While there is a risk that funds accumulated to finance benefits under the conversion policy could be mismanaged or abused, there is no risk of Demars's former employer abusing or mismanaging these funds, since it does not control them, or indeed have any tie to them. Rather, it is the insurers who issued the policy--defendants here--who are in a position to possibly abuse or mismanage the funds. Yet Congress placed into ERISA an express disavowal of any intent to regulate insurers qua insurers. See 29 U.S.C. § 1144(b)(2).

The uniformity of regulations concern is equally attenuated. While conversion policies like Demars's undoubtedly impose an administrative burden, that burden lies on the insurers who provide the policy, not on the former employer. As Fort Halifax noted, "Congress intended pre-emption to afford employers the advantages of a uniform set of administrative procedures governed by a single set of regulations. This concern only arises ... with respect to benefits whose provision by nature requires an ongoing administrative program to meet the employer's obligation." Fort...