Harbor Ins. Co. v. Blackwelder

• Decision Date: 29 September 1989
• Citation: 554 So.2d 329
• Parties: 58 Ed. Law Rep. 390, 11 Employee Benefits Cas. 2618 HARBOR INSURANCE COMPANY v. Robert E. BLACKWELDER, et al. LIFE AND HEALTH SERVICES, INC., and Robert Wilder v. Robert E. BLACKWELDER, et al. 87-391, 87-407 and 87-487.
• Court: Alabama Supreme Court

Page 329

554 So.2d 329

58 Ed. Law Rep. 390, 11 Employee Benefits Cas. 2618

HARBOR INSURANCE COMPANY v. Robert E. BLACKWELDER, et al.

LIFE AND HEALTH SERVICES, INC., and Robert Wilder v. Robert E. BLACKWELDER, et al.

87-391, 87-407 and 87-487.

Supreme Court of Alabama.

Sept. 29, 1989.

Rehearing Denied Nov. 17, 1989.

Clyde C. Owen, Jr. and Gerald C. Swann, Jr. of Ball, Ball, Matthews & Novak, Montgomery, for appellant Harbor Ins. Co.

Robert S. Lamar, Jr. of Brown, Hudgens, Richardson, Birmingham, for appellant Life and Health Services, Inc.

George L. Beck, Jr., Montgomery, for appellee Blackwelder.

C. Knox McLaney III, Montgomery, for appellee Minella Holley.

JONES, Justice.

These appeals are from final judgments entered upon jury verdicts in favor of two classes of plaintiffs. The plaintiffs were all participants in an insurance plan that, due to underfunding, was unable to pay its obligations and failed. Because the plan in question is not a "governmental plan," as that term is used in the Employee Retirement Income Security Act of 1974 ("ERISA") (29 U.S.C. § 1001 et seq.), we hold that, except for their fraud claims against Life and Health Services, Inc. ("L & H"), and its president, Robert Wilder, the plaintiffs' common law claims are preempted by ERISA; therefore, the judgments against L & H and Wilder based on fraud are affirmed; the remaining judgments against Wilder and L & H, and the judgments against Harbor Insurance Company ("Harbor") are reversed; and the cause is remanded for entry of judgments consistent with this opinion.

The facts that led to this appeal are somewhat complicated, but they can be summarized for the purposes of this opinion. In January 1980, Dr. William McWhorter, the president of one of Alabama's junior colleges, became interested in organizing a consolidated health insurance plan for all of Alabama's junior, community, and technical colleges. ¹ He sent questionnaires to the presidents of the other schools to ascertain their interest in such a plan. Once the results were compiled, they were provided to L & H, a third-party administrator of insurance plans with which Dr. McWhorter had had periodic contact concerning the then-existing insurance plan at his college.

In the fall of 1980, a joint committee of presidents of the colleges ("the Committee") was appointed by the Presidents' Association to study the then-existing insurance plans of the schools and to make recommendations for any changes. The Committee concluded that a self-funded insurance plan should be created; and it initially recommended a plan offered by Central Bank in association with Blue Cross, with life insurance provided by American Foundation Life Insurance Company.

The Committee again contacted L & H, this time to determine whether L & H could offer a better rate for the same coverage offered by Central Bank. Wilder undertook the task of "selling" the L & H plan to the Committee and, subsequently, to the individual employees. Although he knew that the plan was underfunded, based on the calculations and assumptions upon which it was premised, Wilder failed to disclose this fact to either the Committee or to the individual employees who chose to accept the plan.

The alternative plan proposed by L & H called for lower premiums than did the plan offered by Central Bank, and it was accepted by the Committee. This plan was reinsured by Harbor. The acceptance of the L & H plan led to the creation of the Alabama Junior/Community Colleges and Technical Colleges Employee Benefit Plan ("the Plan"). The Plan was subsequently presented to the employees of the schools and, eventually, over 1,300 employees at 28 of the schools decided to participate. The Plan collapsed after just one year of operation.

Following the collapse of the Plan, certain participants instituted several actions to recover damages from Wilder, L & H, and Harbor. After certification of the classes and consolidation of the actions, the cases proceeded to trial. The trial court ruled that the Plan was a "governmental plan" and, therefore, exempt from the provisions of ERISA. The jury returned special verdicts against Harbor on negligence claims, and against Wilder and L & H on negligence, wantonness, and fraud claims. These appeals followed.

On appeal, as at trial, the parties raise the issue of the preemptive effect of ERISA. Two threshold questions are presented: 1) Whether the Plan is one "established or maintained" by a governmental body and thus excepted from ERISA's operative effect; and 2) whether the plaintiffs' claims for fraud against Wilder and L & H fall outside the operative effect of the federal act. Because we find that the "governmental plan" exception to ERISA does not apply, we hold that the common law causes of action based upon negligence and wantonness, under which the plaintiffs recovered against all of the defendants, are preempted; thus, the judgments based on these claims are reversed. We further hold that the fraud claims against Wilder and L & H, amounting to claims for fraudulent inducement, are not preempted; thus, the judgments against these defendants on that claim are affirmed.

I.

In our treatment of the "governmental plan" exception, we have undertaken a three-part analysis: 1) The first step, when examining any insurance or benefit plan, is to determine whether the plan falls within the scope of ERISA's coverage; 2) if the plan is so covered, then we must next examine the exceptions to ERISA to ascertain whether any of them apply; and, finally, 3) if we find that the plan is within ERISA's coverage, and that no exception applies, we must examine the preemptive effect of these determinations.

Our inquiry begins with the language of the statute itself. The applicable section of ERISA, governing the scope of its coverage, is found at 29 U.S.C. § 1003:

"(a) Except as provided in subsection (b) of this section and in sections 1051, 1081, and 1101 of this title, this subchapter shall apply to any employee benefit plan if it is established or maintained--

"(1) by any employer engaged in commerce or in any industry or activity affecting commerce; or

"(2) by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce; or

"(3) by both.

"(b) The provisions of this subchapter shall not apply to an employee benefit plan if (1) such plan is a governmental plan (as defined in section 1002(32) of this title)...."

The definitions of an "employee welfare benefit plan" and of a "governmental plan" are found at 29 U.S.C. § 1002, which states, in relevant part:

"(1) The terms 'employee welfare benefit plan' and 'welfare plan' mean 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....

"....

"(32) The term 'governmental plan' means a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing."

It is undisputed that the Plan involved in the present appeal is an employee benefit plan covered by the provisions of ERISA. ² There is a dispute, however, over whether an exception to coverage applies. As noted earlier, the trial court ruled that the "governmental plan" exception applied and, therefore, that ERISA did not control the determination of liability under the Plan. We disagree.

Although the "governmental plan" exception has been discussed in several cases, an analysis of the available authority leaves us without a clear, definitive standard by which we may determine whether the Plan is a governmental plan. Thus, any plan must be closely examined to determine whether it falls within this exception to the coverage of ERISA. Initially, we must bear in mind the broad scope of ERISA's preemption in the employee benefit field.

"In determining whether various benefit policies fall within ERISA, courts should interpret the act's coverage broadly. Sly v. P.R. Mallory & Co., 712 F.2d 1209, 1211 (7th Cir.1983)."

Schwartz v. Newsweek, Inc., 653 F.Supp. 384, 387 (S.D.N.Y.1986), aff'd, 827 F.2d 879 (2d Cir.1987).

One of the first cases to discuss the "governmental plan" exception was Feinstein v. Lewis, 477 F.Supp. 1256 (S.D.N.Y.1979), aff'd, 622 F.2d 573 (2d Cir.1980). In Feinstein, the court considered whether employee welfare plans, established as the result of a collective bargaining agreement between a union of public employees and their municipal or school district employers, were "governmental plans." The court went into a thorough discussion of the term "governmental plan" before ruling that the exception applied to the plans in question. In its analysis of the intention of Congress in enacting ERISA, the court stated:

"These discussions clearly demonstrate that Congress, in exempting governmental plans, was concerned more with the governmental nature of public employees and public employers than with the details of how a plan was established or maintained."

Id. at 1262.

In its holding that the "governmental plan" exception applied, the Feinstein court emphasized that the governmental instrumentality, as the employer, provided 100% of the funding for the plans. Further, the Feinstein court reasoned that the mere fact that the public employers acted in conjunction with the employees' union, pursuant to a collective bargaining agreement, to establish and maintain the benefit plan, "does not lead us to the conclusion that the plan was not 'established' by the ...