House v. American United Life Ins. Co.

• Decision Date: 04 September 2007
• Docket Number: No. 06-30168.,06-30168.
• Citation: 499 F.3d 443
• Parties: Walter Richard HOUSE, Jr., Plaintiff-Appellee-Cross-Appellant, v. AMERICAN UNITED LIFE INSURANCE COMPANY, Defendant-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

499 F.3d 443

Walter Richard HOUSE, Jr., Plaintiff-Appellee-Cross-Appellant, v. AMERICAN UNITED LIFE INSURANCE COMPANY, Defendant-Appellant-Cross-Appellee.

No. 06-30168.

United States Court of Appeals, Fifth Circuit.

September 4, 2007.

Order on Suggestion for Rehearing and Rehearing En Banc Denied October 4, 2007.

Felix R. Weill (argued), Weill, Dunn & Koch, Baton Rouge, LA, for Walter Richard House, Jr.

Don S. McKinney (argued), Adams & Reese, New Orleans, LA, for American United Life Ins. Co.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, GARZA and DENNIS, Circuit Judges.

REAVLEY, Circuit Judge:

Walter House sued American United Life Insurance Company ("AUL") for long-term disability benefits. The district court granted summary judgment by which total disability benefits and a Louisiana state law penalty were awarded to House. We hold that House's claim comes under an ERISA plan that preempts the state law penalty and that he was only partially disabled.

I. Background

Walter House was a trial attorney and founding partner of his firm, earning approximately $350,000 per year. In October 1999, at age forty-nine, House suffered a heart attack. In that same month, House's law firm sought competitive proposals from several insurers to provide more affordable life and disability insurance for the entire firm, including attorneys and staff.

The firm entered into a subscription agreement for group life and disability coverage with AUL, providing for one class of life insurance coverage and three classes of disability coverage: Class 3 covering non-attorney employees, Class 2 covering non-partner attorneys, and Class 1 covering partners. The disability coverage for partners and non-partner attorneys was identical, except that (1) partners would contribute 100% of their premiums and their pre-disability earnings would be calculated using K-1 forms¹ rather than W-2s; and (2) the definition of total disability for the partner and non-partner attorneys (Classes 1 and 2) differed slightly from that applicable to the other non-attorney employees (Class 3). For attorneys, that term meant that "because of Injury or Sickness the Person cannot perform the material and substantial duties of his regular occupation." For the other employees, totally disabled meant that he or she "cannot perform the material and substantial duties of any gainful occupation for which the Person is reasonably fitted by training, education, or experience."

Under the agreement, total disability benefits for all classes would replace the covered person's pre-disability monthly income up to $10,000, but subject to dollar-for-dollar reduction for other employment earnings. Partial disability benefits would be calculated through a stated formula, which yielded a percentage of the covered person's pre-disability income as reduced by other income and not to exceed a maximum $10,000 per month. Partial disability benefits would be subject to discontinuation upon the firm's termination as a "Participating Unit" in AUL's insurance trust — in other words, when the firm no longer maintained insurance through AUL.

The firm provided AUL with enrollment materials for all participants in the life and insurance coverage. On his enrollment form, House filled in his occupation as "Attorney." Because of House's cardiac problems, AUL required a letter from his doctor stating that he was able to return to work full-time with no restrictions before it would approve the group coverage. House's physician provided AUL a letter stating that House's prognosis was excellent and that he could return to work without any limitations. AUL notified the firm that the insurance application for the "group" had been approved and provided a rate exhibit stating the premium rates for all the coverage made available through the group policy. There was no distinction in rates between partners, associates, or staff, but rather a per-coverage-dollar rate for the entire group.

AUL provided certificates of insurance for delivery to the insured individuals, including House. The certificate House received, like the certificates all other firm participants received, describes the disability coverage he was provided, but references the group policy as the source of all rights and benefits, that policy being subject to cancellation or termination by the firm or AUL. Under the group policy, the firm undertook responsibility for certain administrative tasks including determining eligibility for participation, enrollment of participants, calculation of premiums, and payment of premiums. The firm submitted a single premium check to AUL each month, deducting the partner's disability premiums from their draw accounts.

About a month after his October 1999 heart attack, House returned to his trial practice, but a year later he failed stress tests and subsequently underwent quadruple bypass surgery. He briefly returned to work in November 2000, but only to wind up his trial practice and reassign his clients, after which he left the firm. In October 2001, House accepted a position as executive counsel to the Louisiana Department of Economic Development, a non-litigation position that paid him $100,000 per year.

House initially applied for benefits under the AUL policy in November of 2000, contending that he was totally disabled because his doctor advised that returning to the stress of trial work could cause severe medical repercussions, including death. AUL paid nine months' of total disability payments to House from January to September 2001, apparently while evaluating his claim. Initially, AUL told House it would need an independent medical examination to assess his disability claim, but did not ultimately obtain one. Instead, in November 2001 and relying on its policy interpretation, AUL denied House's claim on grounds that, given his post-operative activities and current employment, he appeared to be "capable of performing the sedentary occupation of an Attorney as it is normally performed in the national economy."

House sued, seeking full benefits and, under state law, penalties (related to bad faith refusal to pay, and misrepresentation), and attorneys fees. The parties filed a series of partial summary judgment motions debating ERISA² preemption and policy terms, and the district court held:

(1) House's state law claims were not preempted because the policy was not an ERISA plan;

(2) House was totally disabled based on policy language despite his ability to earn substantial income as an attorney;

(3) House also qualified as partially disabled under the policy language, such status being not mutually exclusive with total disability as written; and therefore that (4) House was entitled to the greater of:

(a) the maximum monthly total disability benefit of $10,000 per month, but subject to offset by his earnings from the Louisiana agency, or

(b) the partial disability benefit as calculated under the policy formula;

(5) partial disability benefits terminated as of February 2002 when House's former firm terminated the firm's policies with AUL;

(6) House was due total disability benefits without offset for the time frame of October 2001 to November 2003, when AUL was disputing that it owed benefits, plus a penalty equaling an additional $10,000 for each month AUL did not pay during that time frame;

(7) House was entitled to total disability benefits with offset after the February 2002 termination date of the partial disability benefits because of the court's earlier determination that House was entitled to the greater of total or partial disability benefits;

(8) House was entitled to attorneys fees and costs.

Neither party was fully satisfied with the outcome and both appeal. House argues he is entitled to additional penalties and either offset-free total disability benefits or continuing partial disability benefits. AUL argues that the disability policy under which House is claiming benefits is governed by ERISA, state law penalties being therefore preempted, and challenges the district court's finding that House was simultaneously totally as well as partially disabled under the policy.

II. ERISA Governance

We are presented with the threshold question of whether House's disability policy is a benefit plan regulated by ERISA. To determine the answer "we ask whether a plan: (1) exists; (2) falls within the safe-harbor provision established by the Department of Labor; and (3) satisfies the primary elements of an ERISA `employee benefit plan' — establishment or maintenance by an employer intending to benefit employees." Meredith v. Time Ins. Co., 980 F.2d 352, 355 (5th Cir.1993).

AUL asserts that House's state law claims for penalties and attorneys fees are preempted because the policy covering House was part of an "employee benefit plan" as defined by ERISA and not exempt under safe harbor. Relying on our decision in Robertson v. Alexander Grant & Co., 798 F.2d 868 (5th Cir.1986), the district court held that the Class 1 disability coverage for partners in House's firm was a separate plan and, since it benefited only partners and not any employees, it was not governed by ERISA and therefore House was entitled to state law penalties and attorneys fees.

A. Standard of Review

We have frequently stated that the existence of an ERISA plan within the statutory definition is a question of fact. See, e.g., Meredith, 980 F.2d at 353. However, where the factual circumstances are established as a matter of law or undisputed, we have treated the question as one of law to be reviewed de novo. See id. at 355. (stating our purpose as review of the summary judgment record for genuine issues of material fact, but applying the statutory scheme as a question of law to the facts established by the district court and overturning the district court's determination that an ERISA plan existed); see also Custer v. Pan American Life Ins. Co., 12...