Schwartz v. Provident Life and Acc. Ins. Co.

• Decision Date: 11 February 2003
• Docket Number: No. CV 01-2041 PHX PGR.,CV 01-2041 PHX PGR.
• Parties: Mark J. SCHWARTZ, Plaintiff, v. PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Arizona

280 F.Supp.2d 937

Mark J. SCHWARTZ, Plaintiff, v. PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, Defendant.

No. CV 01-2041 PHX PGR.

United States District Court, D. Arizona.

February 11, 2003.

COPYRIGHT MATERIAL OMITTED

Richard M. Waugh, Richard M. Waugh Ltd., Phoenix, AZ, for Plaintiff.

Brad Kevin Keogh, Law Office of Brad K. Keogh, Phoenix, AZ, for Defendant.

ORDER

ROSENBLATT, District Judge.

Pending before the Court is Defendant Provident Life and Accident Insurance Company's Motion for Summary Judgment (doc. # 11) and Plaintiff's Cross-Motion for Partial Summary Judgment Re ERISA (doc. # 16). Having considered the parties' memoranda and the oral argument of counsel, the Court finds that the plaintiff's motion should be granted, and the defendant's motion denied, because ERISA does not preempt the plaintiff's state law claims inasmuch as the plaintiff's disability insurance policy is not part of an ERISA-governed employee welfare plan.

The Court concludes that the following facts are undisputed for the purposes of the parties' cross-motions. The plaintiff first obtained an individual disability insurance policy from the defendant in May 1991. At that time, the plaintiff, a CPA, was the president of Schwartz, Cohen & Co., P.C. ("SCC") and owned a 39% interest in the company; SCC then had three other shareholders and some 35-40 employees. The plaintiff obtained a replacement policy from the defendant in November 1991 and a second replacement policy (the policy at issue) in April 1992.

The plaintiff obtained the insurance policy through independent insurance agent Ian Ackerman, an acquaintance, who approached him in May 1991 with the suggestion that SCC's principals apply for individual disability policies with the defendant under the defendant's "list billing" discount program whereby individual disability policies were offered at a discounted premium if the insured's employer agreed to be billed for and remit premiums directly to the defendant. SCC entered in a Salary Allotment Agreement with the defendant on May 15, 1991 wherein SCC agreed to pay in full the entire required premiums for the individual disability policies. Besides the plaintiff, three other shareholders, George Cohen, Mitchell Adler and Mark Rosenfeld, obtained individual disability policies from the defendant at various times in 1991 under the list billing arrangement, as did "key employees" Steven Kopp, who subsequently became a shareholder, and Michael Folb.

SCC was sold to American Express Tax & Business Services in April 1997 and all of SCC's employees became American Express employees. While SCC has not conducted active business operations since 1997, it continues to collect its receivables and installment payments due under the business sales agreement, and still pays premiums to the defendant under the list billing arrangement.

The plaintiff underwent heart bypass surgery in January 1999 and applied for disability benefits in March 1999. He was released for part-time work during April-July 1999 and the defendant paid him benefits for those months; he then applied for total disability benefits in June 1999 but the defendant denied his claim for further benefits after July 1999. At the time the plaintiff filed his claim for benefits in 1999, all of the SCC individuals still insured by the defendant, i.e., the plaintiff, Cohen, Adler, and Kopp, were SCC shareholders.¹

While ERISA preemption is a question of law, Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 874 (9th Cir.2001), the existence of an ERISA plan is a question of fact to be answered in the light of all surrounding circumstances from the point of view of a reasonable person. Stuart v. UNUM Life Ins. Co. of America, 217 F.3d 1145, 1149 (9th Cir.2000). Because the defendant's claim of ERISA preemption is a federal defense, the burden is on the defendant to prove the facts necessary to establish it. Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489, 492 n. 4 (9th Cir.1988), cert. denied, 492 U.S. 906, 109 S.Ct. 3216, 106 L.Ed.2d 566 (1989); Zavora v. Paul Revere Life Ins. Co., 145 F.3d 1118, 1120 n. 2 (9th Cir.1998) (The burden of establishing the existence of an ERISA plan is on the defendant insurer.) The Court concludes as a matter of law that the defendant has not met its burden.

The plaintiff argues in part that his insurance policy is not an employee welfare benefit plan under ERISA's definition because at the time he applied for disability benefits the individual disability policies purchased from the defendant covered only SCC shareholders. The plaintiff's argument is premised on the Department of Labor regulations implementing the statutory definition of an employee benefit plan that provide that a plan "under which no employees are participants" does not constitute an ERISA employee benefit plan, 29 C.F.R. 2510.3-3(b), and that an owner of a business is not considered an "employee" for purposes of determining the existence of an ERISA plan, 29 C.F.R. § 2510.3-3(c)(1), (2); LaVenture v. Prudential Ins. Co. of America, 237 F.3d 1042, 1045 (9th Cir.2001); see also, Kennedy v. Allied Mutual Ins. Co., 952 F.2d 262, 263 (9th Cir.1991) (ERISA does not govern a plan whose only fully vested beneficiaries are a company's owners, but coverage of even one non-owner employee is sufficient to bring a policy within ERISA's scope.)

The Court is unpersuaded by the plaintiff's argument because the Court concurs with the defendant that, pursuant to Peterson v. American Life & Health Ins. Co., 48 F.3d 404 (9th Cir.), cert. denied, 516 U.S. 942, 116 S.Ct. 377, 133 L.Ed.2d 301 (1995), which the Court concludes is still the law of this circuit for the principle for which the defendant cites it, the determinative time period relevant to this issue is when the policy was purchased, not when the claim was submitted, and it is undisputed that at the time the plaintiff obtained his disability policy from the defendant a nonshareholder, Folb, also obtained a disability policy from the defendant under the list billing agreement.²

The plaintiff also argues, however, and the Court concurs, that ERISA is not applicable to this action because his disability insurance policy falls within the Department of Labor's "safe harbor" regulation, 29 C.F.R. § 2510.3-1(j). It is well settled that when an employer provides an insurance plan to employees and satisfies all four requirements of the safe harbor regulation, the employer's mere purchase of insurance does not, by itself, create an employee welfare benefit plan under ERISA. Stuart v. UNUM Life Ins. Co. of America, 217 F.3d at 1149.

Under the DOL regulation, an employee insurance plan is exempt from ERISA coverage when:

(1) No contributions are made by an employer[;]

(2) Participation in the program is completely voluntary for employees[;]

(3) The sole functions of the employer ... with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees ..., to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

(4) The employer ... receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

29 C.F.R. § 2510.3-1(j); Stuart, 217 F.3d at 1149. Only the first and third factors are at issue here inasmuch as there is no dispute that the disability insurance policies were obtained by the SCC personnel on a purely voluntary basis and that the defendant did not pay SCC any compensation in connection with the policies.

The defendant's contention with regard to the first safe harbor factor is that the plaintiff's insurance policy is not exempt from ERISA coverage as a matter of law because SCC made contributions to the plan on behalf of its employees. The Court disagrees. Although it is undisputed that SCC, through its Salary Allotment Agreement with the defendant, was directly billed by the defendant for all of the premiums for the individual disability policies and that SCC issued company checks to pay all of those premiums, the Court concludes that such activity on SCC's part is not, by itself, determinative of this issue. The dispositive question is whether SCC actually absorbed any portion of the cost of those premiums, which by itself would be sufficient to bring the insurance policy outside of the safe harbor, or whether SCC was merely a conduit for premium payments actually made by the insureds, which is conduct which would meet the requirement of the first safe harbor factor.

The plaintiff has submitted significant probative evidence, unrebutted by the defendant, that SCC merely acted as a premium payment conduit in that the plaintiff's affidavit states in relevant part:

13. Notwithstanding the "list-billing" arrangement, each policyholder was ultimately responsible for his own premiums because SCC took them into account when calculating base salary and year-end profit allocations and bonuses. ...

14. As a matter of administrative convenience, SCC paid the disability premiums and a variety of other personal expenses for its key members during the course of each year.... These items were all considered "non-shared expenses" and were deducted from each individual's total compensation when the final allocations were calculated at year end. Rather than attempt to recover the non-shared expenses via payroll deductions throughout the year, SCC accounted for everything through the year-end accounting process. This type of procedure is common among small firms, especially those involving professionals. In this manner, SCC acted merely as a conduit for me and the other key individuals to pay our premiums.

The defendant argues that for purposes of the safe harbor test it is simply irrelevant that SCC made a year-end decision to include...