Security Life Ins. Co. of America v. Meyling
| Decision Date | 14 September 1998 |
| Docket Number | No. 97-15595,97-15595 |
| Citation | 146 F.3d 1184 |
| Parties | 22 Employee Benefits Cas. 1430, 98 Cal. Daily Op. Serv. 5375, 98 Daily Journal D.A.R. 7545, 98 Daily Journal D.A.R. 9892 SECURITY LIFE INSURANCE COMPANY OF AMERICA, a Minnesota corporation, Plaintiff-Appellee, v. Garry L. MEYLING, Defendant-counter-claimant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Marilyn A. Monahan, Sheldon R. Emmer, Emmer & Graeber, A Law Corp., Los Angeles, California, for the plaintiff-appellee.
K. Robert Foster, Neumiller & Beardslee, Stockton, California, for the defendant-counter-claimant-appellant.
Appeal from the United States District Court for the Eastern District of California; William B. Shubb, District Judge, Presiding. D.C. No. CV-95-01463-WBS.
Before: HUG, JR., Chief Judge, and FERNANDEZ and THOMAS, Circuit Judges.
Garry Meyling appeals the district court's grant of summary judgment in favor of Security Life Insurance Company of America in Security's diversity action seeking to rescind its insurance contract with Meyling, its insured. Security sought rescission due to material misrepresentations in Meyling's insurance application. He failed to disclose his prior negative medical history. We reverse.
Meyling is a co-owner, officer, and director of Hubbard, Krause & Meyling, Inc., a small company doing business as HKM Machine and Fabrication. In February 1993, HKM purchased health insurance from Security for its employees and their dependents, including Meyling. The parties do not dispute that the HKM insurance plan is an ERISA 1 plan, nor do they dispute that HKM is the plan administrator.
As part of Security's application process, each HKM employee including Meyling, was required to fill out an insurance application. The application asked the applicant to describe his medical history. In the five years prior to applying for coverage, Meyling had suffered and been treated for high blood pressure, back pain and back spasms, hyperventilation, and a panic disorder. However, on his application, Meyling falsely indicated that he had not been treated for or diagnosed with any of those illnesses.
Based on Meyling's representations of good health, Security issued a policy to HKM at a discounted initial premium. The parties agree that the difference in premiums initially charged would be at least $5,775, which came about because the premium was 15% below normal, rather than 20% above normal, as it should have been.
However, under the Security Life policy, premiums do not remain fixed. Rather, if new health information is received which would have altered the amount of premiums, the insured is retroactively charged so that the insured ultimately pays the same premium as if the correct information had been given in the application. Specifically, in a section labeled "Premium Changes Due to Misstatements," the Security Life policy provides that when misrepresentations are discovered:
There will be a charge to the Policyholder or refund from the Insurer to adjust for past premium payments. This charge or refund will be equal to the difference between: (i) premiums previously billed; and (ii) the premiums that, based on the most current data, should have been billed.
Aside from retroactive premium adjustment, the policy does not expressly provide Security Life any remedy for misstatements regarding health information. There is no provision for rescission, and the termination section does not include misrepresentation as a basis upon which to cancel the policy.
Although the policy does not make any reference to common law remedies for misrepresentation, it contained an incontestability clause providing that the policy could not be contested after two years from the date of issue except for non-payment of premiums. The policy also provided that:
All statements made by the insured employee in the absence of fraud are representations and not warranties. A statement made by the insured employee may be used to contest entitlement to insurance only if: (i) it is part of a written application; (ii) a copy of the application has been given to that person; and (iii) the insurance for which the statement was made has been in effect for less than two years during the life of the insured employee.
The policy identified the contract as being composed of (a) the policy; (b) the policyholder's application attached to the policy; (c) the individual applications of the insured persons, if any; and (d) the employer's written statements as approved by the insurer.
After Security issued the policy, it asked Meyling to review his medical history responses, and for the first time warned that failure to disclose accurate information could result in rescission. Meyling did not correct the misrepresentations on his application.
In November 1994, Meyling suffered an aneurysm in the wall of his heart. He spent approximately three and a half months in the hospital and accrued medical bills in the amount of $670,000. Based on its discovery that Meyling had misrepresented his health history in his insurance application, Security refused to pay Meyling's claim. Instead, it brought suit to rescind Meyling's insurance policy. Meyling counterclaimed for breach of contract and bad faith under California law, and filed an amended complaint stating those claims under ERISA.
In July 1996, Security filed two motions for summary judgment. The first argued that Meyling's state law claims were preempted by ERISA. That motion was granted and has not been appealed. The second motion asked the court to find as a matter of law that Security was entitled to rescission of the insurance contract based on material misrepresentations by Meyling. Meyling admitted the misrepresentations, but argued that under California Insurance Code sections 10700-10718.7 (), insurance policies are not subject to rescission. The district court also granted Security's second motion. It found that provisions of California's Insurance Code which specifically permit rescission based on misrepresentations were not preempted by ERISA, that the provisions were not inconsistent with AB 1672, and that Security was entitled to rescission of its agreement with Meyling. Meyling appealed that determination.
The district court had jurisdiction over this case pursuant to 28 U.S.C. §§ 1331, 1332. We have jurisdiction under 28 U.S.C. § 1291.
We review de novo a district court's grant of summary judgment. Cisneros v. UNUM Life Ins. Co. of America, 134 F.3d 939, 942 (9th Cir.1998); Babikian v. Paul Revere Life Ins. Co., 63 F.3d 837, 839 (9th Cir.1995). " '[T]he district court's interpretation and application of ERISA provisions and its determination that ERISA preempts a state law,' " are also reviewed de novo. Babikian, 63 F.3d at 839 (citation omitted); see also Serrato v. John Hancock Life Ins. Co., 31 F.3d 882, 884 (9th Cir.1994) () (citation omitted).
, 359
The district court based its grant of summary judgment in favor of Security on California Insurance Code sections 331, 359, and 10380, which allow an insurer to rescind an insurance contract when the insured has concealed or misrepresented material facts. 2 Meyling argues that these provisions are preempted by ERISA. We agree.
We have repeatedly emphasized that "ERISA contains one of the broadest preemption clauses ever enacted by Congress." See Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1439 (9th Cir.1990). Generally, ERISA "supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan...." 29 U.S.C. § 1144(a). However, ERISA also contains a "savings clause" which provides that "nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance...." 29 U.S.C. § 1144(b)(2)(A). The district court concluded that although the provisions of the California Insurance Code at issue relate to an ERISA plan, the provisions are not preempted because they fall within ERISA's savings clause. We disagree with that conclusion.
Under the Supreme Court's decisions in Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740-44, 105 S.Ct. 2380, 85 L.Ed.2d 728 (1985) and Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48-49, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987), we employ "a two-part test to determine when laws regulate insurance under ERISA's saving clause." Evans, 916 F.2d at 1439; see also Cisneros, 134 F.3d at 945; Serrato, 31 F.3d at 885. First, we ask whether the law fits a "common-sense understanding of insurance regulation." Cisneros, 134 F.3d at 945. Second, we consider three criteria "taken from case law interpreting the phrase 'business of insurance' under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15.' " Id. Those criteria are "[f]irst, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry." Id. (italics in original). However, "the McCarran-Ferguson factors are simply relevant considerations or guideposts, not separate essential elements of a three-part test that must each be satisfied for a law to escape preemption." Id. at 946.
The Supreme Court's decision in Pilot Life informs our determination that California Insurance Code sections 331, 359, 10380 do not fit within a "common sense" understanding of insurance regulation. In ...
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