Tri-State Mach., Inc. v. Nationwide Life Ins. Co.

• Decision Date: 31 August 1994
• Docket Number: TRI-STATE,No. 93-1971,93-1971
• Citation: 33 F.3d 309
• Parties: 18 Employee Benefits Cas. 1972 MACHINE, INCORPORATED, Plaintiff-Appellant, v. NATIONWIDE LIFE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 309

33 F.3d 309

18 Employee Benefits Cas. 1972

TRI-STATE MACHINE, INCORPORATED, Plaintiff-Appellant, v. NATIONWIDE LIFE INSURANCE COMPANY, Defendant-Appellee.

No. 93-1971.

United States Court of Appeals, Fourth Circuit.

Argued March 9, 1994.

Decided Aug. 31, 1994.

ARGUED: David B. Fawcett, III, Buchanan Ingersoll Professional Corporation, Pittsburgh, PA, for appellant. Gregory Darwin Port, Chorpenning, Good & Mancuso Co., L.P.A., Columbus, OH, for appellee. ON BRIEF: James W. Forsyth, Buchanan Ingersoll Professional Corporation, Pittsburgh, PA; Ray A. Byrd, Schrader, Recht, Byrd, Byrum & Companion, Wheeling, WV, for appellant. Philip F. Brown, Chorpenning, Good & Mancuso Co., L.P.A., Columbus, OH, for appellee.

Before NIEMEYER and LUTTIG, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which Senior Judge PHILLIPS joined. Judge LUTTIG wrote a separate dissenting opinion.

OPINION

NIEMEYER, Circuit Judge:

We are presented with the issue of whether the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Sec. 1001, et seq., preempts state law claims of Tri-State Machine, Inc., for improper claims processing and mismanagement against Nationwide Life Insurance Company. Nationwide Life issued and administered a group insurance policy to provide health care benefits for Tri-State's employees under an employee benefit plan. The district court ruled that Tri-State's state law claims were preempted by ERISA and, upon Tri-State's failure to amend its complaint to state a claim under ERISA, dismissed the action. Tri-State contends on appeal that it is a "mere purchaser" of insurance and that its claims against Nationwide Life are not preempted by ERISA because they do not "relate to" an employee benefit plan. Tri-State also contends that its claims are based on state laws regulating insurance, which are saved from preemption under Sec. 514(b)(2)(A) of ERISA. For the reasons that follow, we conclude that the district court properly held that all of TriState's state law claims are preempted by ERISA and affirm.

I

The employee benefit plan of Tri-State Machine, Inc., provides medical, disability, dental, and death benefits to Tri-State employees and their beneficiaries. The terms of the plan give participants notice that the plan is governed by ERISA and that they are entitled to certain rights and protections under ERISA. Until 1989, the plan was insured and administered by Nationwide Life Insurance Company under a group policy and under a Cash Priority Plan Funding Agreement between Nationwide Life and Tri-State. Under the agreement, claims for benefits were self-funded by Tri-State up to a $25,000 limit for each employee for each year, beyond which Nationwide Life agreed to pay claims under stop-loss insurance. All claims by employees were to be submitted to Nationwide Life, who reserved the right to determine whether the claims were payable. Nationwide Life provided monthly reports to Tri-State detailing Tri-State's liability under the agreement. Nationwide Life entered into a subcontract with First Benefits Agency, Inc., to administer the plan.

Effective July 1, 1989, Nationwide Life terminated its arrangements with Tri-State. Alleging that Nationwide Life mismanaged and improperly carried out its claims processing responsibilities under the policy and agreement, Tri-State filed suit in the West Virginia Circuit Court of Ohio County in February 1990, alleging breach of contract, breach of implied covenants of good faith and fair dealing, bad faith tort, insurance bad faith and violation of the West Virginia Unfair Trade Practices Act, W.Va.Code Secs. 33-11-1 through 33-11-10. Tri-State asserted that Nationwide Life failed to administer the plan according to the terms of the agreement and mismanaged the claims processing procedures by paying claims to wrong medical providers, by issuing coverage cards in the names of employees never associated with Tri-State, by charging claims to accounts of individuals who had not submitted claims, by paying claims not covered, by denying claims that were covered, and by requesting reimbursement from Tri-State for claims improperly paid. Tri-State also charged that Nationwide Life delayed processing of claims in a year during which Tri-State had met its stop-loss liability, deflecting claims into a new policy year so that claims would become the obligations of Tri-State by reason of the annual self-funding limit of $25,000 for each employee.

Nationwide Life removed the case to the federal district court on diversity grounds and also on grounds that the claims were preempted by ERISA. On Tri-State's motion for partial summary judgment to declare that ERISA did not preempt its state law claims, the district court denied the motion and held that "ERISA preempts all of Tri-State's claims based upon West Virginia laws relating to the health insurance plan upon which its complaint is based." The court held specifically that 29 U.S.C. Sec. 1144(a) preempts all of Tri-State's claims and that the exception to preemption contained in 29 U.S.C. Sec. 1144(b)(2)(A), known as the Savings Clause, did not apply because the "Deemer Clause," contained in Sec. 1144(b)(2)(B), excludes from the Savings Clause self-funded benefit plans. The court found that the plan in this case was a self-funded plan and that the stop-loss insurance for coverage above the self-funded amounts did not "change this outcome." Thereafter the court ordered Tri-State to notify the court whether it intended to pursue the case under ERISA. Although Tri-State indicated its intention to do so, it never amended its complaint to state a claim under ERISA, and the district court dismissed the complaint. This appeal followed.

II

We are presented with the legal issue of whether Tri-State's state law claims, arising out of allegedly wrongful claims processing by Nationwide Life, are preempted by ERISA. Since the question is one of law, we will review the district court's orders de novo.

ERISA's preemption clause provides:

Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan ....

29 U.S.C. Sec. 1144(a) (emphasis added). This clause has been broadly interpreted by the courts to carry out Congress' intent to displace any state law efforts to regulate ERISA matters. See, e.g., FMC Corp. v. Holliday, 498 U.S. 52, 58, 111 S.Ct. 403, 407, 112 L.Ed.2d 356 (1990) ("the pre-emption clause is conspicuous for its breadth"); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983) ("the section's pre-emptive scope [is] as broad as its language"); Custer v. Pan American Life Ins. Co., 12 F.3d 410, 418 (4th Cir.1993) ("it is frequently observed that the force of ERISA's preemption is strong and its scope wide"). Thus, any law "that relates to" a plan is preempted by 29 U.S.C. Sec. 1144(a), and the phrase "relates to" is given its common sense meaning, as having "connection with or reference to such a plan." Shaw, 463 U.S. at 96-97, 103 S.Ct. at 2899-2900.

Although ERISA's preemptive sweep is broad, the "Savings Clause" contained in 29 U.S.C. Sec. 1144(b)(2)(A), which saves from preemption state laws that regulate insurance, is stated almost as broadly. This clause preserves for state regulation any law "which regulates insurance, banking, or securities." 29 U.S.C. Sec. 1144(b)(2)(A) (emphasis added). In Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739-40, 105 S.Ct. 2380, 2389, 85 L.Ed.2d 728 (1985), the Supreme Court construed the Savings Clause to apply only to state laws regulating core insurance issues. Considering a complex state statutory scheme which regulated, among other things, the substantive content of health insurance policies, the Supreme Court held that state insurance regulations that mandate particular policy benefits are saved from preemption by the Savings Clause. It concluded that Congress intended to save from preemption only those state laws that regulate the traditional business of insurance to the extent that it involves contractual arrangements for protection against financial loss through the spreading of risk. To guide this inquiry, the Court put forth the following three-part test developed under the McCarran-Ferguson Act:

[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.

471 U.S. at 743, 105 S.Ct. at 2391 (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3009, 73 L.Ed.2d 647 (1982)). Thus, a claim based on state law or regulation that regulates the business of insurance as defined by Metropolitan Life's three-part test is "saved" from preemption by virtue of the Savings Clause, Sec. 1144(b)(2)(A), even if the claim "relates to" an employee benefit plan within the meaning of Sec. 1144(a).

ERISA takes the further step of limiting the Savings Clause by stating that an employee welfare benefit plan itself is not, under state law, to be "deemed" an insurance company for purposes of the Savings Clause. This so-called "Deemer Clause" provides:

Neither an employee benefit plan ... nor any trust established under such a plan, shall be deemed to be an insurance company, or other insurer ... or to be engaged in the business of insurance or banking for purposes of any law or any State purporting to regulate insurance companies, insurance contracts....

29 U.S.C. Sec. 1144(b)(2)(B) (emphasis added). The Deemer Clause has been interpreted by the Supreme Court "to exempt self-funded ERISA plans from state laws that 'regulat[e] ins...