:: Stop Loss Carrier Averts ERISA Preemption In Dispute Over “Fronted” Claims Reimbursement

More specifically, the sole issue we decide in this appeal is whether ERISA preempts a state law breach of contract claim and an alternatively pled state law unjust enrichment claim brought by a third-party company hired to perform only non-discretionary administrative services, under the self-funded portion of an employee health care benefit plan covered by ERISA, against the sponsor of such plan for reimbursement of $93,999.73 in nondiscretionary payments the third-party company fronted to satisfy self-funded benefit claims, when:

(1) the plan administrator, with full discretion to determine whether a claim for self-funded benefits should be paid or denied (and who also served as the sponsor’s chief financial officer) expressly acknowledged the debt and recommended to the sponsor’s chief executive officer that it should be paid; and (2) resolution of either claim requires no interpretation of the plan terms nor is it in any way dependant upon the plan being governed by ERISA.

Great-West Life & Annuity Ins. Co. v. Information Systems & Networks Corp. 523 F.3d 267 (4th Cir. 2008)

With that sentence of Faulknerian length, the Fourth Circuit framed the question of possible ERISA preemption of a claims administrator against a plan sponsor. The case forms a interesting addition to the growing body of law to the effect that contractual disputes between plan sponsors and claims administrators are subject to state, not federal, law.

Effective September 1, 2000, the defendant in this case, Information Systems and Networks Corp. (ISN), established a health care benefit plan for the purpose of providing certain health care benefits to its covered employees and their dependents (the Plan). The parties agree that the Plan is governed by ERISA.

The Facts

The facts suggest a rather ordinary administrative services arrangement between Great West and an employer, ISN.

ISN purchased insurance from the plaintiff in this case, Great-West Life and Annuity Insurance Company (Great-West), to cover some benefits under the Plan, for example, accidental death benefits. ISN also contracted separately with Great-West to provide stop-loss coverage for the amount any claims by an employee or dependent exceeded $30,000.00 per month in the aggregate.

. . . ISN also hired Great-West to perform certain non-discretionary administrative services under the Plan. Great-West’s state law claims against ISN in this case both arise from Great-West’s performance of only one of these nondiscretionary administrative services, namely, Great-West’s non-discretionary duty to front the payment of claims made by ISN employees and their dependents for self-funded benefits under the Plan. ISN, in turn, agreed to reimburse Great-West for any such payments.

Failure To Reimburse

The central dispute arose over Great West’s claim that ISN failed to repay it for funds it “fronted” for ISN’s “self-funded” ERISA plan, and the fees for claims services. The court found the key to its holding in the discretion vested in the plan administrator (ISN). From the plan language:

The Plan Administrator has complete authority to control and manage the Plan. The Plan Administrator has full discretion to determine eligibility, to interpret the Plan and to determine whether a claim should be paid or denied, according to the provisions of the Plan as set forth in this booklet.

The Employer is fully responsible for the self-funded benefits. Great-West processes claims and provides other services to the Employer related to the self-funded benefits. Great-West does not insure or guarantee the self-funded benefits.

Based upon the non-discretionary role attributed to the claims administrator, the Court held for Great West, holding that:

ERISA does not preempt a state law breach of contract claim, nor an alternatively pled state law unjust enrichment claim, brought by the third-party company hired to perform only nondiscretionary administrative services, under the self-funded portion of an employee health care benefit plan covered by ERISA, against the sponsor of such plan for reimbursement of $93,999.73 in nondiscretionary payments the third-party company fronted to satisfy self-funded benefit claims, when: (1) the plan administrator, with full discretion to determine whether a claim for self-funded benefits should be paid or denied (and who also served as the sponsor’s chief financial officer) expressly acknowledged the debt and recommended to the sponsor’s chief executive officer that it should be paid; and (2) resolution of either claim requires no interpretation of the plan terms nor is it in any way dependant upon the plan being governed by ERISA. Accordingly, we affirm the judgment below.

Note: A limiting factor for the ruling was the liquidated nature of the debt. That allowed the court to view the issue as one of debtor-creditor relationship rather than interpretation of the plan

. . . we agree with Great-West and the district court that Great-West’s claims are run-of-the-mill state law claims alleging failure to pay a creditor, i.e., Great-West under the Services Agreement, and thus, are not preempted. The plain and unambiguous terms of the Plan and the Services Agreement make clear that Great-West lacked any discretion in determining whether to pay claims submitted by Plan participants and their beneficiaries for benefits under the self-funded portion of the Plan. Rather, the Plan and the Services Agreement reserved all discretion to deny claims for benefits under the self-funded portion of the Plan to the Plan Administrator, who the parties agree was CFO Bonuccelli. Accordingly, proof that Great-West is deserving of reimbursement under the Services Agreement for the nondiscretionary payment of benefit claims under the self-funded portion of the Plan does not implicate the uniform administration of the Plan as ISN maintains.

On this reasoning, the case would perhaps be preempted if the plan administrator:

1. challenged the amount alleged as owed by directing objections to the administration of claims (thereby requiring interpretation of plan terms

2. challenged the actual discretion exercised by the claims administrator notwithstanding the plan document allocation of duties.

#1 seems a very likely challenge in many such cases; the latter, perhaps not as certain. That would only take a counterclaim at most on the facts in the instant case. As for #2, while in fact claims administrators may frequently exercise discretion in adjudicating claims, the court’s willingness to entertain these line of argument would depend on its insight into practical reality of claims administration.

Query #1 Should it make a substantial difference in preemption as to whether the litigation requires interpretation of plan documents, particularly where the issue is employer versus vendor? I don’t think so. When the plan interpretation is necessary as a measure of damages rather than as a basis of a claim, preemption arguments should be unavailing as they advance no substantial ERISA purpose.

Query #2 This point is a bit esoteric (and arguably not so relevant), but to loosely quote Lincoln, for people who are interested in this kind of thing, this is the kind of thing that interests them:

Revisiting the reasoning of the Fourth Circuit in Talquin Builders, does Great West approach in its ASO arrangement (not uncommon) the line the deemer clause inappropriate?

The stop-loss insurance does not pay benefits directly to participants, nor does the insurance company take over administration of the Plan at the point when the aggregate amount is reached. Thus, no insurance is provided to the participants, and the Plan should properly be termed a non-insured plan, protected by the deemer clause….

“Fronting the claims”, handling claims administration, providing stop loss insurance and – but for one fact – exercising discretion over payment of claims (which was not urged on the court, but very likely a provable fact)? In other words, could it be argued that Great West simply operated as an insurance company on facts such as these?

The only saving grace for the carrier – the plan is primarily and ultimately liable to the participants for payment of claims. Yet, if an employer is financially unable to do so from the outset, for sake of argument, should the economic reality prevail over form, such that the insurer is treated as in fact the insurer? Perhaps we will see that issue argued in some future case.

Attorneys Of Record –  ARGUED:Norman Henry Singer, Singer & Associates, P.C., Bethesda, Maryland, for Appellant [ISN]. Thomas G. Collins, Buchanan, Ingersoll & Rooney, P.C., Harrisburg, Pennsylvania, for Appellee [Great West] . ON BRIEF:Stephen Moniak, Buchanan, Ingersoll & Rooney, P.C., Harrisburg, Pennsylvania, for Appellee