n Ward v. Management Analysis Co. Employee Disability Benefit Plan, the Ninth Circuit cited with approval a decision under California law finding an agency relationship where an employer administers a group insurance policy while under the control and direction of the insurer. According to the Elfstrom rule, a dispositive factor is proof that the employer participated in the administration of the insurance policy and performed insurance tasks delegated by the insurer.  . . . . . . after reviewing the parties’ papers and carefully considering the arguments presented therein, the court adopts the Elfstrom approach to the employer-insurer agency question.

Thrall v. Prudential Ins. Co. of Am., 2008 U.S. Dist. LEXIS 98902 (December 5, 2008) (internal citations omitted)

The Thrall opinion’s patina of historical retrospective on prior Ninth Circuit authority veils the court’s remarkable decision to elevate state law notions of insurance law over uniformity in ERISA plan administration.  The principal issue – when may an employer be deemed an agent of the insurance carrier for purposes of notice of a change in beneficiaries.

In a prior Ninth Circuit case, Ward v. Management Analysis Co. Employee Disability Benefit Plan, the Ninth Circuit applied a rule derived from Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503, 63 Cal. Rptr. 35, 432 P.2d 731 (1967)).

According to the Elfstrom rule, a dispositive factor is proof that the employer participated in the administration of the insurance policy and performed insurance tasks delegated by the insurer. Id. at 1283.

That rule did not stand.

On appeal, the Supreme Court reversed and held that ERISA preempted the Elfstrom rule recognized by the Ninth Circuit. UNUM Life Ins. Co. of Am. v. Ward (Ward II), 526 U.S. 358, 378, 119 S. Ct. 1380, 143 L. Ed. 2d 462 (1999). The Supreme Court did not articulate a federal common law agency rule to replace the preempted state law.

The Facts Before The Court

Fast forward to the facts in Thrall. The decedent had changed beneficiaries of his life insurance benefits from his four children to his wife.  The parties stipulated the facts:

1. The insured initially designated his four children as beneficiaries under the life insurance policy.

2. At a later point, the insured substantially complied with the policy provisions requiring him to provide notice to KPMG of a change of beneficiary (stipulated fact). This notice indicated that the insured was changing the beneficiary to Plaintiff.

3. In a letter dated March 29, 2002, KPMG acknowledged receiving the beneficiary change form.

4. The insured died on October 19, 2002.

5. On November 21, 2002, Defendant tendered the benefits under the policy to the insured’s four children according to the beneficiary forms supplied by KPMG (stipulated fact).

6. On that date, Defendant did not have actual notice of the change of beneficiary to Plaintiff (stipulated fact).

The Issue

The issue boiled down to this – if KPMG, the decedent’s employer, was an agent for the carrier, then the plaintiff wins.  If not, the carrier wins.

The Court held for the plaintiff.  In view of the Ward decision, you may ask how this could be.

Federal Common Law

The answer lies in the use of federal common law.   The concept may appear technical, but when applied with vigor, it liberates the court from the shackles of the procrustean bed of statutory constraints.

Congress has given federal courts the responsibility to promulgate federal common law where ERISA preempts state law. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S. Ct. 948, 103 L. Ed. 2d 80 (1989); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56, 107 S. Ct. 1549, 95 L. Ed. 2d 39 (1987); Menhorn v. Firestone Tire & Rubber Co., 738 F.2d 1496, 1499 (9th Cir. 1984) (”Congress realized that the bare terms, however detailed, of these statutory provisions would not be sufficient to establish a comprehensive regulatory scheme. It accordingly empowered the courts to develop … a body of federal common law governing employee benefit plans.”).

The Federal Common Law At Work

And so the district court went to work constructing a new rule:

None of the traditional factors that would caution against adopting this agency rule as a matter of federal common law under ERISA are applicable here. See Steinberg v. Mikkelsen, 901 F.Supp. 1433, 1438 (E.D.Wis. 1995) (identifying these factors as whether the federal common law is consistent with ERISA policy, whether it will impact the actuarial soundness of the plan, and whether the court would effectively be fashioning a new ERISA remedy by adopting the rule).

In adopting a rule deeming employers the agent of the carrier, the court noted that:

This holding is consistent with ERISA policy because it protects the interests of employees and beneficiaries under benefit plans when significant administrative duties are delegated to the employer and the employee has little knowledge or control over the employer’s actions. Such a rule also provides insurers an incentive to monitor and direct the ongoing administration of benefit plans. See Kobold v. Aetna U.S. Healthcare, Inc., 258 F.Supp.2d 1317, 1324 (M.D.Fla. 2003).

This rule will not affect the actuarial soundness of the plan. See Steinberg, 901 F.Supp. at 1439 (holding that agency rule creating liability against insurer providing group life insurance will not affect its actuarial soundness) (citing Black v. TIC Inv. Corp., 900 F.2d 112, 114-15 (7th Cir. 1990)). Neither does the rule fashion a new ERISA remedy, as it simply allows a beneficiary to receive benefits under a plan from the insurer. Id. at 1439.

Note: This view, if widely adopted, would substantially change the ERISA plan landscape.  In this instance, the issue was beneficiary designation.  But consider the wider implications.

If an employer accepts premiums for an employee that is deemed ineligible by the carrier, perhaps the carrier is nonetheless bound to pay benefits if the indicia of agency are present.  If an employer accepts premiums and then fails to remit them, perhaps the coverage is in force nonetheless.  (See this thread on ERISAboard.com in that context.)   In fact, many exclusions presently available to insurance carriers could be undercut if the employer’s conduct is imputed to the carrier.

The decision is an unwarranted extension of the federal common law, but to the extent it has influence, it can dramatically unseat expectations of uniform plan administration under the auspices of ERISA preemption