:: Fifth Circuit Upholds State Insurance Regulation Of Subrogation Rights

Benefit contends that ERISA’s conflict preemption section, 29 U.S.C. § 1144(a) (“Section 514”), preempts Directive 175. Section 514 “supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” § 1144(a). The preemption is not complete, however, because ERISA saves “any law of any State which regulates insurance, banking, or securities.” § 1144(b)(2)(A). The initial question is whether Directive 175 is a “State law” such that it falls within the preemptive scope of Section 514(a).

Benefit Recovery, Inc. v. Donelon, — F.3d —-, 2008 WL 642972 (C.A.5) (March 11, 2008)

In this rather unique case, the Fifth Circuit had the opportunity to interpret ERISA Section 514 in the context of a challenge to a state insurance department regulation. The regulation, a “directive” in Louisiana regulatory parlance, subordinated insurance carrier’s subrogation claims to the “make whole” doctrine and procurement costs. The district court upheld the regulation, and the issue was appealed to the Fifth Circuit.

The Facts

Benefit Recovery, Inc. (“Benefit”), sued the Louisiana Commissioner of Insurance in his official capacity when a proposed health insurance form from Ochsner Health Plan, with whom Benefit had contracted for subrogation services, was rejected for failing to include terms pursuant to Directive 175. The Directive provided:

“any right of recovery from third parties on the part of the insurer, whether by subrogation or reimbursement, is subordinate to the insured’s right to be fully compensated for his damages; and … the insurer is obligated to share in the legal expenses incurred.”

The regulation only applied to insured ERISA plans.

According to stipulated facts, Directive 175 applies only to insurance policies, not self-funded ERISA benefit plans or entities acting as “pure administrators” of such plans.

The Argument

The Fifth Circuit ruled that certain arguments were inadequately preserved on appeal. Thus, it is important to understand the scope of review and thus the reach of the holding.

Benefit sued the Commissioner in August 2003 on the theory that ERISA preempts Directive 175. The parties proposed the case be decided on cross-motions for summary judgment and filed joint stipulations of fact. The district court granted the Commissioner’s summary judgment motion on the theory that Directive 175 is saved from preemption by 29 U.S.C. 1144(b)(2)(A) (“Section 514”). Benefit moved to alter or amend the judgment pursuant to Federal Rule of Civil Procedure 59(e), asking the court to decide whether Directive 175 is invalid on state-law grounds and requesting an opportunity to submit additional evidence on the savings clause analysis. The district court refused.

Is The Regulation A “State Law”?

The first question before the court involved the nature of the directive itself. The court concluded that:

There can be no doubt that if Directive 175 is a “State law,” it falls within the preemptive scope of Section 514. The other requirement for preemption is that the state law must “relate to” insurance. Not only has the Supreme Court read this prong expansively, see, e.g. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987), but it is intuitively correct that regulating insurance contracts means regulating insurance.

On this point, the Court held:

It is somewhat difficult to categorize Directive 175. In Louisiana, a directive is a “written communication or order issued by or on behalf of the commissioner of insurance to a person whose activities are regulated by this Title, which instructs the person to act in conformance with this Title, or any rule or regulation adopted in accordance with the Administrative Procedure Act.” La.Rev.Stat. Ann. § 22:5(6) (2004). In other words, to the extent that directives have the “effect of law,” it is because they merely expound on what is already in the insurance code. At the same time, there are punitive consequences for violating a directive. There is no need for us to engage in a metaphysical inquiry into the nature of “law” or its effects where the hand of the state firmly, though not harshly, requires compliance.

Is The State Law Saved From Preemption?

Of course, the key issue then becomes whether or not the directive is saved from preemption. The court noted:

Our inquiry does not end with the preemption prong; we must determine whether the state law is saved because it regulates insurance. To decide whether a state law regulates insurance, it must (1) be specifically directed toward entities engaged in insurance and (2) substantially affect the risk pooling arrangements of insurer and insured. Ky. Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 341-42 (2003).

The Commissioner Prevails

In a brief treatment of the issue, the Fifth Circuit held that the subrogation regulation was saved from preemption.

We conclude that any “State law” as defined in the preemption provision qualifies as the “law of any state” for the purposes of the savings clause. The savings clause was phrased with “similar breadth” as the preemption clause. UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 363 (1999). The Court observed this in the process of holding that a judicially created “notice-prejudice” rule regulated insurance and therefore was saved from preemption. Id. at 367-72. If a judicial rule can be a state law, it is far from certain where we would draw the dividing line between “State laws” and “laws of any State.” Given the similar breadth of the clauses, if statutes and state supreme court decisions are “State laws,” it follows that rules, regulations, and anything else having the effect of law are as well.

Note: The Court only considered the issue of conflict preemption, stating:

Benefit contends Directive 175 is invalid as a matter of federal law because it is an improperly issued state regulation purporting to supply a rule of decision for ERISA plans. We do not reach the merits of that argument, because Benefit raised it only after entry of judgment. Benefit made the argument for the first time in its unsuccessful rule 59(e) motion. We review for abuse of discretion. Coliseum Square Ass’n v. Jackson, 465 F.3d 215, 247 (5th Cir.2006), cert. denied, 128 S.Ct. 40 (2007). In other words, we are not deciding whether Directive 175 is in fact invalid as a matter of federal law, but whether the district court acted improperly.

Waiver – The Court observed that:

The question whether Section 502 preempts the Directive is therefore presented for the first time on appeal, so we do not reach the merits of Benefit’s claim. Realizing this hurdle, Benefit seeks to invoke our appellate power through a back door: In its reply brief, it urges that parties do not expect cross-motions for summary judgment to end their case.FN2 Regardless of the legal merits of such an expectation, Benefit has waived our review of the dismissal of the case, because arguments cannot be raised for the first time in a reply brief. Yohey v. Collins, 985 F.2d 222, 225 (5th Cir.1993).

The Insured Plan Distinction – Insurance carriers should be aware that subrogation provisions in their policies will be subject to state regulation. Rush Prudential v. Moran, 536 U.S. 355, 365-66 (2002) (determining whether a law that “regulates insurance” requires that “we start with a ‘common-sense view of the matter,’ … under which ‘a law must not just have an impact on the insurance industry, but must be specifically directed toward that industry’ ”) continues to carry heavy weight on the scope of the savings clause. We have previously seen that effect in cases reviewing state insurance regulations that prohibit “discretionary clauses”. Self-funded plans will be exempt under the deemer clause.