Even if the Court were to conclude that some Indiana state laws, such as those regulating insurance, were consistent with enforcement of the ERISA plan here, see, e.g. Rush, 536 U.S. 355, 122 S. Ct. 2151, 153 L. Ed. 2d 375, the Supreme Court has been clear that a state law action for bad faith is preempted by ERISA. Pilot Life, 481 U.S. at 57. Thus, to incorporate such a cause of action into the terms of the plan would be “inconsistent with the language of ERISA or the policies that inform the statute and animate the common law of the statute.” Buce v. Allianz Life Ins. Co., 247 F.3d 1133, 1148-49 (11th Cir. 2001). A duty of good faith is not among those aspects of Indiana law which may control the parties contract to the extent that they do not stand as an obstacle to the accomplishment of the purposes and objectives of ERISA. See Pilot Life, 481 U.S. at 57. A choice of law clause referencing Indiana law simply does not permit the parties to side-step the strong preemptive effect of ERISA.

Crider v. Life Ins. Co. of N. Am., 2008 U.S. Dist. LEXIS 53812 (W.D. Ky. July 15, 2008)

The Crider opinion offers several interesting insights. First, the case addresses an attempt to incorporate state law into an ERISA long term disability policy. Second, the case raises the nettlesome issue of when a fiduciary breach claim can be heard along side a claim for benefits.

State Law Issue

From time to time an ERISA claimant will attempt an innovative use of the boilerplate provision found in many ERISA plan documents to the effect that state law will apply to the extent not preempted by ERISA. Here’s an example of such a provision included in a long term disability policy:

“This contract shall be governed by the laws of the state in which it is delivered. . . . Policy Delivered In: IN.”

What does that mean? Whatever meaning it may convey, a district court in Kentucky concluded that it cannot import state law obligations into the long term disability contract.

On the particular facts in issue, the plaintiff alleged that the carrier had an obligation under Indiana law to comport its conduct with a standard of good faith and fair dealing as understood under Indiana state contract law. Not so, said the judge.

[The plaintiff’s] argument is irreconcilable with the purposes and goals of ERISA to promote uniformity in the adjudication of healthcare benefit disputes. “Numerous issues which would otherwise be decided by state law are preempted by ERISA for the specific purpose of providing uniformity.” DaimlerChrysler Corp. Healthcare Benefits Plan v. Durden, 448 F.3d 918, 928 (6th Cir. 2006). ERISA expressly preempts state laws which “relate to” employee benefit plans.

Section 514(a) provides:

Except as provided in subsection (b) of this section, the provisions of this subchapter and in 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 described in this section 29 U.S.C. § 1144(a).

The Supreme Court has ruled that a state law claim asserting bad faith processing of a claim of benefits under an ERISA-regulated plan is preempted. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 57, 107 S. Ct. 1549, 95 L. Ed. 2d 39 (1987) because it “relates to” an employment benefit plan. Here, [the plaintiff] cannot escape the application of Pilot Life by recasting the good faith duty as a “right[] under the terms of the plan” which would be enforceable under § 502(a)(1)(B). 29 U.S.C. § 1132(a)(1)(B).

As the Sixth Circuit has noted, “[i]t is not the label placed on a state law claim that determines whether it is preempted, but whether in essence such a claim is for the recovery of an ERISA plan benefit.” See Cromwell v. Equicor-Equitable HCA Corp., 944 F.2d 1272, 1276 (6th Cir. 1991).

Any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy conflicts with the clear congressional intent to make the ERISA remedy exclusive and therefore pre-empted.” Aetna Health Inc. v. Davila, 542 U.S. 200, 124 S. Ct. 2488, 159 L. Ed. 2d 312 (2004). The argument urged in the foregoing case has occasionally been advanced in other contexts, such as attempts to incorporate state law make whole or subrogation limitations. These efforts, inventive as they may be, cannot survive ERISA preemption.

(a)(1)(B) (Claim For Benefits) Versus (a)(2) (Fiduciary Breach Claims)

The advantages and limitations of claims under (a)(2) were noted in my previous post :: First Circuit Rejects Lack Of Standing Defense To Former Partcipant Claims. The issue recurs in Crider where the district court refused to allow an (a)(2) claim stating:

Where, as here, the only identified losses to the plan as a whole are the litigation expenses associated with defending an individual claim for benefits, any §502(a)(1) claim could be recast as a §502(a)(2) claim. See, e.g., Coyne & Delany Co. v. Blue Cross Blue Shield of Va., Inc., 102 F.3d 712, 714 (4th Cir. 1996)(noting “to proceed as a breach of fiduciary duty action would encourage parties to avoid the implications of section 502(a)(1)(B) by artful pleading: indeed every wrongful denial of benefits could be characterized as a breach of fiduciary duty”).

Here, the facts Crider alleges are insufficient to establish that the failure to act “in accordance with the documents and instruments governing the plan . . .” with respect to Crider’s claim for benefits resulted in a cognizable injury to the plan as a whole. The litigation expenses arise from the initiation of a lawsuit, not the alleged original failure to follow the plan documents. Because Crider’s complaint does not allege systemic, plan-wide claims-administration problems or a claim as in Gore which is “distinct and unrelated” to her claim for benefits, she fails to state a separate claim for breach of fiduciary duty pursuant to § 502(a)(2) and the ERISA remedy for the injury she alleges is that specified in § 502(a)(1).

Note: Injury to the plan as a whole is a necessary predicate to an (a)(2) claim.

Crider’s complaint does not allege systemic, plan-wide claims-administration defects. Nor does [*8] it allege a claim “distinct and unrelated” from her claim for benefits as in Gore. Rather, Crider alleges that LINA “improperly and arbitrarily” terminated her individual long term disability benefits.

Mutually Exclusive? Notwithstanding its ruling in Crider, the district court noted that the Sixth Circuit has been tolerant of some overlap in claims where the pleadings supported the claims:

In at least three recent cases the Sixth Circuit has allowed plaintiffs to pursue both a claim for benefits under §502(a)(1) and also to attempt to hold a plan responsible for breaches of fiduciary duty under a separate §502(a) action. See, e.g., Gore v. El Paso Energy Corp. Long Term Disability Plan, 477 F.3d 833, 838-42 (6th Cir.2007)(holding that a plaintiff could simultaneously obtain relief under § 502(a)(1)(B) and § 502(a)(3), but only because recovery under the former would not provide adequate relief); Hill v. Blue Cross & Blue Shield of Mich., 409 F.3d 710 (6th Cir. 2005)(putative class action challenging the plan-wide claims-processing methodology proceeding under §502(a)(1) and §502(a)(3) 3); Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410, 418 (6th Cir. 1998)(challenging plan-wide methodology for computing benefits).

In both Hill and Fallick, however, the plaintiff’s fiduciary duty claims were based “on allegations of systemic plan-wide claims-administration problems.” Hill, 406 F.3d at 718 (observing the difference between plan-wide claims and those correcting the denial of individual claims). And in Gore, the Sixth Circuit acknowledged that a claim for breach of fiduciary duty under §502(a)(3) alleging wrongful denial of benefits would be “duplicative” of a §502(a)(1)(B). Gore, 477 F.3d at 840.

Not Just A Matter Of Pleading – The district court also noted the troublesome observation by Chief Justice Roberts in LaRue:

As Chief Justice Roberts recently noted in his LaRue concurrence, any other result would run completely counter to ERISA’s enforcement scheme:

the significance of the distinction between a § 502(a)(1)(B) claim and one under § 502(a)(2) is not merely a matter of picking the right provision to cite in the complaint. Allowing a § 502(a)(1)(B) action to be recast as one under § 502(a)(2) might permit plaintiffs to circumvent safeguards for plan administrators that have developed under § 502(a)(1)(B). Among these safeguards is the requirement, recognized by almost all the Court of Appeals, that a participant exhaust administrative remedies mandated by ERISA § 503, 29 U.S.C. § 1133, before the filing under § 502(a)(1)(B). Equally significant, this Court has held that ERISA plans may grant administrators and fiduciaries discretion in determining benefit eligibility and the meaning of plan terms, decisions that courts may review only for an abuse of discretion.

128 S. Ct. at 1026 (Roberts, J., concurring in part and concurring in the judgment).