On October 13, 1998, the United States Supreme Court announced it will decide whether the Employee Retirement Income Security Act of 1974 ("ERISA") preempts two California rules that could be used to alter the terms of an employee benefit plan. Members of Thelen Reid's Employee Benefits Practice Group and Labor and Employment Law Group secured the Supreme Court's decision to review the case, UNUM Life Ins. Co. of Am. v. Ward, by filing a petition on behalf of UNUM on May 20, 1998. The case is one of only two ERISA cases scheduled to be heard by the Supreme Court in the 1998-99 Term. The number of petitions filed with the Court has been steadily increasing each year while the number of cases the Court agrees to hear each term has steadily declined. For the 1997-98 Term, a total of 7,692 petitions for review were filed, of which only 94 were heard by the Court.
At issue in UNUM Life Ins. Co. of Am. v. Ward is whether state law rules can be invoked by a participant in an ERISA-governed employee welfare benefit plan to recover benefits that otherwise would not be payable under the plan's lawful terms. The United States Court of Appeals for the Ninth Circuit ruled that ERISA does not preempt two such California rules.
If left standing, the decision would weaken the long-standing rule that the limited remedies available to participants under ERISA are exclusive and cannot be supplemented under state law. The decision also would weaken the equally long-standing rule that all employee benefit plans in all 50 states must be administered solely in accordance with the uniform standards set forth in ERISA. The upshot for employers would be significantly higher costs to maintain their benefit programs. First, employers would be required to defend against more lawsuits over benefits, because the greater potential payouts under state laws would encourage individual employees to sue to establish that particular state laws are not preempted by ERISA. Second, employers with offices in more than one state would face the additional burden and cost of attempting to comply with each state's unique rules.
The case arose when UNUM denied as untimely a claim by John Ward, the former president and CEO of Management Analysis Company ("MAC"), for benefits under a long-term disability insurance policy sponsored by MAC and issued by UNUM. To receive benefits under the terms of the Plan, participants were required to submit written notice of their claims to UNUM within 30 days of the date a disability began, if possible, and written proof of their claims no later than 18 months after the onset of the disability.
Mr. Ward claimed that his disability first began while he was still employed at MAC on May 5, 1992, which coincidentally was the same day that the MAC board of directors asked him to resign (which he did three days later). However, Mr. Ward failed to submit any notice or proof of his claim to UNUM until April 11, 1994, more than 23 months after the onset date of his claimed disability and more than five months after the proof-of-claim cutoff date. Mr. Ward asserted that he filed his claim for benefits late because, although he was the CEO, he was unaware of the existence of the MAC plan until he discovered a certificate of coverage among papers in his safe-deposit box in 1994. He contended that MAC purportedly knew he was "disabled" by 1992 or 1993.
Mr. Ward sued UNUM for benefits under two theories of recovery. First, he asserted that California's "notice-prejudice" rule precluded UNUM from denying his claim for benefits as untimely. Under that rule, an insurer may not deny a claim for benefits "merely" because the claim was submitted after the filing deadline set forth in the policy. Rather, the insurer may deny the claim as untimely only if it can establish actual prejudice as a result of the late filing. The Ninth Circuit held that the California rule "regulates insurance" and therefore is "saved" from preemption by ERISA under a special exception intended to leave the regulation of the business of insurance to the states.
Mr. Ward's second theory was that his employer, MAC, was acting as UNUM's agent. Therefore, he argued, his "notice" to MAC in March 1993 of his disability should be deemed a timely request for benefits from MAC and UNUM. The Ninth Circuit agreed that this was a viable theory, relying on a pre-ERISA California case that the court held was not preempted.
The members of Thelen Reid's UNUM team who secured the Supreme Court's review are David Bacon, Ben Delancy and Chuck Dyke. David was of counsel before the Supreme Court in its two leading decisions on ERISA remedies and preemption, Massachusetts Mut. Life Ins. Co. v. Russell and Pilot Life Ins. Co. v. Dedeaux.
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