California Insurance Bad Faith Law—Claims Denials and Insurance Coverage Issues, Including ERISA Preemption Issues
By ALICE WOLFSON and DAVID LILIENSTEIN
DL Law Group
345 Franklin Street • San Francisco, California 94102
Telephone: 415-678-5050 • Facsimile: 415-358-8484
The following are some issues which frequently arise when litigation insurance bad faith cases. This includes claims denials, coverage issues, duty to defend, duty to indemnify, and ERISA preemption law. This primer focuses on insurer conduct that may qualify as bad faith claims handling.
Because statutes change and decisional law on any topic evolves, and because decisions are often subject to multiple interpretations, the reader is cautioned not to rely on the principles set forth without undertaking additional research.
The authors gratefully acknowledge the assistance of Jill Schlichtmann, Esq., and Amy Bach, Esq.
- Q: What is ERISA preemption?
A: ERISA is an acronym for Employee Retirement Security Act of 1974 (29 U.S.C. 1001-1461). ERISA severely limits policyholder benefits as to group insurance offered through an employer. Remedies are limited to those administrative remedies found in the statute if the group insurance is offered as part of a “plan” within the meaning of ERISA. The issue of whether a group insurance policy is governed by ERISA has become a vital question in light of decisions extending ERISA’s preemptive reach and forcing claimants to bring an ERISA enforcement action in federal court, rather than a common law bad faith action in state court. (Kanne v. Connecticut General Ins. Co. (1987) 481 U.S. 41, 107 S.Ct. 1549.)
- Q: What constitutes an ERISA plan?
A: Whether an ERISA plan exists is a factual question. The courts have generally found a “plan” to exist where the employer pays the premiums, even though the employer does not intent to create an ERISA plan and has little involvement in the administration of the benefit program. (Marshall v. Bankers Life & Casualty Co. (1992) 2 Cal.4th 1045, 10 Cal.Rptr.2d 72.)
- Q: When is an employee plan excluded from ERISA?
A: The Ninth Circuit in Kanne v. Connecticut General Ins. Co., supra, held that all the criteria set forth in the Department of Labor regulations must be satisfied before a plan is excluded from ERISA. These are:
- 1)the employer does not endorse the program;
- 2)employee participation is voluntary;
- 3)premiums are paid entirely by the employee;
- 4)the employers sole function is to collect premiums and remit the same to the insurer; and,
- 5)the employer must receive no consideration other than reasonable compensation for collecting and remitting premiums./li>
Note:State, federal and municipal employees are not governed by ERISA preemption.
(29 U.S.C. section 1309(b), 1321(b)(2).)
- Q: Who is a “participant” in an ERISA plan?
A: ERISA defines a “participant” as an “employee or former employee”. Plaintiffs who own their businesses or who are independent contractors arguably are not “employees”. The key consideration is whether the hiring party has the right to control the manner and means by which work is done. (Nationwide Mut. Ins. Co. v. Darden (1992) 503 U.S. 318, 112 S.Ct. 1344.)