In Harding v. Provident Life and Accident Insurance Company and Unum Group, the court was faced with the issue of whether a long-term disability plan qualified as an ERISA plan under federal law and therefore preempted the employee’s breach of contract, bad faith and unfair trade practices state law claims. The insurer filed a motion to dismiss, which the court treated as a motion for summary judgment.
The employee purchased an individually owned long-term insurance policy from the insurer, under which her employer sent monies to the insurer after deducting them from her paychecks. Employees were a granted a small discount on the premiums as a result of this payment arrangement. Although the employer never formally made the policy an ERISA plan, it formally complied with the federal ERISA regulations. After the employee incurred a disability in 2005, her coverage ran out in 2010. The employee made a claim for residual benefits under her long-term disability plan, but was denied by the insurer. The employee never appealed and failed to exhaust her administrative remedies.
The employee argued that, because her employer never intended the plan to qualify as an ERISA plan and the company never filed the proper paperwork, the court should not interpret the plan under ERISA. However, the court rejected this logic because the plan established a fund for a defined risk group. Moreover, the employee contributed to the fund, which was maintained by her employer and was originally established for the purpose of providing benefits to its participants. The court concluded that these elements established the employee’s long-term disability plan as an ERISA plan.
The employee also claimed that, despite the court’s finding, the policy should be exempt from ERISA under the Department of Labor’s “Safe Harbor” provisions. However, the court concluded that she did not meet the first of four elements required of a policy to fall under the DOL’s “Safe Harbor” provisions and therefore did not qualify for exemption from ERISA.
Having concluded that the carrier’s policy was governed by ERISA, it found that the breach of contract, bad faith, and unfair trade practices claims were preempted by federal law. The Third Circuit has definitively held that state law bad faith claims will be preempted by ERISA.
The court also noted that the employee’s failure to exhaust her administrative remedies allowed the insurer to state a valid affirmative defense. Under Third Circuit law, an employee’s failure to invoke administrative procedures will prevent relief in federal court for an ERISA claim. Such a rule, the court noted, is strictly enforced.
Therefore, the court granted summary judgment to the insurer and ruled that the policy fell under ERISA, preempting the employee’s ability to bring a state law claim for bad faith.
Date of Decision: August 19, 2011