OCTOBER 2006 BAD FAITH CASES FEGLIA PARTIALLY PREEMPTS BAD FAITH STATUTE FOR PUNITIVE DAMAGES AND COURT COSTS, BUT NOT FOR INSURANCE PROCEEDS, INTEREST OR ATTORNEYS’ FEES (Middle District)

In Fernbaugh v. Metropolitan Life Insurance Company, Plaintiff sought bad faith damages against Defendant insurer for its alleged refusal to pay $98,000.00 in insurance proceeds upon the death of his wife, an insured under a Federal Employees’ Group Life Insurance (FEGLI) Policy.  Defendant argued, among other things, that the Federal Employees’ Group Life Insurance Act (FEGLIA) provides the exclusive remedy for disputes concerning the proceeds of an insured’s FEGLI policy.  The United States District Court for the Middle District of Pennsylvania recognized that FEGLIA preempts state law to the extent that state law is inconsistent with the provisions of an insurance contract issued pursuant to FEGLIA; however, the Court determined the policy at issue was not inconsistent with Pennsylvania’s bad faith statute and Plaintiff’s bad faith claim was thus not preempted.  The Court distinguished FEGLIA from ERISA’s broader preemption clause, recognizing that FEGLIA’s clause preempts state laws inconsistent with the terms of a FEGLI policy while ERISA preempts state law that conflicts with any of its statutory sections.  The Court acknowledged that Plaintiff’s FEGLI policy did not authorize the recovery of punitive damages, court costs or certain prejudgment interest, due to this inconsistency with the Pennsylvania bad faith statute which allows such damages.  The Court held that FEGLIA’s preemption clause operated to preempt Plaintiff’s bad faith claims for punitive damages and court costs. Though the Court denied Defendant’s motion to dismiss, it dismissed Plaintiff’s claim for punitive damages, court costs, and prejudgment interest insofar as inconsistent with the terms of the original policy. 

The Court also stated that because the complaint alleged a refusal to pay the optional insurance proceeds despite the insured’s payment of the premiums and representations regarding the insured’s coverage, and refusal to pay the proceeds despite plaintiff’s request that it do so stated a bad faith claim, and defendant’s allegation that its practice is to pay insurance benefits as determined by the government could not defeat the claim on a motion to dismiss.

Date of Decision:  September 21, 2006

Fernbaugh v. Metro. Life Ins. Co., United States District Court for the Middle District of Pennsylvania, No. 1:CV-06-1361, 2006 U.S. Dist. LEXIS 67765 (M.D. Pa. Sept. 21, 2006) (Caldwell, J.)