ERISA Preempts Pennsylvania's Bad Faith Statute

Strategic Insights -

The Third Circuit U.S. Court of Appeals ruled in James Barber v. UNUM Life Insurance Company of America that ERISA preempts Pennsylvania's bad faith statute for insurance claims through conflict and express preemption. This decision comes after a split in Pennsylvania's federal district courts, with some judges holding that the bad faith statute was exempt from ERISA preemption. The ruling resolves the conflict and sets a precedent for similar cases. James Barber, a participant in a group long-term disability insurance plan, had his benefits terminated by UNUM Life Insurance Company of America after he became disabled. Barber sued for breach of contract and bad faith, seeking punitive damages under 42 Pennsylvania Consolidated Statutes Section 8371. UNUM moved to dismiss the bad faith claim, citing ERISA preemption.

Key Takeaways:

  • ERISA preempts Pennsylvania's bad faith statute for insurance claims through conflict and express preemption.
  • The Third Circuit U.S. Court of Appeals ruled in favor of UNUM Life Insurance Company of America, upholding ERISA's remedial exclusivity.
  • Conflict preemption applies to Pennsylvania's bad faith statute, which is a state remedy that allows an ERISA-plan participant to recover punitive damages for bad faith conduct by insurers.
  • The Supreme Court's decision in Aetna Health Inc. v. Davila (124 U.S. 2488; U.S. Sup. [2004]; See July 2004, Page 4) confirmed ERISA's remedial exclusivity, which the Third Circuit relied on in its decision.
  • Express preemption also applies to Pennsylvania's bad faith statute because it does not satisfy the two-part test set forth in Kentucky Association of Health Plans Inc. v. Miller (538 U.S. 329; U.S. Sup. [2003]; See April 2003, Page 4). The statute fails to "substantially affect[] the risk pooling agreement between the insurer and the insured."
  • The appeals court remanded to the District Court with instructions to dismiss Barber's bad faith claim.
  • James Barber is represented by Joseph F. Roda of Roda & Nast in Lancaster, Pa.
  • UNUM is represented by E. Thomas Henefer of Stevens & Lee in Reading, Pa.
  • Amicus curiae the U.S. Chamber of Commerce is represented by Glen D. Nager of Jones Day in Washington, D.C.
  • Amicus curiae United Policyholders is represented by Arnold R. Levinson of Pillsbury & Levinson in San Francisco.

Statistics:

  • The appeals court upheld the District Court's finding that the bad faith claim is preempted by ERISA.
  • The Supreme Court has confirmed ERISA's remedial exclusivity in Aetna Health Inc. v. Davila (124 U.S. 2488; U.S. Sup. [2004]; See July 2004, Page 4).
  • The Third Circuit's decision resolves a split in Pennsylvania's federal district courts regarding the applicability of ERISA preemption to the bad faith statute.
  • The bad faith statute has been found to be exempt from ERISA preemption in at least three other cases, including Rosenbaum v. UNUM Life Insurance Co. of America (No. 016758; E.D. Pa. [2003]; See October 2003, Page 16) and Hunter v. Federal Express (No. 036711; E.D. Pa. [2004]; See August 2004, Page 57).
  • The appeals court remanded to the District Court with instructions to dismiss Barber's bad faith claim.

Sources:

  • James Barber v. UNUM Life Insurance Company of America, No. 03-4363, 3rd Cir.; 2004 U.S. App. LEXIS 18827.
  • Aetna Health Inc. v. Davila, 124 U.S. 2488; U.S. Sup. [2004]; See July 2004, Page 4.
  • Kentucky Association of Health Plans Inc. v. Miller, 538 U.S. 329; U.S. Sup. [2003]; See April 2003, Page 4.
  • Rosenbaum v. UNUM Life Insurance Co. of America, No. 016758; E.D. Pa. [2003]; See October 2003, Page 16.
  • Hunter v. Federal Express, No. 036711; E.D. Pa. [2004]; See August 2004, Page 57.