It is not uncommon for plaintiffs to argue - and for some defense lawyers to agree - that individual life, health, or disability insurance policies cannot be part of an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001, et seq. ("ERISA"). Not so. ERISA broadly provides that an employee welfare benefit plan can be funded "through the purchase of insurance or otherwise," 29 U.S.C. §1002(1), and makes no distinction between individual insurance and group insurance. Thus, benefits under an ERISA-compliant plan can be funded by one or more group or individual insurance policies, or a combination of group and individual insurance policies.
In the past year, there have been several federal district court decisions holding that programs involving individual disability insurance policies are governed by ERISA, even in some instances where the actual structure of the ERISA program expired before an insured filed a claim for benefits under the policy. This article will discuss two of those decisions - both in California - as illustrations of the types of arrangements involving individual insurance policies that courts have found to be regulated by ERISA.
Indicia of an ERISA Plan
The ultimate question in determining whether any insurance policy - individual or group - is regulated by ERISA, is whether the policy is part of an employment relationship. That necessarily requires the establishment of an employer-employee relationship, i.e., there must be an employer and at least one covered employee/participant. See, e.g., 29 C.F.R. §2510.3-3(b) and (c) (every ERISA plan must cover at least one common law employee). It also requires evidence that the insurance policy is part of the employment relationship.
In a typical group insurance arrangement, a group insurance policy is issued to an employer who determines that it will provide coverage to a select group of employees. The employer also typically contributes at least part of the cost of the employee's coverage and/or performs other functions or actions indicating that the employer endorses the program and/or has adopted the policies as part of its overall employee benefit program.
A typical program involving individual policies of insurance is not so different. Examples of some of the common practices involving individual insurance policies can include the following:
- A multi-life program, sometimes exhibited in a written agreement between an employer and an insurer.
- The employer selects the broker, the insurer, and sometimes the types of policies that will make up the program.
- The employer may agree to accept certain responsibilities for establishing and/or maintaining the program, such as payment of all or a portion of the premiums.
- Premiums are subject to a discount as a result of the agreement between the employer and the insurer.
- There may be other benefits such as abbreviated underwriting procedures or higher coverage limits.
- Billings are made directly to the employer, sometimes referred to as a "list bill."
- Individual policies are issued to a select group of employees, many times including one or more owner/employees of the employing entity (frequently a professional corporation).
- The employer maintains ongoing communication with the insurer, including administrative tasks such as informing the insurer when new employees are hired or existing employees are terminated.
- The employer facilitates payment of the premiums. The actual financial responsibility for the premiums may occur in a number of ways, e.g., the employer may absorb the cost, the employer may pass on some or all of the cost to the employees (such as through payroll deductions or via a flexible benefits program), the employer may ask the employees to pay the premiums directly and may reimburse the employees through a bonus program, or the cost of the premiums may be deducted from various expense accounts available to the employees. Many times the purpose of passing on the costs to the employees is to ensure that any benefits would not be subject to income taxes.
Structure of an ERISA Plan
The structure of an ERISA welfare benefit plan is statutory and requires five elements: (a) a plan, fund, or program; (b) established or maintained; (c) by an employer (or an employee organization); (d) for the purpose of providing statutory benefits (including life, health, and disability insurance); (e) to participants and beneficiaries. 29 U.S.C. §1002(1). In the context of group or group-type insurance programs, courts also look to whether the program falls within the "safe harbor" regulation, which excludes any program from ERISA where the employer is a mere advertiser of the program. In order to satisfy the regulatory safe harbor, a plan must satisfy several elements. Two of these elements are most often in dispute when one is attempting to determine whether a plan is exempt from ERISA: (a) whether the employer contributes to the program; and (b) whether the employer has endorsed the program. Satisfaction of either of these elements removes a plan from the safe harbor exemption. 29 C.F.R. §2510.3-1(j).
Case Study: Zide v. Provident Life & Acc. Ins.
The employer in Zide v. Provident Life & Acc. Ins. Co., 2011 U.S. Dist. LEXIS 153777 (C.D. Cal. Apr. 9, 2011) signed a salary allotment agreement with Provident Life & Accident Insurance Company whereby the employer represented that it would pay the entire premium cost in consideration for Provident to issue individual disability policies to select employees of a medical corporation, some of whom were also shareholders of the corporation. The salary allotment agreement was in effect for many years. During that time, various doctors were covered under the plan. Some of the doctors were employees when first covered, but later became shareholders. Premiums were billed via periodic list bills sent to the corporation and the corporation paid the premiums. The corporation then charged the premiums back to the various doctors. There was a substantial premium discount as well as other benefits which continued even if a doctor left the corporation and continued to pay the policy premiums. By the time Dr. Zide filed a claim for benefits under his policy, he was the only insured left at the corporation and he was the sole owner of the corporation. When Provident terminated Dr. Zide's benefits, he sued under California state law and alleged bad faith, seeking compensatory and punitive damages. Provident alleged, among other things, that Dr. Zide's policy was governed by ERISA and that his bad faith claim was preempted.
The district court granted judgment to Provident, ruling that the insurance program was an ERISA plan and that Dr. Zide's state law claims were preempted. Applying the statutory five-factor test, the district court concluded:
- Although there was no formal plan document apart from the insurance policy, there was an established plan, fund, or program in that the plan was a reality and not a mere promise of future potential coverage.
- The program was established and maintained by the employer corporation: premiums were paid initially by the employer; the employer performed other ongoing administrative services, including maintaining contact with the insurer over a period of years; and the employees received a substantial discount and other benefits from the arrangement.
- The corporation was an employer and was identified as such in the salary allotment agreement with the insurer.
- The program provided statutory benefits (benefits in the event of disability).
- There were participants in the program in that the program covered at least one non-owner employee of the corporation at least some point during the program's existence.
The district court also concluded that the program fell outside of the safe harbor exemption. Even though the employees bore the ultimate cost of the premiums, the availability of a discount through the efforts and commitment of the employer and which was in existence solely by virtue of the employment relationship, constituted an employer contribution to the program. Finally, the court ruled that even though the program might not satisfy all of the ERISA requirements at the time Dr. Zide filed his benefit claim -- because it no longer covered at least one non-owner employee -- the fact that the program had at one time been governed by ERISA meant that Dr. Zide's policy continued to be governed by ERISA as he continued to reap the various benefits (discounted premiums and higher levels of coverage) made available to him by the employment relationship and the employer's commitments to the insurer.
Another recent example of an individual disability insurance policy being governed by ERISA is the case of Masteler v. Paul Revere Life Ins. Co., 2012 U.S. Dist. LEXIS 21725 (S.D. Cal. Feb. 22, 2012). In that case, a large national employer entered into an "employee security program" with Paul Revere whereby the insurer agreed to issue individual disability income policies to a select group of executive employees with favorable coverage options and substantial premium discounts, in exchange for the employer's promise to pay the premiums. The program was in effect for several years and multiple policies were issued to executive employees of the employer during that time. When the plaintiff applied for his policy, he represented to the insurer that his employer would pay the entire premium cost. The evidence indicated that the employer did pay the first annual premium for his policy, but several months after the policy was issued, the plaintiff left his employment. He continued the policy, agreeing to pay future premiums himself.
The plaintiff became disabled due to a heart condition and was paid benefits for several years. When benefits were about to reach the maximum pay period under the policy, the plaintiff argued that his heart condition was an injury rather than a sickness, triggering the lifetime benefit clause of the policy. The insurer disagreed, benefits were terminated, and the plaintiff sued under California state law, alleging bad faith and seeking compensatory and punitive damages. Among other things, Paul Revere argued that the policy was governed by ERISA and that the plaintiff's state law claims were preempted.
The district court agreed with Paul Revere and dismissed the plaintiff's state law complaint. The court held that where an employer enters into an agreement with an insurer to make individual disability policies available to employees at discounted premiums and higher coverage levels and pays the premiums, the employer has established an ERISA plan. The court ruled that the regulatory safe harbor did not apply because the employer paid the premium cost. Finally, the court ruled that where the employee elected to continue his coverage under the same policy and under the same terms after he left his employment, the fact that the plaintiff took over the premium payments did not remove the policy from ERISA. The plaintiff's claim was governed exclusively by ERISA and his state law claims were preempted.
The Zide and Masteler decisions are just a couple of examples of situations where individual insurance policies were held to be governed by ERISA. These decisions dispel the myth that only group insurance policies can be part of an ERISA plan and that individual insurance is invariably subject to state law. Of course, in order for ERISA to apply, there must be a nexus to an employment relationship, but once that nexus is established, many fact scenarios may bring individual policy coverage under ERISA and outside of state law.