• ERISA Preemption and the Conversion Policy: A Split in the Courts
  • February 21, 2007 | Authors: Michael T. Kearns; Brian J. Chabarek
  • Law Firm: Hoagland, Longo, Moran, Dunst & Doukas - New Brunswick Office
  • Claims arising under the Employee Retirement Income Security Act of 1974 ("ERISA") as amended, 29 U.S.C. ? et seg., limit the relief available to a claimant. A frequent question that arises is the type of relief a claimant bringing civil actions under these provisions may obtain. Further, issues frequently arise as to the proper scope of discovery, which is generally limited in a claim arising under ERISA. based upon the applicable standard of review. (As practitioners who deal with ERISA are aware, the District Courts of the United States are provided with subject matter jurisdiction over claims brought for benefits arising under the Employee Retirement Income Security Act of 1974 ("ERISA"). 29 U.S.C. ?e), the claimant is not entitled to a jury trial in a claim arising under ERISA, and discovery is ordinarily limited to the administrative record without the usual exchange of written discovery demands, depositions and/or expert reports.)

    However. the normal restrictions on discovery imposed on litigants and the types of relief provided for by ERISA's statutory provisions may not be applicable to a conversion policy, when an employee leaves his employment and "converts" an employee welfare benefit plan subject to ERISA. That is, claimant will then take the position that he is not limited to the relief and remedies afforded by the statutory framework of ERISA in order to maintain state-based claims (such as Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, Emotional Distress, and such other potential state based claims). The issue of whether a "conversion policy" is subject to ERISA's statutory scheme remains unresolved because there is clearly split in the Circuits with divergent rulings. "Some courts have found that an individual policy that is converted from a group plan remains under ERISA's purview, while other courts have held that a converted policy is too far removed from the original plan, thus foreclosing ERISA preemption" Gatewood v. Life Insurance Company of North America, 75 F. Supp.2d. 1347, 1349 (M.D. Florida 1999).

    Introduction to ERISA Preemption Doctrine and Conversion Policies

    Employees filing civil actions for the denial of benefits under an employee welfare benefit plan, as defined by the Employee Retirement Income Security Act of 1974 as amended ("ERISA"), 29 U.S.C. ? et seq. are subject to the statutory scheme of "ERISA". An employee welfare benefit plan is defined at 29 U.S.C. ?1). in pertinent part, as:

    any plan, fund or program which was heretofore or is hereinafter established or maintained by an employer or an employee organization, or by both, to the extent such plan, fund or program was established or is maintained for the purpose of providing its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care of benefits, or benefits in the event of sickness, accident, disability, death or unemployment ...Further, 29 U.S.C. ?provides for "Civil enforcement", wherein it asserts, in pertinent part:

    (a) Persons empowered to bring civil action. A civil action may be brought-

    (1) by a participant or beneficiary-

    (A) for the relief provided for in subsection (c) of this section, or

    (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan ...;

    (3) by a participant, beneficiary, or fiduciary

    (A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or

    (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan ...

    It is well settled that ERISA preempts state law which relaters] to an employee benefit plan subject to ERISA. 29 U.S.c. ?a). This statutory section asserts that the provisions of ERISA "shall supercede any and all State laws insofar as they may now or hereafter relate to any [ERISA] employee benefit plan" "Congress enacted ERISA to protect participants in employee benefit plans. See 29 U.S.C. ?a) and (b). To assure uniform treatment, Congress provided that where a plan is covered by ERISA, all state laws relating to the plan are preempted. Id. at ?(a) citing Ingersoll-Rand Co. v. McClendon, 498 U,S. 133, 138-39, 111 S.cr. 478, 112 L.Ed.2d 474 (1990). Preemption serves the Congressional goal of minimizing burdens on plan administrators and reducing costs for beneficiaries. citing Egelhoff v. Egelhoff. 532 U.S. 141, 150, 121 S.cr. 1322, 149 L.Ed.2d 264 (2001). ..... Brown v. The Paul Revere Life Insurance Company. 2002 WL 1019021 (E.D. Pa.).

    What is unsettled is what happens when a former employee exercises his rights under such an employee benefit plan to "convert" his coverage and obtain what is commonly referred to as a "conversion policy" (as is typical in plans providing for Long Term Disability Insurance)? Questions surrounding this issue include:

    * Is the "conversion policy" subject to ERISA's statutory scheme, thus preempting all of a claimant's state-based claims (and thereby denying the claimant the ability to pursue a state based breach of contract claim, breach of the implied covenant of good faith and fair dealing, claims for emotional distress and such other potential state-based claims)?

    * Is the conversion policy itself subject to ERISA's statutory scheme which regulates the standard of review and/or the amount of discovery a claimant may seek by generally limiting same to the administrative record? (The standard of review in cases brought under "ERISA" for benefits denied is not always easy to apply. In the seminal case on this issue, the Supreme Court stated that 'a denial of benefits challenged under [ERISA, 29 U.S. C.] ?(a)(l)(B) is to be reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101. 115, 109 S.cr. 948, 956-57 (1989). In cases where an administrator exercises discretion, 'trust principles make a deferential standard of review appropriate' and the Court suggested that we review such exercises of discretion under the arbitrary and capricious standard. Id. at 111-12, 109 S.Ct. 948." Stratton v. EI Dupont De Nemours & Co, 363 F.3d. 250, 253-254 (3d Cir. 2004).

    * Is a claim for benefits arising out of a conversion policy subject to the Jurisdiction of the Federal Courts (assuming that diversity jurisdiction does not exist)? (28 U.S.C. ?establishes diversity jurisdiction, and 29 U.S.C. ?e)provides that the District Courts have subject matter jurisdiction over matters for benefits arising under the Employee Retirement Income Security Act of 1974 ("ERISA"). 29 U.S.C. ? et seq.)

    Presently, there is uncertainty on these issues because different Circuits (as well as District Courts) have ruled on this issue with varying results. Moreover, several Circuits have yet to rule on this particular issue as well.

    An employee welfare benefit plan that is being sued for benefits will undoubtedly argue that former employee's. conversion privilege is a benefit which exists solely through their participation in the ERISA plan. Thus, the employee welfare benefit plan will undoubtedly assert that a claim for benefits under conversion policy is governed by "ERISA," as the conversion policy came into being as a result of the claimant's exercise of his or her right under the group policy to obtain this specific insurance policy. Additionally, the employee welfare benefit plan will also undoubtedly assert that the group plan ailowed the former employee to obtain an individual policy without evidence of insurability, something he or she could not have done except for the group plan. The claimant will undoubtedly assert that the conversion policy becomes an "individual policy" (and thus the contract of insurance is directly between the insurer and the individual insured) not subject to ERISA's statutory scheme.

    The claimant will also assert that there is no ongoing administrative or financial involvement of the employer once the policy Is converted If the facts lend themselves in this regard.

    Emerging Views

    Eight Circuit Court of Appeals The Eighth Circuit has held that the conversion policy came into being as a result of exercising a right under a group policy and as such a suit to recover such benefits is governed by ERISA's statutory scheme. The Eight Circuit in Painter v. Golden Rule Insurance Company 121 F.3d. 436, 439-440 (8th Cir. 1997) cert. denied. 523 U.S. 1074 asserted:

    A suit to recover benefits due Painter. under that group policy, inciuding continuation benefits due her as a former employee, would be governed by ?(a)(1)(B). Here, of course, the group policy has expired, and Painteris seeking medical benefits under Golden Rule's separate Conversion policy. But the Conversion Policy came intobeing as a result of Painter exercising her right underthe group policy to obtain this specific insurance policy. Thus, the right to a Conversion Policy was part of theplan or program "established" by M.D. Care to providemedical benefits for its current and former employees. As such, the Conversion Policy is a component of MD. Care's ERISA plan. A suit to recover Conversion Policy benefits is governed by ?(a)(1)(B). Id. at 439-440.

    Further, the Eight Circuit asserted that this determination was "consistent with the overwhelming majority of preemption decisions involving conversion policies and the ERISA plan which gave them birth." Id. at 440., citing Peterson v. American Life & Heaith Insurance Co. 48 F.3d. 404, 407-408 (9th Cir.), cert denied, 516 U.S. 942 (1995); Glass v. United of Omaha Life, 33 F 3d. 1341, 1346-47 (11th Cir. 1994); Greany v. Western Farm Bureau Life Ins. Co., 973 F.2d 812, 817 (9th Cir. 1992); Howard v. Gleason Corp., 901 F.2d 1154, 1157-58 (2d Cir. 1990); Reynolds v. Massachusetts Cas. Ins. Co., 900 F. Supp. 915, 922 (E.D. Tenn. 1995). rev'd on other grounds, 113 F.3d 1450 (6th Cir. 1997); Klosterman v. Western Gen. Mgmt., Inc., 805 F. Supp. 570, 573-74 (N.D. Ill. 1992); Beal v. Jefferson-Pilot Life Ins. Co., 798 F. Supp. 673, 677 (S.D. Ala. 1992); Nechero v. Provident Life & Accident Ins. Co., 795 F. Supp. 374, 379-80 (D.N.M. 1992); Mays v. Unum Life Ins. Co. of America, 1995 WL 317102, 3 (N.D. III. 1995).

    Ninth and First Circuits The Ninth and First Circuits have held that a conversion policy is independent of the ERISA plan, that such policies are independent of an employee welfare benefit plan and thus not subject to ERISA's statutory regulations. In contrast to the determination by the Eight Circuit, the Ninth Circuit has determined with respect to the conversion of an ERISA plan, is that "A converted policy created when an ERISA plan participant leaves the plan and obtains new, a separate, individual policy based on conversion rights contained in the ERISA plan. The contract under the converted policy is directly between the insurer and the insured. It is independent of the ERISA plan and does not place any burdens on the plan administrator or the plan. [emphasis added] There are also no relevant administrative actions by the employer citing Fort Halifax Packing Co. v. Coyne 482 U.S. I, 16 (1987), 107 S.Ct. 2211,(It would make no sense for pre-emption to clear the way for exciusive federal regulation, for there would be nothing to regulate.')." Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 876 (9th Cir.200 l).

    For instance, "whenever an individual has exercised her right to convert from group policy under an ERISA plan to an individual policy, the new policy is no longer regulated by ERISA and state-law ciaims under that policy are not preempted by ERISA." VIi1ks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 876 (9th Cir.200l) Likewise, "An employee benefit plan must cover at least one employee to constitute an ERISA benefit plan citing Peterson Am. Dfe and v. Health Ins. Co., 48 F.3d 404, 407 (9th Cir. 1995). Waks' converted policy covered her as an individual and not as an employee Her converted ... policy is therefore not itself an ERISA plan." Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 875 (9th Cir.2001).

    Likewise, the First Circuit in Demars v Cigna Corporation, 173 F.3d 443, 444 (1thCir.1999). asserted that, "The sole question on appeal is whether ERISA preempts all state law claims related to an individual insurance policy obtained by an employee after termination of employment through the exercise of conversion rights granted by an employee welfare benefit plan. In other words, we consider whether ERISA regulation extends to "conversion policies". The Court indicated that "Consistent with the usual practice, we use the label 'conversion policy' to refer only to a private (non-employer-financed) insurance policy obtained by a former employee, after termination, through the exercise of conversion rights." Id. at 445. The court in Demars noted that ERISA provisions "shall supercede any and all State laws insofar as they may now or hereafter relate to any [ERISA] employee benefit plan. 29 U.S.C. ?a). "But, 'infinite ... relations cannot be the measure of pre-emption' citing New York State Conference of Blue Cross and Blue Shield Plans v. Travelers Ins. Co., 5 I 4 U.S. 645, 656, 115 S.cr. 1671. (1995)." Demars at 445.

    The Court in Demars also indicated that, "Several district courts have adopted the careful distinction between conversion fights and conversion policies that we drew at the outset that were first drawn in Mimbs. [Mimbs v. Commercial Life Insurance Company, 818 F. Supp. 1556, 1561-62 (S.D. Georgia 1993)]. Mimbs found that state law claims involving the right to convert are preempted by ERISA, but that claims related to the conversion policy itself are not." Demars at 448. "... what matters for ERISA purposes is not the nature of the conversion policy but rather the nature of the employer's ongoing administrative and financial ties to the policy. If no such tie exists, the policy should not be subject to ERISA regulation. [emphasis added] Demars, at 450.

    Accordingly, the Court in Demars held, "that Demars' conversion policy is not an 'employee welfare benefit plan' and that Demars' state law claims relating to the conversion policy are not preempted under ?a). Demars supra, at 450.

    The Court in Mimbs stated as follows: "This court draws a distinction. however. between claims arising from the fight to convert to an individual policy and claims arising from the conversion itself. The conversion ... coverage itself, should the former employee elect to convert, is for an individual as opposed to a class of beneficiaries. There is no showing that the conversion coverage in this case contains the requisite elements of an ERISA plan. Furthermore, once conversion has occurred and the policy is in force. there is no longer any 'integral connection' between the individual conversion policy and the ERISA plan that gave rise. to the right to convert." Mimbs v. Commercial Life Insurance Company, 818 F. Supp. 1556, 1561-62 (S.D. Georgia 1993).

    The Court in Mimbs supra also noted that the U.S. Supreme Court addressed the purpose of ERISA pre-emption. "The concerns behind ERISA pre-emption are not implicated by state-law claims arising from obligations incurred under the conversion policy Itself. ... the Supreme Court reviewed the purpose of the ERISA pre-emption provision [and noted that] Congress intended ... [ERISA] pre-emption to afford ... the advantages of a uniform set of administrative procedures governed by a single set of regulations. This concern only arises, however with respect to benefits whose provision by nature requires an ongoing administrative program to meet the employer's obligation. It is for this reason that Congress pre-empted state laws pertaining to plans, rather than simply to benefits." Mimbs v. Commercial Life Insurance Company, 818 F. Supp. 1556, 1561-62 (S.D. Georgia 1993) (citing Fort Halifax Packing Co. v. Coyne, 482 U.S. 1,7-8, 107 S.Ct. 22II (1987) at II, 2217). "There is no showing that administering benefits under the individual conversion policy itself, once that policy is in effect, requires an ongoing program to meet the (former) employer's obligations under ERISA. The connection between a state-law breach of contract claim for benefits allegedly due under the conversion policy appears to be too 'tenuous, remote, [and] peripheral' to warrant a finding that the claim under the conversion coverage relates to the ERISA plan and is pre-empted by ERISA." Mimbs v. Commercial Lifelnsurance Company,.818 F. Supp. 1556, 1561-62 (S.D. Georgia 1993) (citing Shaw v. Delta Air Lines, 463 U.S. 85, 103 S.Ct. 2890 (1983) at 100 n. 21. 2901 n.2I).


    When dealing with the issue of whether a claim for benefits arising from conversion policy is preempted by ERISA's statutory scheme, it is important to address this early In the litigation. There is clearly a split in the Circuits, wherein the First and Ninth Circuits have held that a conversion policy is not pre-empted by ERISA's statutory scheme, and the Eight Circuit has held that ERISA's regulations are applicable to conversion policies. Moreover, many Circuit Courts have not yet ruled on the issue of whether conversion policies are preempted by ERISA's statutory regulations. If your Circuit has not yet made a ruling in this regard, it is particularly important to be mindful of which Circuits the District Court in your venue tends to follow as precedent.

    What is clear is that there are several factors to review when faced with the issue of a "conversion policy" and whether said polley is sufficiently related to" an ERISA plan for purposes of preemption. First, one must review the appllcable polley and determine whether the "conversion policy" will afford the same coverage as afforded under an Employer's group plan or whether the former employee obtains a new separate, individual policy (and thus the contract of insurance is directly between the insurer and the insured). Secondly, one must review the nature of the employer's ongoing administrative and financial ties to the "conversion polley" and whether the "conversion policy" places any burdens on the employer. Along those lines, one must look at whether the individual former employee is solely responsible for payment of the "conversion policy".

    In the final analysis, the determination may affect the proper venue of the action (i.e. the District Court or the State Court), the proper focus and scope of discovery, the number of claims that will be addressed as well as the potential damages arising from those claims (i.e. potential state based causes of actions as opposed to those set forth in ERISA's statutory scheme). In short, be prepared to deal with this issue early on in the litigation.