Midwest Security Life Insurance v. Stroup , 2000 Ind. LEXIS 544 ( 2000 )

ON PETITION TO TRANSFER

SHEPARD, Chief Justice.

We grant transfer in this case to discuss whether common law claims for breach of contract and bad faith are preempted by the Employee Retirement Income Security Act of 1974 (ERISA). We hold that the claims in this case are preempted by ERISA and reverse the trial court.

Factual and Procedural Background

Patrick and Theresa Stroup received a group health insurance policy from Midwest Security Life Insurance Company as a result of Patrick’s employment with Ivy Homes. The policy was governed by ERISA. On January 12, 1993, Theresa sought predetermination of benefits for surgery to correct congenital problems with her jaw. Midwest approved the surgery and Theresa underwent orthognathic surgery on April 13, 1994. Complications arose from this surgery that required another procedure three weeks later.

About four months after Theresa’s surgeries, in August 1994, Midwest amended its plan to exclude coverage for orthog-nathic surgery. After Theresa’s second surgery, she experienced continuing jaw spasms and pain. Non-surgical treatment was unsuccessful and, in January 1995, Theresa requested predetermination for another surgery to her jaw. The procedure was not considered a continuation of a course of care, but was approved under Midwest’s Temporomandibular Joint Dysfunction (TMJ) coverage which capped benefits at 1,000 dollars per year.

To avoid the cost of another procedure, Theresa opted for continued non-surgical treatment but, in October 1995, she awoke in considerable pain to discover that her jaw had broken. One week later, Theresa underwent bone graft surgery to repair her jaw. In January 1996, Theresa was forced to undergo another surgery because of continued pain and muscle spasms in her jaw. This surgery finally corrected the problems.

The Stroups filed suit against Midwest on June 26, 1995, for injunctive relief and damages. They amended their complaint to add claims for breach of contract and the tort of bad faith and to request both compensatory and punitive damages and a jury trial. Midwest filed a motion for summary judgment, arguing that the Stroups’ claims were preempted by ERISA and moving to strike the Stroups’ request for a jury trial. The trial court held that the Stroups’ state law claims were not preempted by ERISA, their request for punitive damages was not preempted by ERISA, and the claims were triable to a jury. On interlocutory appeal, the- Court of Appeals reversed, holding that the Stroups’ state law claims were preempted by ERISA and were not preserved by the ERISA savings clause. Midwest Sec. Life Ins. Co. v. Stroup, 706 N.E.2d 201, 207 (Ind.Ct.App.1999). We granted the Stroups’ petition for transfer.

Standard of Review

Though the appealing party bears the burden of persuasion in an appeal involving summary judgment, we otherwise’ approach the question in the same way a trial court does: summary judgment is appropriate only wheré the evidence shows there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law. See Ind. Trial Rule 56(C); Shell Oil Co. v. Lovold Co., 705 N.E.2d 981 (Ind.1998). All facts and reasonable inferences drawn from those facts are construed in favor of the non-moving party. Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664 (Ind.1997). The review of a summary judgment motion is limited to those materials designated to the trial court. See T.R. 56(H); see also Rosi v. Business Furniture Corp., 615 N.E.2d 431 (Ind.1993). We. review decisions on summary judgment motions carefully to ensure -that the parties were not improperly denied their day in court. Estate of Shebel ex rel. Shebel v. Yaskawa Elec. Am., Inc., 713 N.E.2d 275 (Ind.1999). In this case, the question of whether ERISA preempts the Stroups’ state law claims is a question of law. Therefore, it is a matter that may be properly determined on a motion for summary judgment.

Preemption under ERISA

The Stroups first contend that the Court of Appeals erred in determining that the breach of contract and bad faith claims are preempted by ERISA. The stated purpose of ERISA is to “protect ... participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to Federal courts.” See 29 U.S.C. § 1001(b) (1998). ERISA creates a federal statutory claim for recovery of “benefits due to [the beneficiary] 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,” Employee Retirement Income Security Act of 1974 (ERISA) § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B) (1994 & Supp. 1997). Suits under § 1132(a)(1)(B) may be brought in either federal or state court. Id. § 1132(e)(1).

A “Relates To”

ERISA provides for broad preemption of state law claims in 29 U.S.C. § 1144(a) which reads: “[e]xeept as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.... ” The United States Supreme Court has examined the legislative history surrounding § 1144(a) to determine that “the words ‘relate to’ in [114]4(a) [were used by Congress] in their broad sense.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983) (quoting Representative Dent that “the crowning achievement of this legislation [is] the reservation to Federal authority [of] the sole power to regulate the field of employee benefit plans”).

The courts have focused on the “relate to” language of § 1144(a) and have held that a law “relates to” an employee benefit plan if it has a connection with¹ or a reference to such a plan. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987); accord Shaw, 463 U.S. at 96-97, 103 S.Ct. 2890; California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 324, 117 S.Ct. 832, 136 L.Ed.2d 791 (1997). The preemption provision may apply even to laws that are not specifically designed to affect employee benefit plans or to laws that affect the plans only indirectly. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990).

It appears clear that Stroups’ breach of contract and bad faith claims “relate to” employee benefit plans and therefore fall under the broad preemption provisions of ERISA. These claims are based on Midwest’s failure to pay benefits due under an ERISA-governed pension plan. The complaint asks for damages for breach of the insurance contract and for punitive 'and compensatory damages for the tort of bad faith based on Midwest’s denial of coverage under the insurance contract. The claims clearly have connection with and refer to the ERISA plan.

The essence of the claims is a failure to supply benefits under the plan. The U.S. Supreme Court addressed similar cases in Pilot Life, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39, and Ingersoll-Rand, 498 U.S. 133, 111 S.Ct. 478, 112 L.Ed.2d 474. In both cases, the Court held that the plaintiffs’ common law claims related to ERISA and, therefore, were subsumed under its broad preemption provision. Just as in Ingersoll-Rand, “there simply is no cause of action if there is no plan.” 498 U.S. at 140, 111 S.Ct. 478. Because the Stroups’ claims “relate to” an employee benefit plan, in this case their medical insurance, the claims fall under ERISA’s broad preemption powers.

B. Savings Clause

The Stroups contend that even if the claims “relate to” employee benefit plans and would normally be preempted by ERISA, they are preserved by the “savings clause.” The Stroups argue that the Court of Appeals analysis may be correct under precedent as it then existed, but that the recent U.S. Supreme Court opinion in UNUM Life Ins. Co. v. Ward, 526 U.S. 358, 119 S.Ct. 1380, 143 L.Ed.2d 462 (1999), altered the test to be used under the savings clause.

The clause in question, 29 U.S.C. § 1144(b)(2)(A), provides that “nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.” This provision operates as a “savings clause” to preserve state laws if they “regulate insurance” even though the state law falls under ERISA’s broad preemption provision.

The Supreme Court has created a two-part test to determine if a state law-that “relates to” ERISA “regulates insurance” and therefore is saved. First, because we “begin with the ordinary language employed by Congress and the assumption that the ordinary language accurately expresses the legislative purpose,” the “common-sense view” of the language of the savings clause is examined. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740, 105 S.Ct. 2380, 85 L.Ed.2d 728 (1985) (quoting Park ’N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194, 105 S.Ct. 658, 83 L.Ed.2d 582 (1985)). Second, courts look to case law interpreting the phrase “business of insurance” under the McCarran-Ferguson Act, 15 U.S.C. § 1011, which has focused on: (1) whether the practice has the effect of transferring or spreading a policyholder’s risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry. Pilot Life, 481 U.S. at 48-50, 107 S.Ct. 1549.

A state law or practice “regulate[s] insurance” under the “common-sense view” if it “is grounded in policy concerns specific to the insurance industry.” UNUM Life, 119 S.Ct. at 1388. In UNUM Life, the Court held that California’s notice-prejudice rule “regulates insurance” because it “is directed specifically at the insurance industry and is applicable only to insurance contracts.” Id. at 1386. This is to be distinguished from a state law of general application that may have an impact on the insurance industry. See Pilot Life, 481 U.S. at 50, 107 S.Ct. 1549.

The three McCarran-Ferguson factors must also be examined. The Court held in UNUM Life that it was not necessary for all three criteria to be present in order to avoid preemption under ERISA. 119 S.Ct. at 1389. In that case, the Court found that the “common sense” view of California’s notice-prejudice rule was that it “regulates insurance.” Id. The Court went on to note, however, that only two of the three McCarran-Ferguson factors were present, and that “none of these criteria is necessarily determinative in itself.” Id.

The Stroups breach of contract and bad faith claims do not fall under a “commonsense view” of the phrase “regulates insurance,” nor do they satisfy the McCarran-Ferguson factors previously examined by the U.S. Supreme Court when determining whether a state law falls under the savings clause. The breach of contract claim clearly does not turn on a law that regulates insurance. It is a claim founded on general contract principles that happens to apply to an insurance contract in this instance. There are no specific insurance industry concerns, and state breach of contract law is not directed at' the insurance industry any more than it is directed at any other industry.

Indiana’s tort of bad faith also does not fall under a “common-sense” understanding of “regulates insurance.” The tort was established in Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 519 (Ind.1993). We applied general tort theories to determine that a breach of the duty of good faith may be an independent tort compensable with punitive damages.

Likewise, the Stroups’ claims do not satisfy the McCarran-Ferguson factors that determine if a practice falls under the “business of insurance.” The first factor, whether the state law ‘or rule at issue “has the effect of transferring or spreading a policyholder’s risk,” is not applicable to either the breach of contract claim or the tort of bad faith. See Pilot Life, 481 U.S. at 50, 107 S.Ct. 1549. The Stroups contend that Indiana’s tort of bad faith spreads the insurance risk because insurers in Indiana that are not shielded from liability by ERISA will undoubtedly spread the risk as they raise premiums to cover bad faith claims. This alleged connection between the tort of bad faith and. spreading policyholder’s risk is too attenuated to satisfy this criterion. It would apply to any claim against an insurance company. Furthermore, the Stroups’ argument “does not alter the allocation of risk for which the parties initially contracted” as required under this factor. UNUM Life, 119 S.Ct. at 1389 (citations omitted).

The second factor, whether the breach of' contract or tort of bad faith serves as “an integral part of the policy relationship between the insurer and the insured” is also unsatisfied. The Stroups’ breach of contract claim does not establish the contract terms and is merely a remedy when one party does not honor the terms of the contract. The tort of bad faith is also not integral to the relationship between the insurer and insured. It serves the same function as any other general contract or tort law. As in Pilot Life, that tort “does not define the terms of the relationship,” 481 U.S. at 51, 107 S.Ct. 1549, but merely allows for punitive damages in the event of breach of the insurance contract in bad faith. This is not a case where the 'state law “changes the bargain between the insurer and insured” by adding a mandatory contract term as the California notice-prejudice rule did in UNUM. 119 S.Ct. at 1389.

Finally, the third factor is whether the practice is limited to the insurance industry. We need not resolve that because, even if it were so limited, we conclude, like the Court of Appeals, that the three factors taken together do not render Indiana’s tort' of bad faith a state law “regulating insurance.”

Because the breach of contract and tort of bad faith claims satisfy neither the “common-sense view” of “regulates insurance” nor the McCarran-Ferguson factors, they are not saved under ERISA, and are preempted.

Because we agree with the Court of Appeals that the Stroups’ state law claims are preempted by ERISA, we do not need to address whether a jury trial would be allowed for either the state law claims or for claims under ERISA.

Conclusion

The judgment of the trial court is reversed and remanded with instructions to grant Midwest’s motion for summary judgment on ERISA preemption.

DICKSON, SULLIVAN, BOEHM, and RUCKER, JJ., concur. . BOEHM, J., concurs with separate opinion in which DICKSON, J., joins.

1 . The Stroups contend that the Pilot Life test for determining if a state law "relates to” ERISA was altered by California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 117 S.Ct. 832, 136 L.Ed.2d 791 (1997), and cases that follow it. Specifically, they contend that the "connection with” portion of the test has been replaced by a two-part test that focuses on whether the law impacts ERISA and congressional intent. In Dillingham, the Court stated that "to determine whether a state law has the forbidden connection, we look both to the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive as well as to the nature of the effect of the state law on ERISA plans.” 519 U.S. at 325, 117 S.Ct. 832 (citations omitted). The two factors the Stroups listed are used to determine whether a state law has a connection with ERISA. They do not, as the Stroups claim, displace the "connection with” alternative.