UNUM LIFE INS. CO. OF AMERICA v. WARD
UNUM Life Insurance Company of America (UNUM) issued a long-term group disability policy to Management Analysis Company (MAC) as an insured welfare benefit plan governed the Employee Retirement Income Security Act of 1974 (ERISA). The policy provides that proof of claims must be furnished to UNUM within one year and 180 days after the onset of disability. John E. Ward, a California MAC employee, became permanently disabled in May 1992. Ward informed MAC of his disability in late February or early March 1993. UNUM received proof of Ward's claim on April 11, 1994. Ward was notified that his claim was denied as untimely because his notice was late under the terms of the policy. Ward then filed suit under ERISA's civil enforcement provision to recover the disability benefits provided by the plan. Ward argued that, under California's common-law agency rule, an employer administering an insured group health plan should be deemed to act as the insurance company's agent; therefore, his notice of permanent disability to MAC, in late February or early March 1993, sufficed to supply timely notice to UNUM. The District Court rejected Ward's argument and ruled in favor of UNUM, citing ERISA's preemption clause, which states that ERISA provisions "shall supersede ... State laws" to the extent that those laws "relate to any employee benefit plan." In reversing, the Court of Appeals noted that Ward might prevail under California's "notice-prejudice" rule, under which an insurer cannot avoid liability although the proof of claim is untimely, unless the insurer shows it suffered actual prejudice from the delay.
Does the Employee Retirement Income Security Act of 1974 preempt California's common-law agency rule, under which a California employer administering an insured group health plan should be deemed to act as the insurance company's agent? Does ERISA preempt California's "notice-prejudice" rule?
Legal provision: Employee Retirement Income Security
Yes and no. In a unanimous opinion, delivered by Justice Ruth Bader Ginsburg, the Court held that California's agency rule is preempted by the Employee Retirement Income Security Act of 1974. Justice Ginsburg wrote for the Court that California's common-law agency rule "would have a marked effect on plan administration," adding that it would force employers to take on a role for which they had not volunteered. Further, the Court held that California's notice-prejudice rule is not preempted by ERISA because it is a "law ... which regulates insurance." Thus, Ward's insurance claim may go forward even though he filed for benefits after the deadline because UNUM did not suffer any prejudice from the delay. "By allowing a longer period to file than the minimum filing terms mandated by federal law, the [California] rule complements rather than contradicts ERISA and the regulations," wrote Justice Ginsburg.
Argument of William J. Kayatta, Jr.
Chief Justice Rehnquist: We'll hear argument next in No. 97-1868, UNUM Life Insurance Company of America versus John Ward.
Mr. Kayatta: Mr. Chief Justice, may it please the Court:
This is an action for plan benefits under ERISA.
Now, the plan in question in this case is an insurance policy.
It is not a self-funded plan.
Citing this fact, the Ninth Circuit has determined that certain claim administration rules in this ERISA plan cannot be enforced in this Federal action because California courts would not enforce those same claim administration rules under common law principles that are regularly applied by California courts in breach of insurance contract cases.
There are two basic flaws to this holding.
First, the Ninth Circuit has disregarded Congress' intent to create uniform exclusively Federal rules for claims administration and enforcement without reference to varying State laws, even State laws that regulate insurance.
Second and independently, the Ninth Circuit has misapplied ERISA's statutory preemption clause by determining that California's notice prejudice rule is a rule that regulated insurance and by determining that a rule of California common law that precludes a plan administrator from doing what Congress says the administrator can do does not relate to an employee benefit plan.
Justice O'Connor: Well, you do agree that, even under ERISA, a State law that satisfies McCarran-Ferguson Act requirements is not preempted?
There is a savings clause?
Mr. Kayatta: We agree there is a savings clause.
We do not agree that any law that satisfies McCarran-Ferguson is automatically saved.
You could have a law that satisfies the definition of business of insurance that this Court could determine is not a law which regulates insurance.
Secondly and more importantly, this Court has held in Pilot Life, reaffirmed it in Taylor, and then again in John Hancock, that even laws that are otherwise saved under the savings clause are preempted if they stand as an obstacle to one of Congress' purposes in enacting ERISA or in a specific provision.
Justice Ginsburg: Not just the broad general purpose of ERISA, because if you did that wouldn't you have to call every one of them in favor of the beneficiary, because the purpose of ERISA was to protect people's insurance, workers' insurance, right?
Isn't that the... I mean, ERISA wasn't passed to make life easy for insurers.
Mr. Kayatta: ERISA made a number of balances.
One of its primary purposes was to make employers more likely to have these plans to benefit workers.
That is the major benefit that ERISA produces for employees, and it has been fabulously successful, in large part because of what this Court did in Pilot Life.
Now, having said that, I agree with you that an amorphous purpose of ERISA without some clear foundation in the record is not enough to preempt a law that would otherwise be saved.
Justice Ginsburg: Well, what does the savings clause save?
One argument that you made that I thought certainly would require modification is that if you have a policy term and it's something written into the policy, that wipes away the savings clause.
And that can't be right.
It's not given to private ordering to do away with the savings clause.
Mr. Kayatta: We agree with that, Your Honor, and we're not saying that you can do away with the savings clause.
The savings clause... we also agree that the analysis starts with the presumption that State law is saved.
However, the second stage of the analysis then says, is this within the savings clause?
And the third stage, and this is the stage we're talking about now, says even if it is within the savings clause it will not stand, it will be preempted, in certain circumstances.
And the most important circumstance is the one identified by this Court in Pilot Life and reaffirmed in Taylor and Hancock, which is when you go to the heart of ERISA's... Congress did not do many things in ERISA.
It left the substantive benefits of plans, particularly welfare plans, totally alone and silent.
But what it directed its attention to was erecting a comprehensive, uniform Federal civil enforcement scheme modeled after section 301 of the LMRA.
And you cannot... this Court has held that that purpose is not to be frustrated.
Justice Scalia: Why couldn't the Federal scheme adopt the same rule as California?
I mean, if this is a proposition of general contract law in California and other States, would xx objection to the Federal courts... I mean, let's s xx manded to the Ninth Circuit and they say: I guess you're right, we shouldn't have applied this provision of California law; but as it happens, Federal law's the same way
Would that be all right?
Mr. Kayatta: That would... that would eliminate one of the problems with what the Ninth Circuit has done.
Justice Breyer: The one you just talked on.
Mr. Kayatta: Yes, because now you would be doing what Congress said for the courts to do and what you told the courts to do, which is in a 502(a) action apply the statute and as necessary develop a uniform body of Federal common law.
So if you're now saying, okay, we're not going to have a Federal court's decision in an ERISA action as to how to interpret a plan mandated by a State common law, we're going to develop Federal common law, then the Court would confront several other questions.
One would be are we going to develop a common law that conflicts with any other substantive provisions of ERISA, and there are two in particular which the Court would need to pay attention to.
One is that which was identified by this Court as one of the core aspects of ERISA, which is the role that the written plan instrument plays under ERISA.
So the Federal court would need to say, before we go and say that the plan fiduciary must not, as Congress ordered him, act in accordance with a written plan instrument, we need to satisfy that there is some other Federal interest here that would overbear that, such as for example if you had a facial illegality of a policy that might be a circumstance.
The key point is, though, that the analysis would be one of Federal law and the Federal courts can look to State law, the Restatement states courts law around the country, to inform itself as to what the common law might be on a uniform Federal basis.
Justice Souter: May I interrupt just for one question.
I just don't know the answer because I don't have the Act clearly enough in mind.
Was the term of the Act, the term that you just used,,as distinct from something like, say,,a more generic term?
Mr. Kayatta: I do not believe the three wordsappear in a row.
However, what it says is.
Justice Souter: o it's referring to the words.
What I'm getting at is, and I think you've answered my... the question that was in the back of my mind... is would we have to say that the terms of the plan as ERISA used it might be the terms of the plan as modified by applicable State law?
I think your answer implicit in what you said is no, because ERISA is referring to the document and the document cannot possibly include an accommodation of State law, a modification of its terms.
Is that fair?
Mr. Kayatta: And we're now addressing, if I understand your question correctly, not to 301, 502 field preemption that we talked about in the beginning.
Justice O'Connor: Right.
Justice Scalia: I'm jumping ahead.
Mr. Kayatta: Now we're on to the written plan.
Justice Breyer: Yes.
Mr. Kayatta: And I think this Court in Curtiss Wright captured it this way, that reliance on the face of the written plan document... those were this Court's words... is one of ERISA's core functional requirements.
Justice Souter: If ERISA uses the word,that's... even without any other explication from us, that's pretty strong language for your position.
Mr. Kayatta: Yes, it is.
And ERISA section 404(a)(1)(D) specifically in Congress' words requires that the fiduciary act in accord with the plan documents.
Justice Kennedy: Okay.
Justice Ginsburg: And the savings clause is shoved aside, then, every time the plan document... suppose California law had said the people who make benefit claims take time to get their act together, so we are mandating a two-year proof of claim period, and if insurers put in their policies anything less than that it doesn't count.
Suppose that were the California law and California said, we are adopting this to regulate insurance, to regulate insurance sales in this state; insurer, you must give everybody two years.
But in your ERISA plan you have 1 year and 180 days.
Mr. Kayatta: The example you pose has not just the preemption problem, but, because you pick notice prejudice, it runs head-on into some other provisions of ERISA.
If I understand the thrust of the question, I think it is a State says you must have this provision in your policy and an insurance company doesn't do it and then says: Aha, we don't have it in our policy, the State law is preempted, and so we get by with this
If that's the question...
Justice Ginsburg: My question is this very specific one.
Mr. Kayatta: Yes.
Well then, let me address this very specific one.
Justice Ginsburg: You must give people two years to put in a proof of claim.
Mr. Kayatta: I do not think that a State could do that with the specific one, because in that situation, even though you would have a facial illegality of the policy if the underlying rule were saved, such as for example the rule in Metropolitan-Massachusetts, but here the underlying rule is a dictate to Federal courts as to how they must enforce or interpret language in the plan, and that...
Justice Ginsburg: No, it isn't how they interpret it.
It says it's x'ed out of the plan.
The plan cannot have such language.
There's nothing to construe.
But saved is the State statute, so the State statute displaces the term of the plan, just as in Massachusetts-Metropolitan Life.
They didn't cover mental health, the law says, the State law, says you must cover mental health.
So I'm giving you that same situation.
It's not... the plan is out.
The State law is written into the contract.
Mr. Kayatta: All right, if the State law says you have to have this notice provision in your contract and the policy does not...
Justice Ginsburg: Not in your contract.
We don't care whether you put it in your contract.
That's the law of this State.
Chief Justice Rehnquist: Something else is void.
Mr. Kayatta: Well, then, then if the State law doesn't say that it's improper to have a contract without this language, it simply says that whatever your language we're going to deem it to be this...
Justice Ginsburg: It doesn't say anything about deem or whatever your language.
It says every insured shall be given by every insurer a minimum of two years to put in a proof of claim.
Mr. Kayatta: Well, then the policy would not comply with the mandatory State insurance statute.
In that situation you would have a facial illegality on the policy.
The question with notice prejudice, however, would still remain can a State dictate the claims administration procedures under ERISA, which is...
Justice Ginsburg: Then you're saying that California courts, because it's a court-made rule that we're dealing with, notice and prejudice, they just used the wrong words.
They should have said, our rule is, notwithstanding anything that's in an insurance contract, no insurer can claim a delay unless the delay prejudiced the insurer.
Mr. Kayatta: That is what the California rule essentially says.
Justice Ginsburg: Yes, that's the rule.
But the court says, now, we want you to understand that if you say anything to the contrary in your policy that's void.
Mr. Kayatta: In effect, that's what the California common law rule does.
But the rule does not say that no policy can be issued that provides otherwise.
Justice Scalia: Well, would the answer be different if it did?
Chief Justice Rehnquist: That seems just caviling.
Mr. Kayatta: Well, the answer would... the answer to this particular question, we would get over one hump.
We would have a facially illegal policy if it did.
Justice Souter: Well, let's make it even easier than that.
I don't know how it works in California, but in many, maybe most, States, the policy terms have to be submitted to the insurance commissioner before a policy can be sold using those terms.
Mr. Kayatta: That's right.
Justice Souter: The commissioner says: I won't approve the policy
No policy gets approved unless it has these particular terms in it: Time is not of the essence absent prejudice
And in that case do you concede that we would not even have the issue in front of us because it would have been perfectly proper under ERISA for California to say you can't sell the policy; if they did sell the policy, it would have the terms in it that we're arguing about?
Mr. Kayatta: In that... we're not conceding that, because in that circumstance what California would be doing is directing its attention not to the 502 issue, but to the other provisions in ERISA which say and delegate to the Secretary the authority to promulgate regulations on claims administration matters.
That would be the problem with a statute that said this, is it would be California saying, no matter what the Secretary says is a reasonable claims procedure...
Justice Kennedy: I see your argument.
Mr. Kayatta: So I'm off to a different argument here, which is why that statute would not work.
That statute... and that's why...
Justice Souter: But that's ultimately, I suppose, your answer to Justice Cinsburg's question, too, then.
I mean, you're not caviling, because you say at the end of the day, no matter how you do it, if the State purports to require this term, it is in fact violating the plenary grant of authority over administration, which is Federal.
Mr. Kayatta: Well, I'm saying two things, yes, and perhaps you're saying it better than I am.
Chief Justice Rehnquist: I'm sure I'm not.
Mr. Kayatta: I think how the State does it does make a difference, and I can come back to it if you like.
But yes, in either situation it would not be the State purporting to do something substantive that Congress has not directed its attention to.
Chief Justice Rehnquist: Well, supposing that a State wanted to impose on your client this requirement of notice and prejudice in submitting claims.
Justice Souter: Is there any way it could do it?
Mr. Kayatta: Well, practically it certainly could because any State bar of that sort insurance companies will comply with.
Chief Justice Rehnquist: Well, but that's not an answer in a court.
Mr. Kayatta: And as a legal matter, I do not think a court can dictate... a State can dictate the claims administration procedures under an ERISA plan.
We don't get to that question.
Chief Justice Rehnquist: So what is your answer to my question, that there is no way a State can legally require the sort of notice and prejudice with respect to claims that California has here?
Mr. Kayatta: In an ERISA plan, as a matter of imposing State law, that's correct.
Justice Stevens: So that your case... there's a lot of talk in the briefs about this being a common law rule.
That's really irrelevant to your position?
It'd be the same if it were a statute or a regulation of the insurance commissioner of California; is that correct?
Mr. Kayatta: No, it's not, Justice Stevens.
Justice Stevens: I thought you told the Chief it was.
Mr. Kayatta: It is not irrelevant because the fact that it was a common law rule I think means that this isn't even that case.
Justice Stevens: Yes, but would produce the same result in your view...
Mr. Kayatta: Yes.
Justice Stevens: whether it were a common law rule, a statute, or a regulation by an insurance commissioner?
Mr. Kayatta: Yes, we would get to the same result, for a different reason, for a reason that is also applicable here.
But we would lose one of the other reasons that is applicable here, that being our argument that a common law rule of this type does not regulate insurance.
Justice Ginsburg: I don't understand that because what business is it of the Federal statute what... how a State makes its law, whether the State makes its law through its courts, through its administrative agencies, through its legislature.
I thought ERISA itself makes that clear, that the savings clause saves State law, and then it's up to the State, not the feds, to tell the State how it's going to go about making its laws.
Doesn't ERISA save court law as well as administrative law as well as... ERISA doesn't put a statute on a higher plane than a court decision, does it?
Mr. Kayatta: ERISA defines the termto include all laws on that point.
But the issue here is under the savings clause is this a law that regulates insurance.
So that poses the question, what did Congress mean when it says a law which regulates.
Chief Justice Rehnquist: That's back to Swift against Tyson, you know, where a statute had one level for diversity jurisdiction, but that a common law didn't.
It seems to me it would be unusual for Congress to have reimposed that sort of requirement.
Mr. Kayatta: Well, I don't quite see the analogy, because the issue here is, given that Congress said a law which regulates insurance, did it have in mind common laws of this type, particularly...
Justice Scalia: General common laws.
Mr. Kayatta, am I not correct that you would say a statute would be just as bad under yourtheory if the statute were framed not as specifically as Justice Ginsburg's proposal, but it was a statute which said in all contracts, not just insurance contracts, in all contracts either party... well, time is not of the essence unless there's prejudice?
Mr. Kayatta: That's correct.
Justice Scalia: You would say that that fails for two reasons, both because it impinges upon the administration of the scheme which is given to the Secretary and, secondly, because it does not regulate insurance.
Mr. Kayatta: That's correct.
Justice Scalia: It's a general statute.
Mr. Kayatta: That's correct.
Justice Breyer: What's special about this?
That is, if I assume, which I think I am at the moment, California has a law and the law says insurance contracts, but not others, that have in them a phrase that says you have to notify us at a certain point can only be read to mean you have to notify us or you still win even if you miss the deadline unless we're prejudiced... that's the rule, right?
That's the rule we're talking about?
Mr. Kayatta: That is the rule.
Justice Breyer: And it only applies to insurance companies, says the SG.
They haven't found one case that applies to anything else.
Mr. Kayatta: Well, by name it only applies to insurance companies.
Justice Breyer: And they've found no case in their research that says it applies to anything else.
Mr. Kayatta: That's not what they've said.
Justice Breyer: Well, what I have them as saying is:
"Our survey of California law reveals no cases where the State courts applied the notice prejudice rule as such... "
Mr. Kayatta: Exactly.
Justice Breyer: .. oh,?
Mr. Kayatta: es, and the reason they sayis because we've cited in our case, as does the amicus VACLI, the mechanic' lien case, a notice to a conservatee case, a real estate case.
Justice Breyer: Okay, okay.
Let's now make mine an assumption.
So we assume it's an insurance contract.
Now, we know that insurance contracts, the States regulate them to death.
I mean, that may be good, but I mean they have dozens and dozens and dozens of regulations.
You have to have big print and you have to have this or that.
So what's special about your regulation?
Why does 502, which just says you have to have a procedure for recovery, suddenly preempt your regulation when it doesn't preempt any one of a thousand others that govern when you can recover against an insurance company, when you can't recover, what their contract has to say, what print it has to be in, whether it has to be in English?
Justice Scalia: I like that one.
Justice Breyer: You know, what's special?
Mr. Kayatta: Well, what's special is because it purports to dictate the enforcement and interpretation of claims administration procedures, and that is the one area in particular that Congress meant to preempt the field entirely on.
Justice Breyer: Well, why is it more of a procedure, a claims administration procedure, to say, insurance company, your contract allows you to enforce that notice requirement only when there is prejudice, than to say, insurance company, that contract means you still have to pay unless it's written in plain English, unless it has four-point type, unless?
Why is the one procedure, but the other isn't?
Mr. Kayatta: Because we are in a 502(a) action and Congress said it intended that those actions would be exclusively Federal actions modeled on 301.
In a 301 proceeding you would not bring a...
Justice O'Connor: Well, this is a 502 action.
It doesn't mean that there still can't be a rule regulating insurance, the business of insurance, that is applicable.
Mr. Kayatta: If you're talking about a rule...
Justice O'Connor: They did bring it under 520.
Mr. Kayatta: That's correct, but the rationale that this court adopted for finding that a 502(a) action is an exclusive remedy... and the State law might have lots of remedies that would be fully applicable in a State court; you can't bring them, you can't pursue them, you can't get those damages here... the rationale was Congress' instruction that this be modeled after 301.
Justice Ginsburg: But this isn't a remedy.
It's not... they're not bringing an action under California whatever private right of action.
They're bringing an action under ERISA, and they say the statute's got this savings clause contemplating that there will be in actions under ERISA an element for State law.
And certainly there was a big impact of State law in the Metropolitan Life.
It really had a much more, at least as far as I can understand it, much more intrusive impact on the insurance company than this notice and prejudice.
Mr. Kayatta: In Metropolitan Life the Court enforced an injunction against Metropolitan violating a State law that required that certain benefits with respect to which ERISA was silent be included in policies.
Here we have a 502(a) action which is an exclusive remedy.
Now, let me address the point that, okay, is this not a remedy?
It's the same remedy; why can't we have a different rule subsidiary in the pursuit of that remedy?
Well, if you say that, then you have rejected the rationale for having the exclusive remedy in the first place, was that plan administrators and courts would be able to determine the legality of their actions without looking to varying State law modeling it after 301.
And you could not in a 301 action say, oh, this isn't the remedy, so we're going to import common law.
The Allis-Chalmers case...
Justice Scalia: What State law would govern?
Presumably it would be the State law of each claimant?
Would that be it?
I mean, would more than one State law apply to this, to this document?
Mr. Kayatta: Well, you would first need to do a choice of law analysis.
Then you would need to not only determine what the State common law is, but then you would need to perform the type of analysis in every instance of what is the source of this State law and is it different enough from general law in that particular State.
So literally you could have one State which has a notice prejudice rule which simply says, as in all contracts, we will not enforce these provisions, and in another State you say we only do it if you trace it back 50 years and you see it exclusively.
This would be a significant burden.
Justice Scalia: And they can both apply to the same plan, because... because the claimants are in different States.
Mr. Kayatta: That's correct, that's correct.
Justice Ginsburg: 301 doesn't have a savings clause and that's... what you're trying to say is the savings clause cannot operate at all when it comes to plan administration?
Mr. Kayatta: If you say that Congress meant that we would have 301 here, but with a savings clause, that's the equivalent of saying we don't have 301, because everything in ERISA...
Justice O'Connor: Yes, but we do have it.
Justice Breyer: We do have the savings clause.
Mr. Kayatta: Yes, everything in ERISA preempts but for that savings clause anyhow.
Why, then, does 502, as this Court found and as Congress intended, have a special preemptive force by reference to 301?
It is because 301 occupies the field of enforcement and administration, and in fact was the reason this Court cited in Taylor for taking the extraordinary step of not enforcing the well-pleaded complaint.
Justice Ginsburg: I don't see anything in 502 that refers to 301.
Mr. Kayatta: Congress specifically said that it intended 502(a)...
Justice Ginsburg: Where did it say that?
Mr. Kayatta: In the committee, the committee report.
Chief Justice Rehnquist: Let's talk about the statute.
Mr. Kayatta: Well, that's what this Court said in Pilot Life as well.
It specifically referenced that and came to the conclusion of that, and then in Taylor expanded upon it.
If I might, I would reserve the remainder of my time.
Argument of Edwin S. Kneedler
Chief Justice Rehnquist: Very well, Mr. Kayatta.
Mr. Kneedler, we'll hear from you.
Mr. Kneedler: Thank you, Mr. Chief Justice, and may it please the Court:
I'd like to address several things at the outset in terms of petitioner's argument that the notice prejudice rule conflicts with provisions of ERISA itself, before I get to the insurance savings clause.
First, counsel mentioned or argued that the application of the notice prejudice rule would be inconsistent with the requirement that a fiduciary administer the plan in accordance with its terms.
Actually, what section 1104(a)(1)(D) of Title 29 says, it should be administered in accordance with the documents and instruments governing the plan
"insofar as such documents and instruments are consistent with the provisions of this subchapter. "
This subchapter includes the insurance savings clause.
So to the extent the insurance savings clause makes State law applicable to the plan, the administrator is required to comply with State law in the same way that the administrator would obviously be required to comply with Federal law.
Justice Souter: So the argument based on, in effect, on the wordis essentially a circular argument?
Mr. Kneedler: Yes, because the statute itself says only insofar as it's consistent with the subchapter, which itself incorporates State law.
The other point that's been argued is that section 503 of ERISA, which requires plans to have claims adjudication procedures in accordance with regulations of the Secretary, somehow occupies the field or ousts any notice... any application of a rule like the notice prejudice rule.
And we think that is also incorrect.
Section 503 says nothing about the filing of claims.
The Secretary's regulations under section 503 say nothing about the time period for the initial filing of a claim.
Justice O'Connor: Could the Secretary adopt regulations like the notice prejudice rule and then occupy the field?
Mr. Kneedler: We believe she could, but section 503 and certainly the regulations as they're now written do not occupy the field.
The very first section of the regulations say that they establish minimum standards for claims, and that appears on page 105A of the appendix.
The regulations establish minimum procedures.
They don't address at all the time period for filing claims.
And most significantly, they provide in three separate different subsections, (c), (d)(3), and (g)(3), that where the plan provides for an insurance company to administer... to administer the policy, that the claims process... excuse me... an insurance company that is subject to regulation under State law, that the claim may provide for claims to be adjudicated by the insurance company.
So the regulations themselves refer to the fact that insurance companies are subject to State regulations.
Justice O'Connor: Do other States have similar notice prejudice rules, to your knowledge?
Mr. Kneedler: According to the amicus brief filed by the National Association of Insurance Commissioners, 26 States have similar...
Justice Breyer: What about this?
e did throw me a little bit with that.
I mean, you said, well, really this... California applies this notice prejudice rule only to insurance companies.
That's how I read your statement.
Mr. Kneedler: Right.
Justice Breyer: And then Mr. Kayatta said, well, you said we haven't found a case in California that applies the rule.
Mr. Kneedler: here are... there are parallel principles of general contract law that aren't precisely the same, but that will relieve a party to a contract of a default.
Justice Breyer: Well, then he says, well, once you say that, his point is that, well, this is just like, you know, a rule that says offer is good on acceptance or something.
I mean, it's a general principle of contract law and that doesn't fall within any special insurance clause, although of course insurance companies, like other companies, are bound by it.
Mr. Kneedler: Well, but the important point, though, is that from the outset... and this is explained at some length in respondent's brief.
From the outset, this particular rule has been explained and articulated and evolved in insurance-specific terms.
It is articulated in terms of notice to the insurer and now the insurer bears the burden of proof in showing an absence of prejudice, which is an insurance-specific burden of proof rule.
Chief Justice Rehnquist: It's not just a branch, then, of the condition subsequent law?
Mr. Kneedler: Right, no.
It has been articulated from the outset.
All the California cases, and there is a wealth of them, show that it is an insurance-specific rule.
Justice O'Connor: And we have a court of appeals holding to that effect.
Mr. Kneedler: Yes, we have a court of appeals holding to that effect.
Justice O'Connor: Interpreting State law.
Mr. Kneedler: Right, and this Court...
Justice O'Connor: Which we presume is correct.
Mr. Kneedler: That's correct, and the District of Columbia Circuit also interpreted specifically the California notice prejudice rule as being an insurance-specific rule.
This Court does normally defer to a court of appeals rule or interpretation of State law.
It's also quite clear that a State common law rule can regulate.
That's been clear in this Court's preemption cases and other areas... Garman, Medtronic, Tripalone, cases like that... the Court has made clear that State common law rules may regulate.
And also, just one further point on Justice Breyer's question.
If a State passed an insurance-specific statute that had a rule applicable to insurance and there was also another statute of the State applicable to banking that had a similar rule, I don't think that the law would be rendered not an insurance law since it regulates the terms of an insurance contract.
Justice O'Connor: Mr. Kneedler, applying the same principles, do you think that California's Elfstrom rule is one that applies general agency principles or is insurance-specific?
Mr. Kneedler: We believe that that's a general agency principle, and in fact the respondent doesn't try to defend it on any other ground, nor did the court of appeals.
Justice O'Connor: Are you going to address whether this notice prejudice rule is something regulating the business of insurance?
Mr. Kneedler: Yes, I would like to address that.
In this Court's decision in Metropolitan Life, the Court really went through a two-step analysis.
The first and I think primary focus should be on whether the law is one regulating insurance within a commonsense or straightforward meaning of that term.
And in Metropolitan Life the Court held that a mandated benefits provision to be included in the contract of insurance regulates insurance within a commonsense understanding of that term, and specifically focused on the fact thatis one of the phrases mentioned in the deemer clause and that that was the sort of thing intended to be saved to the States under the insurance savings clause.
The notice prejudice rule is directly parallel to that.
You could look at it either as a mandatory term in a contract, in effect, that untimeliness will not be a ground for rejecting the claim unless there is prejudice, or that it effectively renders unenforceable a provision in a contract that has a time limit unless prejudice is shown.
Justice Scalia: It doesn't alter the allocation of risks insured against at all.
I mean, those other things do.
Those other things say certain risks the insurance company is going to have to take.
That is, certain aspects of the risk insured against.
The risk insured against here is not the risk of how late you make the claim.
Mr. Kneedler: But we do not believe that that is essential.
And even where the Pireno factors apply under the McCarran-Ferguson Act directly, the Court has said that no one factor is dispositive.
We don't think, particularly since the phrasing of the insurance savings clause seems to us to be broader... it talks about laws regulating insurance, not regulating the business of insurance... that those factors have to be applied literally.
I think it's important to look at the Court's decision in FMC versus Holliday, where the Court held that a State law, anti-subrogation law, regulates insurance within the meaning of the insurance savings clause, and that certainly did not allocate the risk, the initial risk for the injury or the occurrence.
What it did was simply say that if the insured recovers on a policy against the wrongdoer that there is no recovery from the insurance company on that.
So we think the commonsense view of it is that, at least if the issue concerns something that is in the contract of insurance... and this Court said in Metropolitan Life, referring to the National Securities case, that the relationship between the insured and the insurer, the contract of insurance and its enforcement, are at the very core of what Congress intended to save to the States under the insurance... excuse me, under McCarran-Ferguson.
We think the contract of insurance and the relationship between the insured and the insurer is at the core here as well of what Congress intended to save to the States.
There's no question that the notice prejudice rule goes to the relationship between the insured and the insurer and goes to the enforceability, one of the important things saved to the States, of the contract provision that is included within, either included within the contract or is rendered unenforceable in the absence of a showing of prejudice.
I would like to... on the Elfstrom rule, the second point of the case, we do believe that the Elfstrom rule very clearly does relate to an ERISA plan.
Justice Ginsburg: What is the rule?
On the one hand, the rule is, it seems to be a rule of law that the employer is always the agent of the insurance company, but the Ninth Circuit didn't treat it that way...
Mr. Kneedler: The Ninth Circuit seemed to treat it more as a factual question under general agency law, and that's why we believe it is not... that it is not saved.
But we do believe that it could be applied as a matter of Federal common law.
Justice Ginsburg: Do you know which it is in California?
Is it a rule of law or is it a matter of fact?
Mr. Kneedler: I actually think it's a combination of the two, because it depends on the predicate fact that the employer has actually assumed some responsibilities for administering the contract.
Justice Scalia: Well, if we're going to believe the Ninth Circuit for one thing, why don't we believe them for the other one?
Mr. Kneedler: Well, the Ninth Circuit did not say that it was...
Justice Scalia: Well, you say they treated it that way.
Did they treat it as something that they shouldn't have treated it as?
Mr. Kneedler: Well...
Justice Scalia: I mean, I think we have to assume that they applied the State law properly.
Mr. Kneedler: For these purposes, we don't think it matters whether it's law or fact.
It is a rule of general applicability and not focused on the insurance contract.
Argument of Jeffrey L. Ehrlich
Chief Justice Rehnquist: Thank you, Mr. Kneedler.
Mr. Ehrlich, we'll hear from you.
Mr. Ehrlich: Mr. Chief Justice and may it please the Court:
I think the place to start is back with the savings clause in ERISA, where Congress said that any law of any State that regulates insurance would be saved from preemption.
As I hear UNUM's argument, they are trying to define or add conditions to this by redefining the notice prejudice rule or the savings clause to exclude a rule that they characterize as administrative.
But in our view the notice prejudice rule can't be accurately described as administrative, because it changes a condition precedent for coverage under the policy.
The policy said that Mr. Ward had to make a claim within a particular period of time and if he didn't do so UNUM wouldn't have to pay.
Justice Souter: Is that a question of coverage or a condition for the payment of benefits?
I mean, when we usually talk about coverage under the policy we usually refer to the substantive terms... what kinds of injuries, disabilities, and so on are covered.
Is it fair, then, to characterize it as a coverage provision?
Mr. Ehrlich: Justice Souter, I believe it is fair because in its effect it determines whether or not the coverage is available to the claimant in this situation, and the State has changed it.
UNUM admits that the notice prejudice rule alters the terms of its policy, and in fact it's that alteration that forms the entire basis of its claim that there's a conflict with section 502.
Justice Scalia: Well, it alters the terms, but it doesn't necessarily alter the coverage.
I mean, the two... the terms include more than what the coverage is.
They include, you know, when you have to apply.
Mr. Ehrlich: Well, there's no doubt that Mr. Ward...
Justice Scalia: Where you have to mail your notice, is that... is that a coverage provision?
Mr. Ehrlich: No, I wouldn't say that's a coverage provision.
But here UNUM has treated the claims provision or the requirement in its policy that if you don't meet it we don't have to pay your claim.
So that goes directly to whether coverage exists for Mr. Ward, and California has said that that kind of...
Justice Scalia: They could say the same thing about the wrong address: You sent your thing to the wrong address and therefore you're not covered
So that's a coverage provision, too.
Mr. Ehrlich: I don't know that... the wordis not what Congress put in the savings clause.
o even if the notice prejudice rule is seen as a rule that somehow only applies to the administration of the policy, I'm not sure that that suddenly automatically means that it's not within the scope of the savings clause.
I have a great difficulty, I think UNUM has great difficulty, or would have difficulty, in trying to square its argument with the Court's holding in FMC, where the Court said that the anti-subrogation law, which doesn't affect the coverage of the policy... the insurer still has to pay, but may be entitled after the fact to recover what it paid from the insurer... the insured, if the insured can recover it from a third party.
And Pennsylvania passed a law saying you can't have that kind of term.
And the Court said that that law invalidated the subrogation provisions and therefore it controlled the terms of the insurance policy and therefore it was a law that regulated insurance.
Justice Scalia: Doesn't that... doesn't that change the scope of the insurance company's risk?
I mean, he's at risk only if, only if money to cover the loss is not collected from somebody else.
Mr. Ehrlich: The insurance... the risk to the insured is the same, Justice Scalia.
The person is injured, the person goes to the insurance company, and the insurance company pays the claim.
After the fact, if there is some other pocket that the injured person can recover from, then the insurance company may stand to be reimbursed.
But it doesn't change...
Justice Scalia: Well, but the insurance company's risk is considerably changed.
Mr. Ehrlich: My understanding is that the risk, the transfer of risk, goes to what the insured must no longer be responsible for.
Justice Scalia: No, I think it goes to the allocation of risk between the two.
Chief Justice Rehnquist: You can also say that the risk is changed if some claims that have come in late have to be paid or if they're not.
I mean, if you want to press the thing.
Mr. Ehrlich: I think that's right, and in the Fabe decision the Court's position was that a statute, an Ohio preference for insureds who have the misfortune of having their insurance company go into receivership, was sufficiently addressed to the spreading of risk because it assured that the policy would be performed in circumstances where it otherwise might not be performed.
And that's really, the notice prejudice rule can be described in the same way.
Justice Breyer: He would like to describe it, I take it, as simply a branch of contract law, where courts have, with contracts of adhesion for example, tried to make certain that defendants can't avoid their bargain through what courts have considered a number of technicalities, and therefore because this is simply a branch of that broader law and really no different from that broader law, and because it's so carefully, it's so closely bound up in when a judge will permit a plaintiff to... a defendant to assert a certain kind of claim, it's like court administration.
It's like... I'm trying to get you to focus on what I think is the characterization of it that would help him, so that you can reply to that.
Mr. Ehrlich: I want to be very careful in responding to your question, Justice Breyer, not getting hung up in,because the notice prejudice rule is not just a branch or an application of a broadly applied principle.
California courts have applied it only in the insurance context.
And if you are a party to any kind of other contract in California, a mortgage, a lease, any other kind of contract, and you miss a notice deadline in the policy, you have no assurance.
You cannot come into court in California and say, oh, there's a rule that means I don't have to comply with this notice unless the other party who s trying to enforce it can bear the burden of showing substantial prejudice.
That rule, that kind of categorical application, only applies in California to insurance policies, and that's why it's not accurate to say, well, this is really just Restatement section 229.
In all of the other contexts, if a party is trying to assert that principle that there's a disproportionate... forfeiture would be disproportionate or apply Restatement section 229, you'd have to come before the court in a case by case basis, invoke the court's discretion or equity that in the terms of that particular contract the equities are with you, that it's not a material term of the contract, and you would be the person that would have to bear the burden.
But here California by rule has categorically changed it and the rule only applies in insurance policies.
And although UNUM has cases where the wordsand the wordsappear fairly close to each other, there's no notice prejudice rule.
Justice Scalia: Suppose, suppose the Secretary decided that this just makes the administration of plans impossible, that every plan administrator has to figure out what the law is in 50 different States and go through the same job of determining whether it is narrowly applied to insurance or it's a general law and so forth, and he says: We're going to adopt a rule that'll apply to all
Can the Secretary do that, to all plans?
Mr. Ehrlich: So as I understand your question, would it be valid if the Secretary under its authority under section 503 adopted a rule, and would that preempt the field?
Justice Kennedy: Yeah.
Justice Scalia: How could it preempt the field when you have this express exemption for State laws regulating insurance?
Mr. Ehrlich: That would... I think that's correct.
I think that the Secretary's power to promulgate regulations...
Justice Scalia: Of course, the government doesn't like that.
The government wants to have it both ways.
But it seems to me that if this is indeed the regulation of insurance the Secretary has no control over it.
Mr. Ehrlich: The Secretary's power is obviously delimited by the terms of what Congress gave the Secretary in ERISA and what Congress... part of what the Secretary has to work with is the fact that laws that regulate insurance are saved.
Justice Scalia: But I mean, you know, that doesn't help your case a whole lot, because that means that there could be all sorts of different rules in different States pertaining to the administration of insurance plans, and they would all be applicable.
Mr. Ehrlich: Well...
Justice Scalia: And it could make... it's clear that Congress wanted administration of these plans to be simple.
Mr. Ehrlich: I suppose that when the rule... there are rules of administration and rules that go directly to whether the claim's going to be paid.
It seems to me that here this rule is really no different than the rules that the Court has already found regulate insurance, such as the anti-subrogation statute.
And in the National Securities case, when the Court defined for the purposes of the McCarran-Ferguson Act what the scope of the business of insurance was, the Court said that if it's a rule that addresses the relationship between the insurance company and its insured or if it goes to the type of contract that can be issued, its reliability, its enforcement, or its interpretation, that's within the scope of the business of insurance.
It seems that the Court should apply the same, or that Congress would no doubt... that was said before ERISA was enacted... and when Congress put a savings clause in that let States regulate insurance, that it must have known that that might create some disuniformities.
And the Court has recognized that in Metropolitan Life.
I don't see any conflict here between the ability to change the terms of the contract under the savings clause and then the power to enforce the contract once it's been changed or permissibly altered.
That argument, which UNUM makes, would completely swallow up Metropolitan Life and the FMC versus Holliday case, where in neither of those cases did the insurance... well, in one case, in Metropolitan Life, the policy did not contain the mandated benefit provision.
And in FMC, the policy contained a provision that was unenforceable.
And in both cases, if it's saved it would be enforced.
Under UNUM's approach, the savings clause would just disappear because any time the State exercised the power that Congress gave it to regulate insurance and changed or altered the terms of the policy, then there would be a conflict and it would not be enforceable.
So I don't see any conflict with 502, and obviously the government doesn't see any, either.
I guess I would part also company with UNUM's attempt to rely on this three-part Pireno factor that the Court developed in a different context, which was to decide whether the State law... I'm sorry, whether a particular business practice regulates the business of insurance.
UNUM has changed the test and substitutes the wordfor,and as a result UNUM's formulation would be: Does this law constitute the business of insurance
And that's not the test under ERISA.
The test is whether it's a State law that regulates insurance.
And as the Court in Fabe recognized, the category of laws that regulate the business of insurance is necessarily broader than simply the business of insurance, and UNUM is confusing its tests here.
So in our view, where the State has changed the terms of the insurance policy, as it did in FMC, as it did in Metropolitan Life, and the Court held that common sense dictated it was regulating insurance, the same rule is applicable here.
Justice O'Connor: Are you going to address the Elfstrom rule?
Mr. Ehrlich: I have very little to add to the Elfstrom rule than what we've already said in the briefs, and so I would ask the Court to simply resolve the case by reaffirming what it said in Metropolitan Life, which is if a State law regulates insurance it's saved, and that the Court will not read limitations...
Justice Ginsburg: I didn't know that you were making that particular argument.
Elfstrom... well, maybe you are.
It's my confusion about what the Elfstrom rule is.
I thought you said... didn't the Ninth Circuit say it didn't relate to...
Mr. Ehrlich: That's right, that was the Ninth Circuit's view.
Justice Ginsburg: The Ninth Circuit didn't say anything about the savings clause.
Mr. Ehrlich: No, Your Honor.
I didn't mean to indicate at all that I said that the Elfstrom rule or the general agency principles that the Ninth Circuit applied were saved.
Justice Ginsburg: But you just said something about savings, and that wasn't...
Mr. Ehrlich: I was trying to wind up and sit down, Your Honor.
Justice Ginsburg: But the Council of State Governments did say something about savings in Elfstrom, and your brief doesn't pick that up.
Your brief just talks about it doesn't relate to.
Mr. Ehrlich: I don't... I didn't understand the government's position to be that the Elfstrom rule was a rule that regulated insurance.
Justice Ginsburg: No, I'm not talking about the SG.
I'm talking about the Council of State Governments.
They filed a brief on your side.
Mr. Ehrlich: Yes.
Yes, they did.
Yes, Your Honor.
Justice Ginsburg: And they said they think that this is a law that regulates insurance and therefore it's saved.
Mr. Ehrlich: Justice Ginsburg, we didn't make that argument because we were troubled by the fact that what the Ninth Circuit appeared to apply were generally applicable rules, and so it looked to us maybe too much like the situation in Pilot Life, where the Court said that a rule that was generally applicable in all cases wouldn't be specifically directed at insurance.
So we didn't make that argument.
Chief Justice Rehnquist: But you did make the argument that the Ninth Circuit really didn't apply Elfstrom, which I find very difficult to follow in view of the language of the Ninth Circuit.
It said Elfstrom, Elfstrom, Elfstrom.
Mr. Ehrlich: It was difficult, Your Honor.
But in our view, as I read the California Supreme Court's decision in Elfstrom, the court established that if the employer assumed these administrative duties then as a matter of law it was the agent.
The Ninth Circuit remanded for a factual finding.
Chief Justice Rehnquist: To see if it had assumed the duties.
Mr. Ehrlich: Well, another clue to what we view as the way the Ninth Circuit read the Elfstrom rule was the discussion of the Oregon case where the Ninth Circuit sort of harmonizes Elfstrom and all other rules that are... might initially seem at odds with each other, and comes out saying that Elfstrom is one end of a continuum and there are other cases on the other end of the continuum.
And actually we read Elfstrom to require no more... I'm not saying it right because I hadn't focused on this.
But the Ninth Circuit reformulated the Elfstrom rule so that it was no longer a categorical rule where you simply said, well, if the employer is the administrator then it's the agent, and instead it said we look to the facts of the matter on a case by case basis.
Justice Stevens: Is it your view that if you win on the notice prejudice rule we don't have to fuss with the Elfstrom rule?
Mr. Ehrlich: That is our view.
Justice Stevens: That's the heart of your argument, if I got the message.
Mr. Ehrlich: That is the heart of our argument, yes.
And with that...
Justice Scalia: And that's a good time to sit down.
Rebuttal of William J. Kayatta, Jr.
Chief Justice Rehnquist: Thank you, Mr. Ehrlich.
Mr. Kayatta, you have three minutes.
Mr. Kayatta: Thank you, Your Honor.
Subrogation, an anti-subrogation rule, is classic risk-spreading.
It says who has the primary risk, who has the secondary risk.
It says as between the insurer, the insured, a tortfeasor, and another insurance company, who will have the primary risk-bearing when it comes to the loss.
Deferring... the Court does defer to considered decisions, particularly repeated ones as in Bishop and Runyon, of the circuit courts regarding State law.
But it is something different to defer to the Federal legal conclusion given to that State law.
Here the issue is under Federal law is the California law, whatever it might be, sufficiently specific or sufficiently general to fall on the applicable side of the line, and I don't think that that's something...
Justice Scalia: So the question isn't the content of the State law.
It's what the State law... how the State law qualifies as a matter of Federal law.
Mr. Kayatta: That's correct.
Justice Scalia: Which we can re-examine de novo.
Mr. Kayatta: That's correct.
And then secondly, I think we have to be very careful about simply adopting a provision that says essentially everything that's in the Restatement of Contracts or Trusts, as long as it is given an insurance-specific name and applied and adopted repeatedly in insurance cases, where it will be applied the same each time because insurance policies by State law often have the exact same language, so you will get... and they happen to be the source of a lot of litigation... so you will get lots of these cases having the same name.
And that would cover essentially the entire Restatement of Contracts.
Justice Ginsburg: But that would... I know you said this is not like McFadden, but there's lots of things that regulate insurance, like false and deceptive selling techniques and representations in policies, that are in insurance codes of fair practices, and they surely have common law derivation just like here.
So they become not... they don't regulate the business of insurance if they have a strong common law underpinning?
Mr. Kayatta: I agree you have to... there is a spectrum here and we need to draw a line someplace.
I think when we're talking about something that is a classic, it's in the Restatement of Contracts and it's simply applied here and it varies from State to State the label being given to it, how administrators are then to apply that creates such a burden on administrators where they were supposed to not have to refer to State law, much less try to determine is the label dispositive.
Justice Ginsburg: Well, now you're shifting to something else.
You're shifting away from the common law derivation.
But I was thinking all of consumer protection law has some roots in the common law.
Mr. Kayatta: That would then lead us, if we follow that to its end, that leads us to a conclusion that there is no limit to this definition.
Justice Ginsburg: What you're saying is that half of what's in an insurance code doesn't count because it's derived from the common law, but applied to, specifically to the insurance industry.
Mr. Kayatta: I'm saying that I don't think the rule could be at either end of the spectrum.
I don't think we could have a rule that says if it's at all, in any respect analogous to anything in the common law, then it's not directed.
Conversely, I don't think...
Chief Justice Rehnquist: Your time has expired, Mr. Kayatta.
The case is submitted.
The honorable court is now adjourned until Monday next at ten o'clock.
Argument of Speaker
Mr. Kneedler: The opinion of the Court in No. 97-1868, UNUM Life Insurance Company of America versus Ward will be announced by Justice Ginsburg.
Argument of Justice Ginsburg
Mr. Ginsburg: This case concerns the Employee Retirement Income Security Act ERISA is its acronym.
It is complex legislation and it is a constant supplier of questions in need of adjudication.
Two of ERISA's most litigated clauses, the Preemptions Clause and the Saving Clause are again at issue.
The Preemption Clause broadly states that ERISA provisions shall supersede state laws that relate to any employee benefit plan.
The Saving Clause prays with similar breadth exempts from preemption "any law of any State which regulates insurance".
The key words "regulate insurance" in the Saving Clause and relate to in the Preemption Clause require interpretation for their meaning is not plain.
To apply ERISA sensibly we must measure its key words in context.
The context here is a suit to recover disability benefits under an ERISA-governed policy issued by the defendant-petitioner UNUM Life Insurance Company.
Plaintiff-respondent, John Ward submitted his proof of disability claim to UNUM outside the time limit set in the policy, and UNUM therefore denied Ward's application for benefits.
Ruling in Ward's favor and reversing the District Court's judgment for UNUM, the Court of Appeals for the Ninth Circuit relied on decisional law in California, the State in which Ward worked.
We affirm the Court of Appeals' judgment in Prime Part.
The Ninth Circuit's judgment rested on two grounds.
That court relied first on California's "notice-prejudice" rule, under which an insurer cannot avoid liability although the proof of claim is untimely, unless the insurer shows it was prejudiced by the delay.
The "notice-prejudice" rule is saved from ERISA preemption, the Court of Appeals held, because it is law which regulates insurance.
By its very terms, the "notice-prejudice" rule is specifically directed at the insurance industr.
Our opinion explains in detail why we are satisfied that the "notice-prejudice" rule is not simply an industry-specific application of the general principle that law abhors a forfeiture rather it is a notably stringent adaptation of that principle of rule made mandatory only for insurance contracts.
The Court of Appeals stated a second contingent ground for reversing the District Court's judgment for UNUM, one that would come into play only if on remand the insurer proved prejudice due to the delayed notice.
Under California decisions, the Ninth Circuit said, an employer could be deemed an agent of the insurer in administering group insurance policies.
Ward's employer knew of his disability within the time the policy allowed for proof of claim.
The generally applicable agency law of California the Ninth Circuit held, does not relate to employee benefit plans, and therefore is not preempted by ERISA.
We disagree with this contingent ruling deeming the employer or the agent of the insurer would have a marked effect on plan administration, forcing the employer to assume a role with attendant legal duties and consequences that the employer had not bargained for.
We are therefore satisfied that the California agency law involved, does relate to ERISA plans and accordingly does not escape preemption.
In sum, we affirm on the main ground the "notice-prejudice" rule and reverse on the contingent employer as agent holding.
The opinion of the Court is unanimous.