Date: 11-10-2003

Case Style: Rod Hollaway, M.D. v. UNUM Life Insurance Company of America

Case Number: 2003 OK 90

Judge: Kauger

Court: Oklahoma Supreme Court

Plaintiff's Attorney:

Joseph F. Clark, Jr., Joseph F. Bufogle, Tulsa, Oklahoma, for Plaintiff.

Defendant's Attorney:

Patrick M. Ryan, Phillip G. Whaley, Joe M. Hampton, Amy J. Pierce, Oklahoma City, Oklahoma, for Defendant.

Description:

Does Oklahoma's cause of action for breach of the implied covenant of good faith and fair dealing allowing for recovery of consequential and (when appropriate) punitive damages, as adopted in Christian v. American Home Assurance Co., 1977 OK 141, 577 P.2d 899, apply only to contracts of insurance such that it can be said to "regulate insurance" as that term is used in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) and Unum Life Ins. Co. of America v. Ward, 527 U.S. 358 (1999) (requiring that to "regulate insurance" a regulation must, as a matter of common sense, "home [] in on the insurance industry and [] not just have an impact on that industry"). If Oklahoma's cause of action for the breach of the implied obligation of good faith and fair dealing "regulates insurance," it avoids preemption pursuant to ERISA's saving clause under Unum and Lewis v. Aetna U.S. Healthcare, Inc., 78 F.Supp.2d 1202 (N.D. Okla. 1999). If it does not "regulate insurance," the cause of action is no longer available in the ERISA context and Lewis is no longer good law.

2 In Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003), the United States Supreme Court set forth a new and different test for determining when a law regulates insurance under 29 U.S. C. §1144(b)(2)1 to avoid federal preemption. Because the Miller opinion alters the test in causes previously considered by the Tenth Circuit and because pursuant to 20 O.S. 2001 §1602,2 this Court has authority to answer any question which may be determinative of an issue in the cause, we answer a single question, as reformulated:3

whether Oklahoma's cause of action for breach of the implied covenant of good faith and fair dealing is a "law which regulates insurance" within the mean of 29 U.S.C. §1144(b)(2)(A) and as that term is defined by Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003)?

3 Pursuant to Miller, a law which substantially affects the risk pooling arrangement between the insurer and the insured and which is specifically directed toward the insurance industry avoids the general rule of preemption under the Employee Retirement Income Security Act of 1974 (ERISA).4 Because Oklahoma's cause of action for bad faith breach of an insurance contract does not substantially affect the risk-pooling arrangement between insurers and insureds,5 it does not meet the test established in Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003) as a law which regulates insurance under 29 U.S.C. §1144(b)(2).6

FACTS

4 The plaintiff, Rod Holloway, M.D. (Holloway/insured), filed suit in the District Court of Tulsa to recover benefits funded through a group long term disability insurance policy issued by the defendant, UNUM Life Insurance Company of America (UNUM/insurer), to Holloway's former employer. Holloway also asserted a claim for bad faith breach of the implied covenant of good faith and fair dealing seeking consequential and punitive damages. Subsequently, the cause was removed to federal court.

5 It is undisputed that the insurance benefits arise out of and are related to an employee welfare benefit plan governed exclusively by ERISA. It is also agreed that any claim for benefits is preempted by ERISA and is governed by federal law. Nevertheless, Holloway claims that Oklahoma's common law cause of action for bad faith breach of an insurance contract is exempted from ERISA preemption as a state law which "regulates insurance" under 29 U.S.C. §1144(b)(2).7

6 Recognizing that state law is determinative of the preemption issue on the bad faith cause of action and that this Court has not addressed the precise issue presented, the federal court certified the question to this Court pursuant to the Uniform Certification of Questions of Law Act, 20 O.S. 2001 §1601 et seq. on August 9, 2002. We set a briefing cycle which was completed on October 21, 2002.

7 On February 25th and 28th, 2003, respectively, Holloway and UNUM filed a notice and response to recent authority following the Tenth Circuit's decision in Conover v. Aetna U.S. Health Care, Inc., 320 F.3d 1076, 1080 (10th Cir. 2003). In Conover, the federal court held that Oklahoma's bad faith law did not "regulate insurance" within the meaning of ERISA's savings clause and was thus preempted both because it related to an ERISA employment benefit plan and because it conflicted with the federal statute's civil enforcement scheme. On April 2, 2003, the United States Supreme Court decided Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003), in which it established a new test for determining whether a state law "regulates insurance" and whether it is removed from the general rule of ERISA preemption under the savings clause, 29 U.S.C. §1144(b)(2).8 Holloway and UNUM addressed the Miller opinion in filings on April 10th and April 14th, 2003, respectively.

I.

8 THE TEST FOR ERISA PREEMPTION ALTERED WITH THE SUPREME COURT'S DECISION IN Kentucky Ass'n of Health Plans, Inc. v. Miller, MAKING ANY PREVIOUSLY PROMULGATED TENTH CIRCUIT DECISIONS OF LITTLE ASSISTANCE. UNDER THE AUTHORITY OF 20 O.S. 2001 §1602, WE ANSWER A QUESTION WHICH MAY BE DETERMINATIVE OF AN ISSUE IN THE CAUSE.

9 The federal court recognized that Oklahoma law would govern the preemption issue. It certified the preemption question over the objections of the insurer. UNUM urges us to refrain from answering the certified question. The insurer opposed certification in the federal court on grounds that federal case law was determinative of the preemption issue and that any resolution we might provide to the dispute would not be determinative of a material issue in the cause. Although the answer to the question certified may not resolve the cause, we answer because no Oklahoma law exists on a determinative issue and because tests applied by the Tenth Circuit have been altered by a recent Supreme Court decision.

10 Pursuant to 20 O.S. 2001 §1602,9 this Court has the power to answer certified questions from federal courts, appellate courts of other states, federally recognized Indian tribes, and governmental entities of Canada and Mexico. Questions may be answered if our response may be determinative of an issue in the pending litigation and there is no controlling precedent established through judicial opinion, constitutional provision or legislative enactment.

11 UNUM objected to certification on grounds that under the Supreme Court's decision in Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 122 S.Ct. 2151, 2165, 153 L.E.2d. 375 (2002), a decision by this Court on the issue of preemption would not be determinative of a material issue in the cause. In Rush, the Supreme Court determined that state-law based pleas for damages not provided for under the ERISA scheme were preempted. UNUM argued that, even if we were to hold that Oklahoma's cause of action for bad faith breach of the covenant of good faith and fair dealing regulated insurance within the meaning of 29 U.S.C. §1144(b)(2)(A),10 ultimately ERISA would foreclose the possibility of an award of consequential or punitive damages as remedies foreclosed by the federal statute's remedy provision.11

12 The federal court was unconvinced that Rush was dispositive of the issue certified -- whether Oklahoma's law of bad faith breach of the covenant of good faith and fair dealing "regulates insurance" within the mean of ERISA. In dismissing UNUM's argument on this point, it cited to specific language from Unum providing:

"Although we have yet to encounter a forced choice between the congressional policies of exclusively federal remedies and the 'reservation of the business of insurance to the States,' . . . we have anticipated such a conflict, with the state insurance regulation losing out if it allows plan participants 'to obtain remedies . . . that Congress rejected in ERISA. . .'" [Citations to authority omitted.]

13 Apparently, the federal court was convinced that although the insured might not ultimately prevail, it remained in need of direction on state law relating to a material issue -- whether Oklahoma's law of bad faith regulates insurance within the meaning of 29 U.S.C. §1144(b)(2)(A).12 Title 20 O.S. 2001 §1602,13 does not foreclose an answer to a question simply because this Court's response may not be dispositive of the cause. All the statute requires for us to proffer an answer to a certified question is that the response be determinative of a single issue in the cause and that no controlling state law exist.

14 The Tenth Circuit has on three occasions addressed the issue of whether state-law bad faith claims were laws regulating insurance and thus avoiding preemption under 29 U.S.C. §1144(b)(2)(A). In a case decided before certification, Moffett v. Halliburton Energy Serv., Inc., 291 F.3d 1227, 1232 (10th Cir. 2002), the federal court determined that Wyoming's tort of insurance bad faith did not "regulate insurance" within the meaning of ERISA's savings clause preemption provision. The decision in Conover v. Aetna US Health Care, Inc., 320 F.3d 1076, 1078 (10th Cir. 2003) was promulgated after certification and reaffirmed the appellate court's earlier holding in Gaylor v. John Hancock Mutual Life Ins. Co., 112 F.3d 460, 465-66 (10th Cir. 1997) that Oklahoma's bad faith law did not regulate insurance within the meaning of ERISA's savings clause preemption provision.14

15 Although the trial court here might normally consider itself bound by the Tenth Circuit's pronouncement in Conover concerning the state of Oklahoma's bad faith cause of action,15 we are not so constrained. By virtue of the Supremacy Clause, we are governed by the decisions of the United States Supreme Court with respect to the federal constitution and federal law, and we must pronounce rules of law that conform to extant Supreme Court jurisprudence.16 Nevertheless, nothing in the concept of supremacy or in any other principle of law requires subordination of state courts to the inferior federal courts.17 Subject to decisions of the United States Supreme Court, we are free to promulgate judicial decisions grounded in our own interpretation of federal law.18 Where no Supreme Court directive exists, federal law is merely instructive in providing guidance on state law questions.19

16 Further, with the Supreme Court's recent pronouncement in Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003), which established a new test for the regulation of insurance determination under ERISA, it is questionable whether the trial court here would determine that it must follow Conover as controlling precedent. In Conover, the Tenth Circuit applied a test to determine whether Oklahoma's bad faith cause of action was a law regulating insurance within the meaning of ERISA's savings clause developed out of the McCarran-Ferguson Act requiring the consideration of three factors: 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.

17 The United States Supreme Court decided Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003) specifically rejecting the test applied by the Tenth Circuit in Conover. The Supreme Court stated in Miller:

". . . We believe that our use of the McCarran-Ferguson case law in the ERISA context has misdirected attention, failed to provide clear guidance to lower federal courts, and, as this case demonstrates, added little to the relevant analysis. . . .

. . . Today, we make a clean break from the McCarran-Ferguson factors and hold that for a state law to be deemed a 'law . . . which regulates insurance' under §1144(b)(2)(A), it must satisfy two requirements. First, the state law must be specifically directed toward entities engaged in insurance. . . . Second, as explained above, the state law must substantially affect the risk pooling arrangement between the insurer and the insured. . . ." [Citations omitted.]

It is with the Supreme Court's pronouncement in mind that we have reformulated the certified question. In answering the question, we will apply the test mandated by the high court in Miller.

II.

18 OKLAHOMA'S CAUSE OF ACTION FOR THE BAD FAITH BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING DOES NOT AFFECT THE RISK POOLING ARRANGEMENT BETWEEN INSURERS AND INSUREDS SO AS TO AVOID ERISA PREEMPTION PURSUANT TO 29 U.S.C. §1144(b)(2) AND THE SUPREME COURT'S PRONOUNCEMENT IN Kentucky Ass'n of Health Plans, Inc. v. Miller.

19 Hollaway argues that Oklahoma's cause of action for bad faith breach of the covenant of good faith and fair dealing meets the two-part Miller test and is exempted from ERISA preemption. He asserts that actions based on a breach of the covenant of good faith and fair dealing affect the risk pooling arrangement between insurers and their insureds and that they are specifically directed towards the insurance industry. UNUM disagrees with both these contentions.

20 Under Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003), a state law must meet both prongs20 of a two-step test to avoid federal preemption under ERISA and to fall within the savings provision, 29 U.S.C. §1144(b)(2).21 The state law must: 1) substantially affect the risk pooling arrangement between the insurer and the insured; and 2) be specifically directed toward the insurance industry. In Miller, the Supreme Court determined that Kentucky's statutory provisions of its health care act, which were directed at all willing providers, met the test and were saved from preemption. The laws met the first test of risk pooling by altering the permissible bargains between insurers and insureds and the second through their application only to potential health care providers.

21 "Risk" within the meaning of the insurance industry and as it relates to the insurer-insured relationship involves the event or happening for which the insurance company has specifically contracted to reimburse its insured -- the actual risk transferred from the insured to the insurer.22 It is the risk of injury for which the insurance company contractually agrees to compensate the insured.23

22 Risk pooling is an essential characteristic of the insurance industry.24 It serves as a form of diversification that reduces the dispersion or volatility of losses.25 Risk pooling is the practice of pooling those with greater and lesser risks together to better account and minimize the unpredictable risk for everyone.26 Risk pooling results in spreading the costs of risk of loss for which an insurer must pay across the span of insureds. The theory of risk pooling is that it is not possible to predict whether a particular insurance policy and premium will produce a return for the insurer. Premiums are established on the basis of actuarial forecasts that predict a net return on all policies by a particular insurer or group of insurers.27

23 The Supreme Court has previously determined that although bad faith actions may concern the policy relationship between the insurer and insured, they do not effect a spreading of policyholder risk.28 Research reveals nine cases29 which have applied the new Miller test to bad faith breach of contract actions. All nine of these decisions provide that state law bad faith claims are preempted and do not fall within ERISA's savings provision.30 Two of the nine courts specifically found that causes of action for bad faith -- which provide for extra-contractual damages -- do not substantially affect the risk pooling arrangement between the insurer and the insured within the meaning of Miller.31 The determination that state law bad faith causes of action do not effect a spreading of risk in the risk pooling sense conforms with the cases predating Miller in which courts addressed the risk allocation issue.32

24 The tort of bad faith breach of an insurance contract is not a risk identified within insurance policies as a risk of loss the insurer agrees to bear on behalf of the insured.33 The fact that the existence of the tort may compel insurance companies to investigate an insured's claims more thoroughly does not result in increased costs which may automatically be passed on to the insured.34 There is no indication that the law of bad faith was intended to result in the sharing of risk as to any form of medical care.35 Although the tort of bad faith may well have affected insurance rates to the extent that it has placed an additional burden on insurers to act in good faith to avoid increased awards, the insured has not demonstrated that it is a "risk of loss" included in risk pooling formulas used by insurers to determine premiums for losses insured against.

25 We align ourselves with the jurisdictions which have applied the Miller test determining that state-law based bad faith claims are preempted under ERISA. Further, we note that the overwhelming majority of pre-Miller decisions considering the bad faith issue also determine the claims are subject to ERISA preemption.36 We hold that Oklahoma's cause of action for breach of the implied covenant of good faith and fair dealing does not affect the risk pooling arrangement between insurers and insureds. Therefore, it does not meet the Miller-test as a law which regulates insurance under 29 U.S.C. §1144(b)(2).37

Outcome: ¶26 Although this Court will not answer a certified question in the guise of appellate review,38 the test for preemption has altered with the Supreme Court's recent decision in Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003) making any previously promulgated Tenth Circuit decisions of little assistance. Therefore, we exercise our authority to answer any question which may be determinative of an issue in a cause pursuant to 20 O.S. 2001 §1602.39

¶27 The result here may seem harsh. However, it is a consequence of a federal statute which contains one of the broadest preemption clauses ever enacted by Congress.40 ERISA provisions supersede any and all state laws insofar as they now or hereafter relate to any employee benefit plan.41 Congress has expressed an exclusive federal interest in regulating employee benefit plans.42 The breadth of ERISA's preemption clause often results in plan beneficiaries or participants being left without a meaningful remedy.43 Nevertheless, the Supreme Court made clear in Kentucky Ass'n of Health Plans, Inc. v. Miller, ___ U.S. ___, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003), that -- to avoid preemption and to fall within ERISA's savings provision, 29 U.S.C. §1144(b)(2)44 -- a state law must: 1) substantially affect the risk pooling arrangement between the insurer and the insured; and 2) be specifically directed toward the insurance industry. Because Oklahoma's law of bad faith does not substantially affect the risk pooling arrangement between the insurer and the insured, it cannot meet the two-prong test of Miller. Therefore, we determine that it does not "regulate insurance" under 29 U.S.C. §1144(b)(2).45

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Click the case caption above for the full text of the Court's opinion.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: Digested by Kent Morlan