The Third Circuit issued an opinion today, putting to rest the controversy that stemmed from several federal district court cases* in Pennsylvania which had held that ERISA does not preempt bad faith insurance claims brought under 42 Pa. C.S. section 8371**. The Third Circuit opinion issued today in Barber v. Unum Life Ins. Co. of Am., holds that, under the doctrine of conflict preemption, ERISA preempts the statute because it provides “a form of ultimate relief in a judicial forum that [adds] to the judicial remedies [already] provided by ERISA,” citing the very recent and well-known U.S. Supreme Court case of Aetna Health Inc. v. Davila, 124 S. Ct. 2488 (2004) as authority. (You can read about the Aetna case here and here.)
The Third Circuit opinion also provides that, under the doctrine of express preemption, the state statute is preempted as well. The court held that the statute does not constitute a law that “regulates insurance,” preventing the statute from being “saved” from preemption under ERISA’s “saving clause.” (ERISA’s saving clause–section 514(b)(2)(A) of ERISA–creates an exception to preemption of a state law when that state law proposes to regulate insurance.) The court relied on another recent U.S. Supreme Court case, Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003) in reaching its decision under the doctrine of express preemption. (You can read about the Miller case here.) The court applied the two-part test promulgated in Miller that a statute “regulates insurance” and satisfies the saving clause only if it (1) is “specifically directed toward entities engaged in insurance” and (2) “substantially affect[s] the risk pooling arrangement between the insurer and the insured.” The Third Circuit in Barber ruled that the Pennsylvania statute satisfied the first prong of the test, but not the second, in reaching its decision that the statute was not “saved” from preemption.
Read more about the history of the legal controversy in this article from Law.com: “ERISA and Bad-Faith Claim Debate.”
*Rosenbaum v. UNUM Life Insurance Co. of America, No. 01-6758, 2002 U.S. Dist. LEXIS 14155 (E.D. Pa. July 29, 2002); Barber v. UNUM Life Insurance Co. of America, No. 03-3018 (E.D. Pa. filed Sept. 9, 2003); Stone v. Disability Mgmt. Servs., 288 F. Supp. 2d 684 (M.D. Pa. 2003).
**42 Pa. C.S. § 8371 provides:
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.