74 F. 3d 1135 - Morstein v. National Insurance Services Inc

This appeal focuses upon the preemption doctrine under the Employee Retirement Income Security Act of 1974 ("ERISA"). 29 U.S.C. Secs. 1001-1461 (1985). The district court found that Morstein's state law claims related to the employee benefit plan established by her employer and, therefore, those claims were preempted by ERISA. We affirm the decision of the district court.

Plaintiff-appellant, Margery Morstein, is the president, director, and sole shareholder of Graphic Promotions, Inc. ("Graphic"). At all times relevant to this appeal, Morstein was also one of two employees of Graphic. In 1991, Morstein met with Scott Hankins, an insurance broker and employee of the Shaw Agency, for the purpose of obtaining a replacement policy of major medical insurance for herself and Graphic's other employee. The policy was to be administered by National Insurance Services, Inc. ("National") and underwritten by Pan-American Life Insurance Company.1 Morstein alleges that during her meeting with Hankins, she advised him that any policy of major medical insurance that would replace her current policy would be unacceptable if it excluded from coverage medical treatment related to any preexisting medical condition. Morstein asserts that Hankins assured her that the policy that he proposed would provide the same coverage for preexisting conditions as her current policy. The policy offered by Hankins was issued to Graphic, and Graphic paid the initial premium.

Over one year after the policy was issued, Morstein had surgery involving a total hip replacement. When she submitted a claim for payment for this procedure, National refused payment because it asserted that Morstein's surgery involved a preexisting condition, which she failed to disclose during the application process. National then rescinded the policy and refunded the premium payments to Graphic that were made on behalf of Morstein. She claims that because Hankins and the Shaw Agency fraudulently induced her to purchase a policy of major medical insurance, Morstein allowed a separate full-coverage insurance policy to lapse. In doing so, she further alleges that Hankins and the Shaw Agency were negligent in processing her application for insurance and that she has state law claims against them for negligence and fraud.

Morstein filed an action in state court, alleging negligence, malfeasance, misrepresentations, and breach of contract. Defendants removed the action to federal court on the basis that Morstein's claims constituted an ERISA action. The district court denied Morstein's motion to remand and found that defendants were entitled to summary judgment as to the state law claims against them. The district court concluded that Morstein's claims "clearly relate to the employee benefit plan established by Graphic Promotions; therefore, those claims are preempted by ERISA." R2-29-3. Morstein now appeals the district court's grant of summary judgment. We review a grant of summary judgment de novo. Forbus v. Sears Roebuck & Co., 30 F.3d 1402, 1404 (11th Cir.1994) (citing RJR Nabisco, Inc. v. United States, 955 F.2d 1457, 1459 (11th Cir.1992)), cert. denied, --- U.S. ----, 115 S.Ct. 906, 130 L.Ed.2d 788 (1995).

Morstein alleges that the district court erred in applying the preemption doctrine under ERISA to bar her state law claims. Section 1144(a) of ERISA provides that its provisions "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a)...." 29 U.S.C. Sec. 1144(a) (1985) (emphasis added). A state law "relates to" an employee benefit plan if the law "has a connection with or reference to such a plan." Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 111 S.Ct. 478, 483, 112 L.Ed.2d 474 (1990) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983)). The Supreme Court has endorsed a broad interpretation of the phrase "relate to" that extends to preempt certain state law tort and contract actions brought by employees. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47-48, 107 S.Ct. 1549, 1553, 95 L.Ed.2d 39 (1987). The Supreme Court does acknowledge some limits to ERISA preemption: "Some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." Shaw, 463 U.S. at 100 n. 21, 103 S.Ct. at 2901 n. 21 (citation omitted).

In determining whether Morstein's state law claims against Hankins and the Shaw Agency are related to Graphic's employee benefit plan, we must examine our circuit precedent in this area. The facts of the case before us are analogous to those in Farlow v. Union Central Life Insurance Co., 874 F.2d 791 (11th Cir.1989). In Farlow, plaintiff was a shareholder, president, and member of the board of directors of Pace-Plus, Inc. Farlow and his wife were designated beneficiaries under Pace-Plus's employee benefit plan. The Farlows alleged that an insurance agent induced them to purchase a new group health life insurance plan, and that the insurance agent fraudulently misrepresented that, among other things, the new policy would provide the same coverage as the company's old policy. Id. at 792. After switching to the new policy, Farlow's wife became pregnant. The Farlows then discovered that, unlike Pace-Plus's old policy, the new policy did not provide maternity or pregnancy coverage. Id.

Our court found the conduct alleged by the Farlows to be "intertwined" with the refusal to pay benefits:

[T]he conduct alleged in these claims is not only contemporaneous with [the insurer's] refusal to pay benefits, but the alleged conduct is intertwined with the refusal to pay benefits. Finding the Farlows' state law claims not wholly remote in content from the [insurer] plan, we reject the Farlows' contention that simply because their claims invoke misconduct in the sale and implementation of the [insurer's] plan, their claims do not relate to the plan.

Consequently, we hold that ERISA preempts the Farlows' misrepresentation and negligence claims.

Farlow, 874 F.2d at 794.2 The facts in the case before us are quite similar to those in Farlow. As in Farlow, Morstein claims the insurance agent made a fraudulent misrepresentation regarding the coverage provided by the new policy. Like Farlow, Morstein claims that her state law causes of action are not preempted by ERISA because they are not related to the plan. We are bound by the precedent set by this court in Farlow and other cases in this circuit and hold that Morstein's state law claims are preempted by ERISA.3

Morstein attempts to distinguish Farlow by arguing that, unlike the insurance agent in that case, Hankins was acting as Morstein's agent, not the agent of the Shaw Agency. Thus, she argues that, "[i]t defies credibility to suggest that an agent of a plan beneficiary, whose duties effectively terminate upon the establishment of a 'plan,' is insulated by ERISA from liability resulting from his malfeasance in performing duties for the benefit of the beneficiary." Appellant's Brief at 9. We do not find that the relationship between Hankins and Morstein differs from the relationship between the insurance agent and the plaintiff in Farlow.4

Bound together with Morstein's agency argument is her contention that Hankins and the Shaw Agency are not each a "party in interest" and therefore are not governed by ERISA. 29 U.S.C. Sec. 1002(14) (Supp.1995). While intriguing, this argument does not hold any weight under the facts before us. In Farlow we looked not to the relationship between the parties but to the relationship between the alleged conduct and the refusal to pay benefits. If the actions of a party, regardless of his "interest" in the plan, are intertwined with the refusal to pay benefits, then the action is related to the plan, and thus, it is preempted.

Morstein also argues that Forbus, supports her argument that her state law claims are not preempted. Forbus, however, is distinguishable from this case. In Forbus, we found no preemption because the plaintiffs' claims centered on alleged fraud by Sears concerning the elimination of plaintiffs' jobs, not fraud relating to the amount or availability of pension benefits to the plaintiffs. Forbus, 30 F.3d at 1406. Here, Morstein's fraud allegations related to the availability of benefits for a preexisting medical condition.

Morstein challenges the district court's conclusion that her state law claims against Hankins and the Shaw Agency are preempted by ERISA. We conclude that we are bound by the precedent established by this circuit in Farlow and its progeny. Accordingly, the district court's grant of summary judgement is AFFIRMED.

The application of ERISA preemption in removed cases arising out of insurance twisting, common law fraud in the inducement, or other illegal selling practices is not consistent in this circuit, or between circuits. I concur only because Farlow v. Union Central Life Ins. Co., 874 F.2d 791 (11th Cir.1989) appears to bind this court to a rule that need not be cast in concrete, if it is wrong.

In Farlow, the plaintiffs alleged that the defendant insurance agent wrongfully induced them to switch to a new insurance policy by false representations that the new policy he was selling would provide the same coverage as the old policy being replaced. The new policy did not, however, provide pregnancy and maternity coverage, which Mrs. Farlow learned to her dismay after she became pregnant. The Eleventh Circuit held that ERISA preempted the Farlows' claims:

[A] state law cause of action "relates to" an employee benefit plan if the employer's conduct giving rise to such claim was not "wholly remote in content" from the benefit plan....

The Farlows' complaint alleges that [the insurance agent] negligently failed to disclose that the Union Central plan did not provide maternity and pregnancy coverage and fraudulently misrepresented that the Union Central plan's coverage was coextensive with [the] former plan's coverage. [The] conduct alleged in these claims is not only contemporaneous with Union Central's failure to pay benefits, but the alleged conduct is intertwined with the refusal to pay benefits. Finding the Farlows' state law claims not wholly remote in content from the Union Central plan, we reject the Farlows' contention that simply because their claims involve misconduct in the sale and implementation of the Union Central plan, their claims do not relate to the plan.

874 F.2d at 794.

The Fifth Circuit, a year later, announced a different rule. Perkins v. Time Ins. Co., 898 F.2d 470 (5th Cir.1990). In Perkins, as in Farlow, the plaintiff alleged that he was fraudulently induced by the defendant insurance agent into surrendering coverage under an existing policy in order to participate in an ERISA plan that did not provide as broad coverage as the old. The insurance agent told the plaintiff that his daughter's eye conditions, which required surgery, would be covered under the new policy rather than excluded as a preexisting condition. That representation was false, and when the plaintiff's claim for benefits for his daughter's eye surgery was denied, he sued the agent for fraud. The Fifth Circuit held that ERISA did not preempt the claim:

Giving the ERISA "relates to" preemption standard its common-sense meaning, we conclude that a claim that an insurance agent fraudulently induced an insured to surrender coverage under an existing policy, to participate in an ERISA plan which did not provide the promised coverage, "relates to" that plan only indirectly. A state law claim of that genre, which does not affect the relations among the principal ERISA entities (the employer, the plan fiduciaries, the plan, and the beneficiaries) as such, is not preempted by ERISA.

Perkins, 898 F.2d at 473 (citations omitted).

The obvious tension between the Eleventh Circuit's holding in Farlow and the Fifth Circuit's holding in Perkins has affected the district courts. See, Martin v. Pate, 749 F.Supp. 242 (S.D.Ala.1990), aff'd without op. sub nom. Martin v. Continental Investors, 934 F.2d 1265 (11th Cir.1991). There, a district judge, after reading Perkins, gave Farlow a narrow interpretation and found no ERISA preemption in a fraud in the inducement case "quite similar" to Farlow. Martin, 749 F.Supp. at 246. As noted, we affirmed, but without opinion, creating a covert intra-circuit conflict in our own doctrine.

In Martin, the plaintiff sued an insurance agent for fraud in the inducement, alleging that the agent knew or should have known of the plaintiff's preexisting heart condition, and that despite such knowledge the agent represented that the new insurance policy would cover the condition. The insurance company refused to pay benefits because of plaintiff's failure to disclose the condition.

Noting with approval the Fifth Circuit's decision in Perkins, the district court reasoned that application of state fraud law would not result in regulation of an ERISA plan: "What will be regulated is conduct on the part of defendants, engaged in prior to the time plaintiff became a beneficiary under the plan, i.e., representations made to induce plaintiff to enroll under the plan." Id. The district court admitted that it was "cognizant" of Farlow, then proceeded to criticize Farlow for relying on a case that was not, in the district court's opinion, authority for finding preemption in fraud in the inducement cases. Id. at 247.

As a visiting judge from still a third circuit, one is diffident about characterizing the conflict between Farlow and Martin as a hazard to navigation for the district courts of this circuit. But compare Beal v. Jefferson-Pilot Life Insurance Company, 798 F.Supp. 673 (S.D.Ala.1992) with Barnet v. Wainman, 830 F.Supp. 610 (S.D.Fla.1993).

In Beal, the plaintiff exercised a retirement option to convert his ERISA group employee benefit plan to an individual policy. The ERISA group plan contained language to the effect that coverage would be similar after conversion to the individual policy. The plaintiff suffered a heart attack, and learned to his financial chagrin that many medical expenses were not covered by his new policy. In his lawsuit, the plaintiff claimed that he had been fraudulently induced to purchase the new policy, and that, but for the fraud, he would have recovered benefits under the old policy. Holding the plaintiff's claim preempted by ERISA, the district court followed Farlow and distinguished Martin.

In Barnet, the plaintiff alleged that an insurance agent fraudulently and negligently advised him that his failure to reveal certain preexisting medical conditions on an application for a health insurance policy would not affect his coverage under the policy. When he applied for benefits, his application was disallowed and his insurance rescinded on account of his failure to disclose his preexisting condition. Holding that the plaintiff's claim was not preempted by ERISA, the district court distinguished Farlow and followed Martin.

Given the demonstrated difficulty faced by the district courts, and the real possibility that Perkins is more consistent than Farlow with federalism, state anti-twisting statutes, and the intent to benefit workers which underlies the ERISA scheme, it may be timely and appropriate to suggest an en banc review of the preemption matter. There is no apparent sign that ERISA filings are declining in the district courts, and it is not impertinent to suggest that clear direction from the Circuit is in order.