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The hottest issue in ERISA law just got a little hotter now that a federal judge in Philadelphia has refused to follow a colleague’s recent decision that said ERISA plaintiffs can also pursue a claim under Pennsylvania’s bad-faith statute. The first decision, handed down July 30 by Senior U.S. District Judge Clarence C. Newcomer in Rosenbaum v. UNUM Life Insurance Co., was a major victory for plaintiffs because it held that workers can now seek punitive damages when suing the insurer that provides their benefits. Now U.S. District Judge Ronald L. Buckwalter has said he respectfully disagrees with Newcomer because the bad-faith statute creates “additional remedies” and is therefore “categorically pre-empted” by ERISA’s exclusivity provisions. “Pennsylvania’s bad faith statute, authorizing punitive damages and interest penalties, would significantly expand the potential scope of ultimate liability imposed upon employers by the ERISA scheme,” Buckwalter wrote in Sprecher v. Aetna U.S. Healthcare Inc. “In short, the relief ultimately available would not be what ERISA authorizes in a suit for benefits. … Therefore, because Pennsylvania’s bad faith statute provides a form of ultimate relief in a judicial forum that adds to the judicial remedies provided by ERISA, it is incompatible with ERISA’s exclusive enforcement scheme,” Buckwalter wrote. In Rosenbaum, Newcomer found that the 3rd U.S. Circuit Court of Appeals has never tackled the question of whether Pennsylvania’s bad-faith statute, � 8371, is pre-empted by ERISA, but that district judges, including Newcomer himself, have consistently and unanimously held that it is. But Newcomer said those decisions must now be re-examined due to a “new trend in the federal law” led by the U.S. Supreme Court. In a pair of recent decisions from the high court — Unum Life Insurance Co. of America v. Ward in 1999 and Rush Prudential HMO Inc. v. Moran in 2002 — Newcomer found that the justices significantly changed the test for assessing whether a state law qualifies for ERISA’s “saving clause,” which exempts from pre-emption “any law of any state which regulates insurance.” For the first time, Newcomer said, the justices explained that the savings clause can protect a state law from pre-emption even if its doesn’t meet all three factors of the McCarran-Ferguson Act when deciding whether the regulation fits within the “business of insurance.” The McCarran-Ferguson factors are: � Whether the practice has the effect of transferring or spreading a policyholder’s risk. � Whether the practice is an integral part of the policy relationship between the insurer and the insured. � Whether the practice is limited to entities within the insurance industry. Until now, the Pennsylvania bad-faith statute has never survived the first factor. Courts routinely held that � 8371 doesn’t meet the first of the three McCarran-Ferguson factors because it does not have the effect of transferring or spreading a policyholder’s risk. But Newcomer found that since Pennsylvania’s bad-faith statute satisfies the second and third factors, a bad-faith claim is not pre-empted. Now, Buckwalter has said he disagrees with Newcomer on two key points. Buckwalter found that Pennsylvania’s bad-faith law doesn’t satisfy the McCarran-Ferguson test, but that even if it did, the claim would nonetheless be pre-empted by ERISA’s exclusivity provisions. On the second factor of the McCarran-Ferguson test, Buckwalter found that the bad-faith statute doesn’t serve as “an integral part of the policy relationship between the insurer and the insured” because it doesn’t “change the bargain between insurer and insured.” In the Supreme Court’s decision in Unum, Buckwalter said, the justices held that California’s notice-prejudice rule met McCarran-Ferguson’s second factor because it effectively created a mandatory contract term and thus, dictated the terms of the relationship between the insurer and the insured. And in Rush Prudential, Buckwalter said, the justices held that an Illinois state law was not pre-empted by ERISA because it required HMOs to provide a mechanism for review by an independent physician when the patient’s primary care physician and HMO disagreed about the medical necessity of a treatment proposed by the primary care physician. “The Supreme Court found that this review process affected the ‘policy relationship’ between HMOs and covered persons because it provided a legal right to the insured, enforceable against the HMO, to obtain an authoritative determination of the HMO’s medical obligations, a legal right which was not enforceable under the terms of the insurance contract alone,” Buckwalter wrote. By contrast, Buckwalter said, Pennsylvania’s bad-faith statute “does not alter the terms of the contract between the insurer and the insured.” Insurers already have the obligation to act in good faith, Buckwalter found, and “a state statute providing a remedy for breach of this obligation does not have the effect of creating a new, mandatory contract term.” Instead, Buckwalter said, the bad-faith statute simply creates an opportunity for a policyholder, whose claim has been improperly handled by the insured, to seek punitive damages and interest penalties. “This creates a deterrence for insurance carriers to refuse to pay a claim when there is no reasonably credible basis to deny it. The deterrence, however, does not change the bargain between the insurer and the insured that the insurer will act in good faith,” Buckwalter wrote. While the California and Illinois regulations “supplemented and supplanted the procedures” for insurers to follow, Buckwalter found that Pennsylvania’s bad-faith statute “in no way effects claims-procedures provided for in the policy, but rather declares only that, whatever terms have been agreed upon in the insurance contract, a policy holder may obtain punitive damages and interest penalties when an insurance carrier improperly processes a claim for benefits.” But Buckwalter said that even if he were to hold that the bad-faith law qualified for protection from pre-emption under ERISA’s savings clause, it was nonetheless pre-empted because “its provision for interest penalties and punitive damages, is more akin to an ‘alternative remedy,’ which is categorically preempted by ERISA.” In Pilot Life Insurance Co. v. Dedeaux, Buckwalter found that the Supreme Court “established that it was Congress’ clearly expressed intent that the civil enforcement provisions of ERISA … be the exclusive vehicle for actions by ERISA-plan participants and beneficiaries.” As a result, Buckwalter said, “even a state law ‘regulating insurance’ will be pre-empted if it provides a separate vehicle to assert a claim for benefits outside of, or in addition to, ERISA’s remedial scheme or enlarges that claim beyond the benefits available in any action brought under [ERISA].” The question, Buckwalter said, was whether Pennsylvania’s bad-faith statute provides such a vehicle. “I conclude that it clearly does. ERISA’s enforcement scheme authorizes an action to recover benefits, obtain a declaratory judgment that one is entitled to benefits, and to enjoin an improper refusal to pay benefits. ERISA’s civil enforcement provision also authorizes suits to seek removal of the fiduciary as well as claims for attorney’s fees. In contrast, punitive damages and interest penalties are not provided for under ERISA,” Buckwalter wrote. “Because Pennsylvania’s bad-faith statute provides a form of ultimate relief in a judicial forum that adds to the judicial remedies provided by ERISA, it is incompatible with ERISA’s exclusive enforcement scheme and falls within Pilot Life’s categorical pre-emption,” Buckwalter wrote. Aetna U.S. Healthcare was represented by attorney Burt M. Rublin of Ballard Spahr Andrews & Ingersoll. Plaintiff Gerald L. Sprecher was represented by attorneys Joseph F. Roda and Eric L. Keepers of Roda & Nast in Lancaster, Penn.

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