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As Senior U.S. District Judge Clarence C. Newcomer sees it, he was right all along in holding that ERISA does not pre-empt a claim under Pennsylvania’s bad-faith statute, and those nine colleagues of his on the Eastern District bench who disagreed were simply misled by some especially bad dicta from the U.S. Supreme Court. In Rosenbaum v. UNUM Life Insurance Co., decided Monday, Newcomer refused to reconsider a July 2002 ruling that cleared the way for an ERISA plaintiff to pursue a bad-faith claim — and the prospect of punitive damages — after finding that the most recent ERISA decision from the U.S. Supreme Court now proves that he was right. The original Rosenbaum decision led to a flurry of litigation as plaintiffs’ lawyers across Pennsylvania moved to amend their ERISA lawsuits to add bad-faith claims. But the initial excitement among plaintiffs’ lawyers slowly fizzled as, one by one, Newcomer’s colleagues rejected his view. Newcomer’s colleagues faulted the Rosenbaum decision for focusing too much on ERISA’s so-called “savings clause” in which Congress spelled out a category of state laws that would not be pre-empted. Missing from Rosenbaum, the other judges found, was the second half of the ERISA pre-emption test in which courts must address whether the state law at issue is subject to “conflict pre-emption.” Since Rosenbaum, nine Eastern District judges have concluded that ERISA does pre-empt a claim under Pennsylvania’s bad-faith statute, � 8371, because Congress intended that ERISA’s remedies be “exclusive” and the state law provides additional remedies, most notably punitive damages. Now Newcomer has concluded that the U.S. Supreme Court’s decision earlier this year in Kentucky Association of Health Plans Inc. v. Miller “dramatically changed the analysis for determining whether state legislation qualifies for exemption from express pre-emption under ERISA via ERISA’s saving clause.” As a result, Newcomer concluded that the rationale of all his colleagues’ decisions was flawed because they were relying on dicta from a pair of U.S. Supreme Court decisions that simply doesn’t withstand scrutiny. If a state law qualifies under ERISA’s savings clause, Newcomer found, the intent of Congress was clear that such laws should not be pre-empted. And so, a finding that the same law is nonetheless subject to conflict pre-emption is wrong, Newcomer concluded, since such a holding effectively renders the savings clause meaningless. “Other than the obvious requirement that the law must regulate insurance, Congress placed no other requisites or restrictions on the laws saved from pre-emption under ERISA’s saving clause. In this regard, Congress’ intent was clear, it wanted all state laws which regulate insurance to be exempt from pre-emption under ERISA,” Newcomer wrote. Newcomer found that his colleagues relied on dicta in two U.S. Supreme Court decisions — Pilot Life Insurance Co. v. Dedeaux, handed down in 1987, and Rush Prudential HMO Inc. v. Moran, handed down in 2002 — in which the justices suggested that because Congress failed to include certain remedies in ERISA’s remedial scheme, such remedies were specifically excluded. But Newcomer found that the dicta in both cases was “unpersuasive” and “flawed.” “Rather than simply accepting that Congress said what it meant in drafting ERISA, the Pilot Life and Rush Courts seem to have adopted and applied the canon of construction known as ‘expressio unius est exclusio alterius,’ or, the inclusion of one implies the exclusion of the other,” Newcomer wrote. By including a savings clause, Newcomer said, Congress clearly intended that all state laws which “regulate insurance” would be exempt from pre-emption under ERISA. “The Pilot Life and Rush holdings present an implied congressional intent which flatly contradicts this express intent,” Newcomer wrote. “Rather than allowing any state law which ‘regulates insurance’ to survive ERISA pre-emption, this implied intent adds an additional requirement, that is, the law must not offer a remedy which is not listed under Section 502(a),” Newcomer wrote. “The problem with such a requirement is that the courts have taken an implied intent, which was derived by questionable means, and have interpreted that implied intent to overrule Congress’ express intent, as reflected in the saving clause,” Newcomer wrote. Instead, Newcomer said, courts should apply the same “expressio unius” analysis to the savings clause itself. “Under an expressio unius analysis, Congress impliedly meant to exclude from consideration any other requisites for state laws to qualify for the saving clause,” Newcomer wrote. Holding that a state statute cannot add to ERISA’s remedies, Newcomer found, “is another restriction on the application of the saving clause. … Adding such a requirement violates the express intent of Congress as well as the implied intent when using the form of interpretation used by the Pilot Life and Rush courts.” Newcomer found that the dicta in Pilot Life and Rush “disregard the fundamental presumption against implied pre-emption.” Since the “clear and manifest purpose of Congress” was spelled out in the saving clause, Newcomer found that a finding of conflict pre-emption “would supplant Congress’ express intent and, in the process, would violate the spirit of the 10th Amendment.” MILLER ‘S CROSSING Newcomer found that his original decision was proven correct when the U.S. Supreme Court handed down the Miller decision earlier this year in which, he said, the justices “significantly altered the applicable test for determining whether state legislation qualifies for protection under ERISA’s saving clause.” The Miller test, Newcomer said, “replaces the McCarran-Ferguson three-prong approach in determining whether a state law ‘regulates insurance,’ and is, therefore, exempt from ERISA’s pre-emptive effect.” The two-part Miller test requires that state legislation “be specifically directed toward entities engaged in insurance” and “substantially affect the risk pooling arrangement between the insurer and the insured.” Newcomer concluded that Pennsylvania’s bad-faith statute easily satisfies the first prong of the Miller test. Turning to the second prong, Newcomer said it was “critically important to note that this test differs significantly from the first of the now defunct McCarran-Ferguson factors which asks ‘whether the [law] has the effect of transferring or spreading a policyholder’s risk.’” As Justice Antonin Scalia explained, the Miller test “requires only that the state law substantially affect the risk pooling arrangement between the insurer and insured; it does not require that the state law actually spread risk.” Newcomer found that in two post -Miller decisions, two of his Eastern District colleagues — Senior U.S. District Judge James McGirr Kelly and Robert F. Kelly — “overlooked” that crucial difference. “While both of these cases correctly recite the second prong of the Miller test, neither actually applies the standard as presented by Miller. Rather, both revert to the very different standard provided in the first of the McCarran-Ferguson factors,” Newcomer wrote. Applying the new test himself, Newcomer concluded that � 8371 does qualify for the savings clause because it has an effect on the “risk pooling arrangement between an insurer and an insured.” “Section 8371 effectively alters this arrangement by dissuading insurers from denying claims in bad faith. Some may argue that remedies are already available in order to accomplish the same. However, in reality, these remedies (i.e., compensatory damages) do little to persuade an insurer against denying a claim in bad faith,” Newcomer wrote. “In addition, the compensatory remedies available offer insurers little incentive to settle bad faith lawsuits as their liability is somewhat limited and they are able to benefit by holding onto the funds in dispute until judgment is rendered at little or no additional cost. … This is precisely why the Pennsylvania Legislature drafted Section 8371.” Newcomer found that the “separate and distinct status” of � 8371 “enables it to have the effect of altering policy provisions.” Although an insurance policy may provide for an applicable statute of limitations, courts have held that � 8371 claims survive such a provision. The same rationale would also apply, Newcomer found, in cases where an insurer inserts language in a policy that excludes punitive damages, limits attorney fees or interest. “Section 8371 effectively overrides such language by effectively supplementing the policy with its provisions to create new mandatory contract terms. In doing so, Section 8371 changes the bargain between the insurer and the insured, thereby effectuating a shift in the risk as allocated in the policy,” Newcomer wrote.

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