Legal Summary: Ober v. Berkshire Life Insurance Company

Ober v. Berkshire Life Insurance Company
No. 1:06-CV-169, 2008 WL 11342559 (E.D. Tenn. Jan. 18, 2008)

We sued Berkshire Life Insurance (“Berkshire”) for wrongfully denying our client’s disability insurance benefits. Our client had long suffered from health issues, which were exasperated by his attempt to run his business he owned on his own, so he filed a claim on his disability insurance policies with Berkshire. When his claim was denied, we filed a complaint in state court demanding a jury trial on claims of breach of contract, bad faith failure to pay claim, and violation of the Tennessee Consumer Protection Act.

Berkshire removed the case to this district court and filed a Motion for Partial Summary Judgment, alleging that our client’s state-law claims were preempted by ERISA. The Employee Retirement Income Security Act, 29 U.S.C. §§ 1001 et seq. (“ERISA”), is a federal law governing employee benefits and was enacted to protect the interests of participants in employee benefit plans and their beneficiaries. 29 U.S.C. § 1001(b). Should a claimant’s policy be a part of an ERISA plan, then the claims under state law are preempted and federal common law will apply to determine his recovery. Pilot Life Ins. v. Dedeaux, 481 U.S. 41, 56-57 (1987).

Berkshire also filed a motion to strike our client’s jury demand if the court found our client’s state-law claims preempted by ERISA.

In order to prevail on the motion for partial summary judgment, Berkshire had to show that, assuming the facts we claimed were true, that our client’s insurance policy was part of an employee benefit plan subject to the federal ERISA law, and therefore ERISA controlled and not state law.

The court explained that summary judgment is considered proper where “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). Berkshire had the initial burden of demonstrating that no genuine issue of material fact existed. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). To refute such a showing, one must provide significant, probative evidence indicating that a trial is necessary to resolve a material factual dispute. If the Court concludes that a fair-minded jury could not return a verdict in favor of the nonmoving party based on the evidence presented by the moving party, it may enter a summary judgment. Anderson, 477 U.S. at 251-52; Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir. 1994.)

Looking at the facts alleged, the court noted that our client was the principal and sole owner of two executive recruiting firms. While working as the company’s only employee, our client took out two individual disability insurance policies with Berkshire. Invoices on the policies were sent directly to the firm and the firm paid the premiums. The firm briefly had nine employees, before returning to only our client, his wife, and one other employee.

The third employee took out an individual disability insurance policy with another insurer. The firm reimbursed him for the premiums paid on that policy, but neither the firm nor our client were involved with the selection, purchase and administration of the employee’s disability insurance policy.

The court then explained the legal analysis it applied to this issue. The Court of Appeals for the Sixth Circuit has held that a district court must engage in a three-part factual inquiry to determine whether an employee benefit plan exists. First, the court must apply the so-called “safe harbor” regulations established by the Department of Labor to determine whether the program was exempt from ERISA. The court must next look to see if there was a “plan” by inquiring whether “from the surrounding circumstances a reasonable person could ascertain the intended benefits, the class of beneficiaries, the source of financing, and procedures for receiving benefits.” Finally, the court must ask whether the employer “established or maintained” the plan with the intent of providing benefits to its employees. *3 Thompson v. American Home Ass. Co., 95 F. 3d 429, 434-35 (6th Cir. 1996.)

The Court chose to focus on the third prong of the Thompson test, which questioned whether our client’s firm “established or maintained” an employee benefit plan with the intent to provide disability benefits to its employees.

Federal regulations define who qualifies as an “employee” under Title I: “An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse.” 29 C.F.R. § 2510.3-3(c). Under this statute, our client and his wife would not be considered employees at the firm.

Despite the firm taking all of the necessary steps to establish and maintain our client’s individual disability policies, it would be considered to have established and maintained an ERISA employee benefit plan only if it also selected, purchased, and minimally administered disability insurance for someone other than our client and his wife. The court determined there was no evidence that the firm distributed an enrollment form to its third employee or was involved with any claim made on his policy. The court agreed that the firm did not intend to create an ERISA employee benefits plan that included disability insurance.

The fact that the firm paid the premiums for both of its separate employee’s disability insurance and our client’s policies does not make the two separate policies with two separate providers an employee benefit plan. See New England Mut. Life Ins Co., Inc. v. Baig, 166 F. 3d 1 (1st Cir. 1999); (Slamen v. Paul Revere Life Ins. Co., 166 F.3d 1102, 1106 (11th Cir. 1999.) The court previously held that: “If an employer offers no welfare benefit plan to its employees but leaves each employee free to shop around for his or her own health (accident, disability, life, etc.) insurance, ERISA does not apply.” Brundage-Peterson, 877 F.2d at 510. The firm’s employee purchased his insurance independently from the firm and our client, so ERISA does not apply.

The court agreed that the firm did not offer, nor did it intend to create, an ERISA employee benefit plan that provided disability coverage as part of its employee benefit plan under our client’s disability policies. Our client’s disability insurance plans were “completely independent and separate” from the health insurance, dental insurance, and 401(k) plans that constituted the firm’s employee benefit plan.

Because our client’s disability policies were not part of an employee benefit plan, ERISA was not applicable, and his state-law claims were not preempted. Berkshire’s Motions for Partial Summary Judgment and to Strike Jury Demand were denied, so that our case was allowed to proceed under the applicable state law.

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