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Insurance Law

No ERISA Preemption for Unfair Insurance Practices in Montana

Barry Zalma   By Barry Zalma, Attorney and Consultant

In 1987 the U.S. Supreme Court decided Pilot Life Insurance Co. V. Dedeaux, 481 U.S. 41, 95 L. Ed. 2d 39, 107 S. Ct. 1549 (U.S. 04/06/1987), that held that the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U. S. C. § 1001 et seq. preempted the plaintiff's state common law claims because they conflicted with the federal statute. It also concluded that the claims against an insurer operating an ERISA plan are not rescued by the savings clause in the ERISA statutes. In so doing Pilot Life destroyed many bad faith claims brought against insurers who wrote programs within the ambit of ERISA.

Before Pilot Life the denial of a claim under an ERISA program would result in a suit in state court seeking damages for unfair insurance practices and for the tort of bad faith thereby giving each plaintiff the opportunity to collect the benefits of the insurance policy and punitive and exemplary damages. The U.S. Supreme Court, noting that the ERISA statute only allowed for suits for contract damages, held the federal government preempted the state causes of action and gave the insurers an absolute defense to each ERISA based bad faith suit.


The Ninth Circuit Federal Court of Appeals, sometimes known as the "Circuit of Reversal" decided that although there is an ERISA preemption involved in a suit against Blue Cross and Blue Shield, a claim for unfair insurance practices fell within an exception to ERISA preemption.

Every plaintiff's lawyer in the Ninth Circuit's jurisdiction should cheer because their practice may soon increase logarithmically.


In Fossen v. Blue Cross & Blue Shield of Mont., 2011 U.S. App. LEXIS 20989 (9th Cir. Mont. Oct. 18, 2011), the Ninth Circuit Federal Court of Appeals was asked to resolve whether a provision of the federal Health Insurance Portability and Accountability Act (HIPAA), preempts Montana's "little HIPAA" law, Mont. Code Ann. § 33-22-526(2)(a), for purposes of both conferring federal subject matter jurisdiction and defeating state-law causes of action on the merits, and whether, even if preempted, a suit for breach of a fair claims handling statute the plaintiffs may sue their insurer for damages. The federal and state HIPAA provisions at issue prohibit certain health insurers from charging different premiums to "similarly situated" participants on account of a participant's "health status-related factor"


Plaintiffs-Appellants (collectively, Fossens) were three brothers, Dale, Larry, and Marlowe Fossen, their three corporations (which they jointly own with their spouses), and Fossen Brothers Farms (a partnership of the three corporations). In 2004, Fossen Brothers Farms applied to Blue Cross and Blue Shield of Montana (Blue Cross) to obtain health insurance coverage for the Fossen Brothers Farms's three employees.

From 2004 through May 2009, Blue Cross provided coverage to Fossen Brothers Farms through the Associated Merchandisers Inc., Health First Plan (Associated Merchandisers Plan), and from June 2009 through the time this lawsuit was filed, Blue Cross provided coverage through the Montana Chamber Choices Group Benefit Plan (Chamber Choices Plan).

In 2006, Blue Cross informed the Fossens that their premium was increasing by over 20%. The Fossens learned that Blue Cross was imposing different increases (and even decreases in some cases) on other plan members. After the Fossens complained to the Montana Insurance Commissioner, Blue Cross reduced the proposed increase to 4%. For the 2008 plan year, however, Blue Cross increased the Fossens' premiums over 40%. The Fossens complained again to the insurance commissioner, but apparently to no avail. They then filed a lawsuit in state court in September 2009.

The Fossens' complaint asserted three substantive causes of action. First, they alleged that Blue Cross's 40% premium increase violated a provision of Montana's "little HIPAA" statute that prohibited "group health plan[s]" (and insurers offering coverage through group health plans) from imposing a "premium or contribution that is greater than the premium or contribution for a similarly situated individual" on account of "any health status-related factor of the individual . . . ." Second, the Fossens asserted that Blue Cross's premium increase violated a provision of Montana's Unfair Trade Practices Act. Third, the Fossens claimed that the premium increase constituted a breach of their contract with Blue Cross, which allegedly incorporated by reference both the Montana HIPAA provision and the unfair practices provision.

The complaint sought two forms of relief-declaratory relief: that Blue Cross violated the law and restitutionary relief through a return of overcharged premiums-and sought certification as a class action.

Blue Cross timely removed the complaint to federal court, asserting that the Fossens' little HIPAA claim was completely preempted by the Employee Retirement Income Security Act of 1974 (ERISA). Federal HIPAA, which is part of ERISA (as amended), contains a provision similar to the Montana HIPAA statute raised in the complaint. Blue Cross argued that ERISA's "complete preemption" doctrine conferred federal jurisdiction over the Fossens' nominal state-law claims. The district court agreed with Blue Cross, and denied the Fossens' motion to remand. The court then granted Blue Cross's motion for summary judgment. The court noted that all of the Fossens' claims were premised on an underlying violation of federal HIPAA, and, finding no violation of that statute, the court held that the Fossens' claims failed as a matter of law.

Law Book and Stethoscope and Gavel


There are two strands of ERISA preemption: (1) 'express' preemption under ERISA § 514(a), 29 U.S.C. § 1144(a); and (2) preemption due to a 'conflict' with ERISA's exclusive remedial scheme set forth in [ERISA § 502(a),] 29 U.S.C. § 1132(a).  HIPAA contains an additional express preemption provision relevant to this case. All of these preemption provisions defeat state-law causes of action on the merits. State-law claims may be removed to federal court if the "complete preemption" doctrine applies.

The Ninth Circuit created a two-part test for determining whether a state-law claim is completely preempted by ERISA § 502(a):

1.   an individual, at some point in time, could have brought the claim under ERISA § 502(a)(1)(B), and

2.   where there is no other independent legal duty that is implicated by a defendant's actions.

Express preemption under ERISA § 514 is also governed in relevant part by a two-prong test. ERISA broadly preempts "any and all State laws insofar as they may now or hereafter relate to any [covered] employee benefit plan . . . ." But this broad preemption provision is tempered by a savings clause in § 514(b), which spares "any law of any State which regulates insurance, banking, or securities." To fall under this savings clause, a regulation must satisfy another two-part test:

1.   The state law must be specifically directed toward entities engaged in insurance.

2.  It must substantially affect the risk pooling arrangement between the insurer and the insured.

In addition to these generally applicable preemption provisions, ERISA also contains a HIPAA-specific preemption clause. Under that clause, federal HIPAA does not "supersede any provision of State law which establishes, implements, or continues in effect any standard or requirement solely relating to health insurance issuers in connection with group health insurance coverage except to the extent that such standard or requirement prevents the application of a requirement of federal HIPAA." The provision's plain terms appear to permit state laws that are, generally speaking, more favorable to the insured.

The Fossens could have brought suit under HIPAA. They were suing for restitution of premiums they allegedly overpaid in violation of Montana's HIPAA statute. As the district court correctly recognized, the Fossens' claim under Montana HIPAA could also have been brought under federal HIPAA, because the relevant state and federal HIPAA provisions are identical.  The individual Fossens were the participants in the ERISA plan, and they were suing Blue Cross (the plan's third-party insurance company) to enforce rights that are provided by ERISA.

Because the Fossens could have brought their claim under ERISA § 502(a) the Fossens' state-law HIPAA claim was identical to the federal-law HIPAA claim they could have filed. The state-law claim, although purportedly separate and distinct from ERISA, "falls squarely within the ambit" of federal HIPAA. The Fossens' state-law HIPAA claim existed only because of Blue Shield's administration of ERISA-regulated benefit plans.

Because the Fossens' state HIPAA cause of action could have been brought under ERISA § 502(a), and because that cause of action is identical to and expressly dependent upon ERISA, the district court properly denied the Fossens' motion to remand and exercised jurisdiction over this case.

Because the Fossens' state-law HIPAA claim was conflict-preempted by § 502(a), it failed on the merits. Because the Fossens never requested that the district court recharacterize their state-law claim in this manner, the court need not have taken this extra step; it simply could have granted summary judgment for Blue Cross on account of § 502(a) conflict preemption.


The Fossens contested the district court's grant of summary judgment on their statutory unfair insurance practices claim.

To determine whether the Fossens' state-law unfair insurance practices claim was preempted by ERISA on the merits, the court had to consider express preemption under ERISA § 514 and conflict preemption under ERISA § 502(a).

The statute is plainly directed at insurance companies because it regulates insurance rates and premiums, and, in fact, the statute appears in a section of the Montana Code entitled "Insurer's Relations with Insured and Claimant". Moreover, the statute affects the risk-pooling arrangement because it regulates insurers' ability to obtain a premium that accurately reflects the risk being insured.

With respect to conflict preemption, the unfair insurance practices statute does not run afoul of § 502(a) because the Fossens seek relief (restitution) that is consistent with ERISA's enforcement scheme

Unlike the state-law HIPAA claim, the unfair insurance practices statute applies without regard to the existence of an ERISA plan. Also, the unfair insurance practices statute creates a right that is separate from and could not possibly be remedied under ERISA. Whereas HIPAA (both the state and federal versions) prohibits plans and their insurers from charging different premiums on account of "health status-related factor[s]," the unfair insurance practices statute applies more broadly to bar "any unfair discrimination" with respect to premiums.

Because these statutes are not identical in scope (as is the case with the state and federal HIPAA provisions), they are not conflict preempted.


The district court properly exercised jurisdiction over this matter because the Fossens' Montana HIPAA claim is completely preempted by ERISA § 502(a). The Ninth Circuit reversed with regard to the unfair insurance practices claim and remanded the case to the district court so that the district court may address the state unfair insurance practices claim in the first instance.


State statutes mandating fair claims handling are designed to be enforced by the state departments of insurance.  When a fair claims practices statute is allowed to create a private right of action it is subject to abuse. In California the Supreme Court's decision in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal. 3d 880 [153 Cal. Rptr. 842, 592 P.2d 329], which allowed such a private right of action resulted in abuse by litigants sufficiently that the Supreme Court, less than ten years later, reversed itself in Moradi-Shalal v. Fireman's Fund Insurance Companies, 46 Cal. 3d 287, 758 P.2d 58, 250 Cal. Rptr. 116 (Cal. 08/18/1988), which that held that California's Unfair Claims Statute does not allow a private right of action.

The Ninth Circuit seems to believe that Montana's statute allows for a private right of action so that even though the plaintiffs' suit was barred by preemption it allows them to go forward with the unfair insurance practices action. They should reconsider, read Moradi-Shalal and determine that there is no private right of action and that ERISA preempts the suit.

Although the Ninth Circuit noted the existence of the Pilot Life case it found the unfair insurance practices action to be exempted from the ERISA preemption. Hopefully the Supreme Court will take the case and reverse or Montana will make clear by statute that its Unfair Insurance Practices statute does not provide a private right of action.

Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.

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