Court Curbs Worker Suits Over Group Health Plans

SAN FRANCISCO —  In a far-reaching decision, the California Supreme Court ruled Thursday that workers cannot sue insurers under state law for damage awards when they are improperly denied group health plan benefits.

The high court, citing several federal rulings on the issue, held 5 to 2 that such suits are barred by a more restrictive federal law regulating worker pension and benefit plans. Dissatisfied claimants must proceed under the federal statute, which provides fewer legal remedies, the justices said.

The ruling represented another in a series of legal victories that insurers have won since a more conservative majority emerged on the court following the defeat of three liberal justices in the 1986 general election.

Attorneys said the decision will have wide impact in the workplace in California, where the vast majority of employees and their families are covered by private, employer-sponsored group life and health insurance plans that are subject to the federal law.

Hundreds of suits seeking hundreds of millions of dollars in damages from insurers and employers for alleged “bad-faith” refusal to pay claims are pending in the state and federal courts in California.

Under Thursday’s ruling, along with a similar decision last October by a federal appeals court, these suits will not proceed under state law unless the U.S. Supreme Court rules otherwise in any subsequent appeals, lawyers said.

At issue in the case before the state high court was whether claimants could rely on the state Unfair Trade Practices Act to sue insurers and employers for compensatory, punitive and emotional distress damages for the intentional wrongful refusal of a claim. In the past, such awards have reached millions of dollars and have caused widespread concern among insurers and employers.

The court majority found such suits were preempted by the federal Employee Retirement Income Security Act (ERISA), which generally limits dissatisfied claimants to court actions seeking only the recovery of lost benefits and attorneys’ fees.

The justices said that while states were still free to regulate the substance or terms of benefit plans, they could not provide for procedural remedies beyond those available under ERISA.

‘Conflicting Standards’

“A contrary rule would undermine ERISA’s important policy of promoting uniformity in employee benefit-plan remedies by creating the potential for conflicting standards of recovery,” Justice Edward A. Panelli wrote for the majority.

In a sharp dissent, Justice Stanley Mosk, joined by Justice Allen E. Broussard, argued that states should be allowed to provide their own procedures to enforce state laws against unfair insurance practices.

“There is a growing and ominous trend toward federal preemption of issues that belong within the sphere of control by the individual states,” Mosk wrote. “And these inroads into traditional federalism are taking place despite their inconsistency with the pious rhetoric emanating from Washington about returning government to the people at state and local levels.”

Attorneys for insurance companies praised the decision, saying the protections it provides for employers and insurers will provide added incentive to maintain group health plans.

“A lot of employers have been reluctant to set up plans because they’re afraid they’ll get hit with big punitive damage claims,” said David L. Bacon of Los Angeles, an attorney for Commercial Life Insurance Co., the firm involved in Thursday’s ruling. “This will likely result in broader health-care coverage.”

Bacon noted that even though a landmark high court ruling last August barred private suits against insurers under the state unfair practices law in the future, Thursday’s decision will still affect “literally hundreds of cases” that had already been filed alleging bad-faith refusal of claims. And by holding that federal law prevails over state law on the issue, the decision will also deter efforts in the Legislature to reverse the August ruling, he said.

‘No Legal Remedy’

However, William M. Shernoff of Claremont, an attorney for the unsuccessful claimant in the case before the court, expressed dismay with the ruling, saying Congress could not have intended to leave workers without state law protections.

“I know of no other area in the law where a person has no legal remedy for a fraud that’s committed,” he said. “Sooner or later, people are going to realize that and get something done about it.”

Shernoff said it was unlikely the ruling will be appealed to the U.S. Supreme Court. More probable, he said, will be an appeal of a ruling by the U.S. 9th Circuit Court of Appeals last October in a separate case that reached the same conclusion the state court did Thursday.

Leonard Sacks of Encino, another of the attorneys who had urged the court to uphold the state law in such cases, predicted that the ruling will only encourage insurers to delay or deny benefits to workers.

‘Deep-Pockets’ Ruling

The attorney noted further that in addition to Thursday’s ruling, insurers had recently prevailed in the August decision barring future bad-faith suits against insurance companies and in another ruling last April upholding Proposition 51, the “deep-pockets” liability reform measure. “I don’t see what insurers doing business in California have to complain about,” he said.

The case arose when Joseph V. Juliano brought suit under the state law in San Diego in 1985 against Commercial Life after he was refused payment for eye surgery on the grounds his condition existed before he was covered by his employer’s health plan.

Juliano alleged that the claim had been refused in bad faith and sought $12,148 for the cost of surgery, $350,000 for emotional distress and unspecified punitive damages.