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finding the Los Angeles City Employees Association to be an employee organization because, in part, "[t]he sole purpose of the LACEA is to provide insurance benefits to members"
Summary of this case from Gordon v. Oxford Health Insurance, Inc.Opinion
No. 01CV1504 ABC(BQRX).
October 30, 2001
Brian S. Kabateck, Christian J. Garris, James Gardner Bernald, Quisenberry Kabateck, Los Angeles, CA, for plaintiff.
Michael F. Bell, Cameron Hall Totten, Galton Helm, Russell G. Petti, Bannan, Green, Frank Terzian, LLP, Los Angeles, CA, for defendants.
ORDER RE: DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
This case arises from a group life insurance plan for employees of the City of Los Angeles, enrolled in by John Hanson, now deceased. After Mr. Hanson's death, his wife, Plaintiff Marilee Hanson, received $33,000 of the $200,000 in life insurance for which Mr. Hanson had subscribed; but Defendant United States Life Insurance Company denied her claim for the remaining $167,000. At issue in Defendants' Motion for Summary Judgment (the "Motion") is whether Plaintiff's state law claims for the remaining balance are preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"). After reviewing the materials submitted by the parties and the case file, the Court hereby GRANTS the Motion.
I. FACTUAL BACKGROUND
The facts relevant to the Motion are not really in dispute. Rather, it is the legal consequence of those facts that is in dispute. Accordingly, the Court relies primarily on Defendants' Separate Statement of Uncontroverted Facts ("UF") and Plaintiff's Response to Defendants' Separate Statement of Uncontroverted Facts ("Response").
The Los Angeles City Employees Association ("LACEA") is a nonprofit mutual benefit corporation formed more than seventy years ago by full-time employees of the City of Los Angeles (the "City"). UF ¶¶ 1-2; Response ¶¶ 1-2. The LACEA is an organization comprised of both active and retired employees of the City of Los Angeles. It is controlled by a seven-member board comprised of full-time employees of the City of Los Angeles. The board members are selected by the vote of the member employees of the LACEA. UF ¶¶ 3, 31; Response ¶¶ 3, 31.
The LACEA is not run by any insurance company; no insurance company or representative of an insurance company has a seat on the LACEA's managing board, and no insurance company or representative has any involvement in the day-to-day operations of the LACEA. UF ¶ 5; Response ¶ 5.
During the period time at. issue in this case, the LACEA received no funds from the City. UF ¶ 30; Response ¶ 30. The City has never had a seat on the LACEA board, has never exercised any authority over the LACEA, and has never possessed any control over the amount or type of benefits provided to the member employees by the LACEA. UF ¶ 31; Response ¶ 31. The LACEA does not need City approval to borrow money, issue notes, or pledge property as a security for loans. The LACEA does not need City approval for it to spend money. Similarly, the LACEA does not have any access to public funding to perform its functions. UF ¶ 33; Response ¶ 33.
Throughout its history, the LACEA has had as its sole purpose the creation and administration of employee benefit plans for its members. UF ¶ 6; Response ¶ 6. The LACEA does not perform any traditional government function. UF ¶ 35; Response ¶ 35. The LACEA has never possessed any power to levy taxes or assessments. The LACEA has, never possessed the subpoena power, or any police powers. UF ¶ 32; Response ¶ 32.
The LACEA currently has a staff of 13 full-time employees, all of whom work primarily at creating and administering employee benefit plans for members of the LACEA. UF ¶ 6; Response ¶ 6. The LACEA purchases group insurance policies for term life insurance, long term care insurance, cancer insurance, short term disability and long term disability insurance, then advertises to and enrolls its members in that insurance plan. The LACEA funds this program through the voluntary collection of premiums from its member employees. UF ¶¶ 4, 11, 17-18; Response ¶¶ 4, in, 17-18. The LACEA chooses which insurers to utilize for its plans based on the best interests of its member employees and will not hesitate to change from one insurer to another insurer that may offer better policy features or similar policy features at a better price. UF ¶ 5; Response ¶ 5. After purchasing a group policy, the LACEA affirmatively markets the plan. The LACEA has a full-time staff of persons whose job is to meet with groups of City employees and point out the benefits of the various plans it offers. UF ¶ 11; Response ¶ 11.
Defendants assert that the LACEA "offers" the plans to its members. Plaintiff objects to the word "offers" as ambiguous. It is clear from other undisputed facts, however, that, at a minimum, the LACEA advertises to and enrolls members in its plans.
Defendant United States Life Insurance Company ("U.S. Life") issued group life insurance policy No. V-189,706 to the LACEA, effective August 1, 1997. UF ¶ 9; Response ¶ 9. The LACEA and U.S. Life also entered into an Administrative Service and Service Fee Agreement, under which the LACEA is to perform a variety of administrative functions. UF ¶ 13; Response ¶ 13. Under that Agreement, the LACEA is responsible for soliciting eligible members for enrollment in the plan; preparing and distributing descriptive brochures and other materials regarding the plan; collecting and remitting premiums; receiving and transmitting notification of claims; and maintaining books, records and statements of account with respect to the plan, including effective and termination dates of coverage, beneficiary designations, and similar insurance information. UF ¶ 14; Response ¶ 14. The LACEA's compensation for providing the services under the Agreement is 17% of the gross life insurance premiums collected. UF ¶ 15; Response ¶ 15.
The marketing materials prepared by the LACEA for the life insurance plan at issue here prominently mention the LACEA and refer to the life plan as "LACEA Life Insurance," "Your LACEA life insurance," and "LACEA life." UF ¶ 16; Response ¶ 16.
When a City employee shows an interest in joining a LACEA group insurance plan, such as the life insurance plan here, the LACEA representative provides the employee with an application. The application form is prepared by the LACEA and has the LACEA's name prominently displayed on the form. UF ¶ 17; Response ¶ 17. After the employee fills out the application form, the LACEA either forwards the application form to the insurer for approval or simply accepts the employee into the group plan. UF ¶ 18; Response ¶ 18. Newly enrolled members receive information on their rights and responsibilities under the group insurance plans. UF ¶ 22; Response ¶ 22.
Generally, the City deducts premium payments from members' paychecks and charges the LACEA a small fee for making the deductions. UF ¶ 19; Response ¶ 19. The LACEA uses these deducted funds, as well as premium payments collected directly from members, to pay the premiums for the group policy to the insurer and to cover the LACEA's own administrative expenses. UF ¶¶ 20-21; Response ¶¶ 20-21.
When a member wishes to modify his coverage, he requests that modification from the LACEA, rather than dealing directly with the insurer. UF ¶ 26; Response ¶ 26. The LACEA provides the application for modification, submits the application to the insurer, and informs the member whether the change in coverage is approved. UF ¶ 27; Response ¶ 27.
The LACEA also assists members in preparing claims by providing the member with a claim form, assisting in preparation of the form, and gathering the necessary information. The LACEA reviews the claim to determine if the member has paid his premiums and otherwise is in good standing. UF ¶ 28; Response ¶ 28. The LACEA then submits the claim to the insurer, sometimes interceding on behalf of the member. UF ¶ 29; Response ¶ 29.
Each pay period, the LACEA receives from the City a list of which employee members of the plans remain employed by the City and which are having premiums deducted from their paychecks. The LACEA uses this information to provide regular updates to the various insurers as to who is insured under the respective group polices. UF ¶ 24; Response ¶ 24. In addition, the LACEA provides its members with periodic updates about their payroll deductions and current plan enrollments. UF ¶ 23; Response ¶ 23. Members receive annual refund checks from the LACEA after claims and administrative expenses are paid. UF ¶ 25; Response ¶ 25.
Prior to 1997, decedent John Hanson had applied for and been issued life insurance coverage in the amount of $25,000 under the LACEA group life insurance plan. When U.S. Life took over the life insurance coverage in August 1997, Mr. Hanson's basic life insurance benefit was automatically increased to $33,000. UF ¶ 41; Response ¶ 41. On August 26, 1998, Mr. Hanson applied for additional coverage under the LACEA life insurance plan, bringing his total benefit up to $200,000. U.S. Life issued the requested coverage effective October 25, 1998. UF ¶ 43; Response ¶ 43. Mr. Hanson died on October 10, 1999, as a result of B-cell lymphoma. UF ¶ 43; Response ¶ 43. On December 8, 1999, U.S. Life paid Plaintiff Marilee Hanson, the decedent's wife, $33,280.24, the amount, plus interest, of Mr. Hanson's pre-October 1998 coverage. UF ¶ 44; Response ¶ 44. On March 8, 2000, U.S. Life denied Plaintiff's claim for the additional life insurance benefit of $167,000. UF ¶ 45; Response ¶ 45.
II. PROCEDURAL HISTORY
On January 9, 2001, Plaintiff Marilee Hanson filed the instant action in Los Angeles County Superior Court alleging three state law claims against Defendants U.S. Life, American General Corporation, Cheryl A. Martin, and Does 1 through 50:(1) breach of contract; (2) breach of the covenant of good faith and fair dealing; and (3) professional negligence. On February 14, 2001, Defendants removed the action to this Court, on the ground that Plaintiff's claims are preempted by ERISA. On March 14, 2001, the Court denied Defendants' motion to dismiss, allowing 60 days for discovery on the issue of whether one of the exceptions to ERISA preemption applies to this action.
On March 15, 2001, Plaintiff filed a motion to remand the action to state court. The parties stipulated to continue that motion so it would be heard concurrently with the instant motion. On July 25, 2001, Defendants filed this Motion for Summary Judgment. Plaintiff filed her Opposition on August 27, 2001; and Defendants filed their Reply on August 31, 2001. The motions were originally set for hearing on September 10, 2001. Due to court congestion, the hearing was continued to October 29, 2001. On October 25, 2001, the Court took the matter under submission pursuant to Federal Rule of Civil Procedure 78 and Local Rule 7-15.
I. DISCUSSION
The party moving for summary judgment has the burden of establishing that there is "no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56 (c); British Airways Bd. v. Boeing Co., 585 F.2d 946, 951 (9th Cir. 1978).
A. ERISA Preemption
ERISA governs employee benefit plans. See 29 U.S.C. § 1001 et seq. An "employee benefit plan" is defined as "an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan." 29 U.S.C. § 1002 (3). At issue is whether the LACEA life insurance plan is an ERISA plan. If the LACEA program is an ERISA plan, then Plaintiff's state law claims that "relate to" an ERISA employee benefit plan are preempted and Defendants' Motion should be granted. 29 U.S.C. § 1144 (a); see also Greany v. Western Farm Bureau Life Ins. Co., 973 F.2d 812, 817-18 (9th Cir. 1992) ("`ERISA contains one of the broadest preemption clauses ever enacted by Congress'[;] . . . The ERISA provisions `supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.'"); Harper v. American Chambers Life Ins. Co., 898 F.2d 1432, 1433 (9th Cir. 1990).
B. The LACEA is an Employee Welfare Benefit Plan
"`The existence of an ERISA plan is a question of fact, to be answered in light of all the surrounding facts and circumstances from the point of view of a reasonable person.'" Harper, 898 F.2d at 1433.
An "employee welfare benefit plan" is "any plan, fund, or program . . . established or maintained . . . by an employee organization . . . to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries" insurance benefits. 29 U.S.C. § 1002 (1). Based on the undisputed facts, the Court finds that the LACEA life insurance program meets these requirements and is an ERISA plan.
1. There is a Plan
A plan is "a complex ongoing relationship between the insureds and the insurer which require[s] constant administrative attention" rather than "a mere benefit, such as the simple payment of a sum of money." Qualls v. Blue Cross of California, Inc., 22 F.3d 839, 843 (9th Cir. 1994). The LACEA insurance program creates such an ongoing relationship. The LACEA reviews its policy and changes insurers to offer members better policy features and better prices. UF ¶ 5; Response ¶ 5. The LACEA arranges for deductions to be made regularly from members' paychecks. UF ¶ 19; Response ¶ 19. The LACEA assists members in modifying their coverage and making claims to the insurers. UF ¶¶ 26-29; Response ¶¶ 26-29. The LACEA provides regular updates to the insurers and members about insurance coverage. UF ¶¶ 23-25; Response ¶¶ 23-25.
"[T]he intended benefits, [the] class of beneficiaries, the source of financing, and the procedures for receiving benefits" of the plan are clear. Donovan v. Dillingham, 688 F.2d 1367, 1373 (11th Cir. 1982). The intended benefits are life insurance payments; the class of beneficiaries is City employees, UF ¶¶ 1-2; Ressponse ¶¶ 1-2; and the source of financing is member payments, UF ¶¶ 20-21; Response ¶¶ 20-21. Additionally, benefits are received after claim forms are submitted through the LACEA. UF ¶¶ 28-29; Response ¶¶ 28-29.
Accordingly, the Court finds that the LACEA life insurance program is a "plan."
2. The Plan is Established or Maintained by the LACEA
Specific reference to ERISA in a written policy tends to prove that the employee association "intended to create an ERISA plan." Stuart v. UNUM Life Ins. Co. of Am., 217 F.3d 1145, 1154 (9th Cir. 2000). In this case, the LACEA bylaws state that the organization intends to establish an ERISA plan. See Defs.' Motion, Ex. 1 at Art. XIV, § 5.
Additionally, the LACEA maintains the plan by reviewing its policies and changing insurers as necessary, UF ¶ 5; Response ¶ 5; by collecting and paying premiums, UF ¶¶ 20-21; Response ¶¶ 20-21; and by updating and distributing the records about its members, UF ¶¶ 23-25; Response ¶¶ 23-25.
3. The LACEA is an Employee Association
In turn, ERISA defines "employee organization" broadly as including "any employees' beneficiary association organized for the purpose in whole or in part, of establishing [an employee benefit] plan." 29 U.S.C. § 1002 (4). The Court recognizes that the definitions of "employee welfare benefit plan" and "employee organization" are somewhat circular, in that they refer to each other. Nevertheless, the facts demonstrate that the LACEA is an employee organization maintaining an employee welfare benefit plan.
The Department of Labor has explained that an organization is an "employees' beneficiary association" if:
(1) membership in the association is conditioned on employment status — for example, membership is limited to employees of a certain employer or union;
(2) the association has a formal organization, with officers, by-laws or other indications of formality;
(3) the association is organized for the purpose, in who or in part, of establishing a welfare or pension plan, and
(4) the association generally does not deal with employers.
U.S. Dep't of Labor Op. 89-20A, 1989 WL 206424 (1989). The LACEA meets these criteria.
"[I]nterpretations contained in formats such as opinion letters are `entitled to respect' . . ., but only to the extent that those interpretations have the `power to persuade.'" Christensen v. Harris County, 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000). The Court finds the Department of Labor's opinion letter to be a persuasive explanation of the statutory language.
Membership in the LACEA is limited to employees and former employees of the City of Los Angeles. UF ¶ 3; Response ¶ 3. The LACEA has a board of directors and formal bylaws. Id.; Defs.' Motion, Ex. 1. The sole purpose of the LACEA is to provide insurance benefits to members. UF ¶ 6; Response ¶ 6. And finally, the LACEA only deals with the City when collecting paycheck deductions. UF ¶¶ 19, 30-31; Reponse ¶¶ 19, 30-31.
The cases cited by Plaintiff for the proposition that the LACEA is not an employee association are distinguishable. In all three cases, the organizations were run by and for the benefit of third-party entrepreneurs. See Bell v. Employee Security Benefit Assoc., 437 F. Supp. 382, 392 (D.Kan. 1977) ("ESBA's program is provided by a third-party entrepreneur. . . . The ESBA plan is certainly not non-commercial; its operation provides profit-making opportunities. . . ."); Hill v. Assoc. of Small Business Employees, 824 F. Supp. 955, 959 (D.Colo. 1992) ("there is no evidence that any employee covered by the Trust participated in its creation or has any input in its maintenance"); Angoff v. Kenemore, 887 S.W.2d 782, 786 (Mo.Ct.App. 1994) ("AT G established and operated the plan with the help of NETA, not the subscribing [members]. . . . [I]t noted that one of its objectives was to make a profit."). Here, in contrast, there is no question that the LACEA is run by and for its member employees.
Wayne Chemical, Inc. v. Columbus Agency Serv. Corp., 567 F.2d 692 (7th Cir. 1977), is entirely inapposite as it is addressing the status of an employer who was never a member of the purported association. See id. at 699 ("An employer does not become a participant in, or establish or maintain, a plan by applying for insurance and paying premiums for what it understands to be insurance without any knowledge that the plan exists.").
Although profit-making is not one of the factors in the Department of Labor's opinion letter, the Court notes that the LACEA refunded to members any monies in excess of claims and administrative expenses. UF ¶ 25; Response ¶ 25.
Accordingly, the Court finds that the LACEA is an employee association.
4. The Purpose of the Plan is to Provide Welfare Benefits to Members
It is undisputed that the sole purpose of the LACEA is to create and administer employee benefit plans, including plans for life insurance disability insurance. UF ¶ 6; Response ¶ 6.
Because the LACEA meets all four requirements, the Court finds that the life insurance program is an ERISA welfare benefit plan.
C. The Exceptions to ERISA Preemption do not Apply
1. The LACEA is not a Government Plan
ERISA does not preempt claims related to governmental plans. See 29 U.S.C. § 1003 (b)(1). A governmental plan is one "established or maintained for its employees . . . by the government of any State or political subdvision thereof." 29 U.S.C. § 1002 (32). The LACEA is not a governmental plan.
Contrary to Plaintiff's argument, the fact that Mr. Hanson was an employee of the City of Los Angeles is insufficient to make the LACEA life insurance program a government plan. The City must actually have "established or maintained" the plan for this exception to apply. It is undisputed that the City engaged in no activities that could be considering establishment or maintenance of the plan: the City provided no funds to the LACEA; has never had a seat on the LACEA board; has never exercised any authority over the LACEA; and has never possessed any control over the benefits provided to the members. See UF ¶¶ 30-31; Response ¶¶ 30-31. Furthermore, it is undisputed that the LACEA is not a governmental entity: it has no access to public funds and it performs no traditional government functions. See UF ¶¶ 32-33, 35; Response ¶¶ 32-33, 35. Accordingly, the Court finds that the LACEA life insurance plan is not a governmental plan exempted from ERISA coverage.
2. The Safe Harbor Does not Apply
In addition to governmental plans, ERISA also does not preempt claims related to:
group or group-type insurance program[s] offered by an insurer to . . . members of an employee organization under which
(1) No contributions are made by an employer or employee organization;
(2) Participation [in] the program is completely voluntary for . . . members;
(3) The sole functions of the . . . employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to . . . members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
(4) The . . . employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.29 C.F.R. § 2510.3-1 (j). The Ninth Circuit has held "that a group insurance plan cannot be excluded from ERISA coverage when an employer [or employee association] fails to satisfy any one of the four requirements of the safe harbor regulation." Stuart, 217 F.3d at 1153 (citing cases). Because the activities of the LACEA go beyond those identified in the third prong, this "safe harbor" does not apply to the LACEA.
The Ninth Circuit has held that if the employee association acts as the administrator of the plan and "does not merely advertise the group insurance," then it "`endorses'" the plan within the meaning of the safe harbor. Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489, 493 (9th Cir. 1988) (per curiam) (as amended); see also Zavora v. Paul Revere Life Ins. Co., 145 F.3d 1118, 1121 (" Kanne suggests that a plan administrator necessarily endorses a plan."). In addition to the administrative agreement with U.S. Life, the LACEA's maintenance activities, described above, demonstrate that the LACEA is an administrator of the plan.
The undisputed facts show that the LACEA was more than "administrator in name only." Zavora, 145 F.3d at 1121. The LACEA's activities went beyond those listed in the safe harbor regulation. Unlike the insurer in Zavora, U.S. Life does not have "full, final, binding and exclusive discretion to determine eligibility for benefits and to interpret the policy." Id. In some cases, the LACEA can enroll new members without approval of the insurer. UF ¶ 18; Response ¶ 18. The LACEA handles requests for modifications in coverage, as well as claims for benefits. UF ¶¶ 26-29; Response ¶¶ 26-29. And the LACEA changes its insurers when necessary to provide its members with better coverage. UF ¶ 5; Response ¶ 5.
Accordingly, because the LACEA does not meet the third prong, the Court finds that the safe harbor does not apply.
IV. CONCLUSION
Because of ERISA's exceptionally broad preemption, the Court finds that all of Plaintiff's claims "relate to" this ERISA plan. Plaintiff alleges that Defendants failed to pay the insurance benefits to which she is entitled under Mr. Hanson's policy and asks for those payments in her prayer for relief. For the foregoing reasons, the Court hereby GRANTS Defendants' Motion. Plaintiff's claims are hereby DISMISSED. The Court GRANTS, sua sponte, Plaintiff leave to file, within 20 days from the date of this order, an amended complaint that properly asserts claims for relief under ERISA. Plaintiff's Motion to Remand is accordingly STRICKEN as moot.
SO ORDERED.