Opinion
IP 99-0742 C-T/G
September 19, 2000
ENTRY ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Defendant, Hancock Construction Company ("Hancock"), filed a motion for summary judgment pursuant to Federal Rule of Civil Procedure 56. Hancock argues that it is entitled to judgment as a matter of law because there exists no genuine issue of material fact upon which relief can be granted to Plaintiff, United of Omaha Life Insurance Company ("Omaha"). Omaha argues that Hancock's motion should be denied because Hancock failed to present undisputed material facts that support judgment for Hancock as a matter of law.
I. Background
This cause of action arises out of a group health insurance policy ("policy") entered into between Omaha and Hancock whereby Omaha would provide health insurance benefits to Hancock's officers and employees in exchange for the payment of premiums.
The policy, a copy of which is attached to the Complaint, contained a termination rider which stated:
It is agreed that we have the right to terminate hospital, medical or surgical coverage, but only for the following reasons:
(a) Nonpayment of required premium;
(b) Fraud or misrepresentation of the Small Employer, or with respect to coverage of an insured person, fraud or misrepresentation by the insured person or such person's representative;
(c) The number of insured persons covered under the plan/coverage is fewer than the number or percentage of eligible persons required under the plan/coverage;
(d) Noncompliance with plan/coverage provisions; or
(e) The small employer [sic] is no longer actively engaged in the business in which it was engaged on the effective date of the plan/coverage.
(Termination Rider). The policy also contained a pre-existing condition rider which provided that Omaha would not pay benefits "for any preexisting condition until the day after a nine consecutive month period has passed from the time that person was insured." (Preexisting Conditions Rider.)
Norman Anderson, a Hancock employee, and his wife were covered under the policy effective January 1, 1998. Anderson had a prior medical history which Omaha claims was not disclosed on his application for insurance. (Pl.'s Br. in Resp. at 3-6.) Had the prior history been disclosed, Omaha claims that Hancock's insurance premiums would have been set at a much higher rate due to the increased risk associated with insuring Anderson. (Pl.'s Br. in Resp. at 6-7.)
Neither Omaha nor Hancock directed the court to a provision in the policy addressing payment of additional premium amounts due as a result of fraud or misrepresentation by an insured person. The court has not been able to locate such a provision on its own so, apparently, none exists.
In its Complaint, Omaha asserts a cause of action in Count I for equitable relief pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a)(3)(B), in Count II for breach of contract, and in Count III for violation of Indiana Insurance Statute, Ind. Code § 27-8-5-5. Omaha seeks relief in the form of rescission of Anderson's individual certificate of insurance and restitution damages in the amount of paid medical claims on behalf of Anderson and his wife or actual damages in an amount equal to retroactive increased premiums for the period of time Hancock was covered by the group health insurance plan, plus all other appropriate relief.
II. Statement Of Jurisdiction
Omaha, in its Complaint, asserts that this court has subject matter jurisdiction pursuant to the federal question jurisdiction statute, 29 U.S.C. § 1331, and ERISA, 29 U.S.C. § 1001, et. seq. Omaha asserts a cause of action under section 1132(a)(3).
ERISA section 1132(a)(3) provides:
A civil action may be brought —
* * *
(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan[.]29 U.S.C.A. § 1132(a)(3) (West 1999). If Omaha's cause of action does not fall within the terms of this section, there is no federal question jurisdiction. See Administrative Comm. v. Gauf, 188 F.3d 767, 770 (7th Cir. 1999) (holding that when plaintiff submits that federal subject matter jurisdiction exists pursuant to section 1132(a)(3), the terms of that section must be satisfied for federal jurisdiction to exist).
The first issue to address, therefore, is whether Omaha's cause of action falls within the terms of section 1132(a)(3). See Gauf, 188 F.3d at 770; Metropolitan Life Ins. Co. v. Estate of Cammon, 929 F.2d 1220, 1222-23 (7th Cir. 1991) ("A federal court must examine its own jurisdiction whether or not the parties question it[.]"). "In resolving this issue, [the court] must make two inquiries: 1 — whether the [plaintiff] is a fiduciary under [ERISA] § 503(a)(3); 2 — whether the [plaintiff] is seeking equitable, rather than legal relief." Gauf, 188 F.3d at 770. The first inquiry is satisfied. Hancock does not dispute that Omaha is a fiduciary. Therefore, whether federal question jurisdiction is proper here will turn on whether Omaha seeks equitable or legal relief. See id. ("The plain wording of [ERISA] § 502(a)(3) makes clear that, if the [plaintiff] is seeking legal relief, [the court] does not have jurisdiction.") (citing Mertens v. Hewitt Assocs., 508 U.S. 248, 255-62 (1993)).
A. Equitable Relief
Omaha asserts that it is entitled to equitable relief in the form of restitution from Hancock. Equitable relief under section 1132(a)(3) includes "categories of relief that were typically available in equity (such as injunction, mandamus, and restitution, but not compensatory damages)." Mertens, 508 U.S. at 256; see Buckley Dement, Inc. v. Travelers Plan Admins. of Illinois, Inc., 39 F.3d 784, 788 (7th Cir. 1994) ("The Court emphasized that the statute includes only the typical remedies available in equity, not such 'legal remedies' as compensatory damages or monetary relief.") (citing Mertens, 508 U.S. at 256); Anweiler v. American Elec. Power Serv. Corp., 3 F.3d 986, 993 (7th Cir. 1993) ("In Mertens, the Court held that the 'appropriate equitable relief' in section 1132(a)(3) included only typical remedies available in equity and not 'legal remedies' like compensatory damages or monetary relief.") (citation omitted). "In Mertens, the Court specified that equitable relief within the meaning of this statute is the traditional injunctive, restitutionary, noncompensatory type of relief:
Petitioners maintain that the object of their suit [inter alia, monetary relief] is 'appropriate equitable relief' under § [1132](a)(3). They do not, however, seek a remedy traditionally viewed as 'equitable,' such as injunction or restitution. . . . Although they often dance around the word, what petitioners in fact seek is nothing other than compensatory damages — monetary relief for all losses their plan sustained as a result of the alleged brief of fiduciary duties. Money damages are, of course, the classic form of legal relief. And though we have never interpreted the precise phrase 'other appropriate equitable relief,' we have construed the similar language of Title VII of the Civil Rights Act of 1964 . . . to preclude 'awards for compensatory or punitive damages.'"
Buckley Dement, 39 F.3d at 788 (quoting Mertens, 508 U.S. at 255 (citations omitted)).
Omaha asserts that it is entitled to restitution from Hancock for the additional premium amounts that Omaha would have charged Hancock had Anderson been forthcoming on his application for insurance regarding his prior medical history. Omaha argues that "withheld premium amounts are subject to equitable relief under the same rationale" by which courts have recognized restitution as equitable relief allowable under section 1132(a)(3). (Pl's Br. in Resp. at 9). None of the cases cited by Omaha support this theory. Omaha relies on UIC Severance Pay Trust Fund v. Local Union No. 18-U, United Steelworkers of America, 998 F.2d 509 (7th Cir. 1993), for the proposition that restitution is a proper remedy for "wrongfully withheld premium amounts[.]" (Pl.'s Br. in Resp. at 9). UIC does not advance Omaha's position.
In UIC, the Seventh Circuit allowed "recovery of contributions mistakenly made" by a labor union to a severance pay trust fund on behalf of the union's business representative, Harold Oliver. See UIC, 998 F.2d at 509-10, 512. When Oliver retired he requested payment from the fund of the amount that had been contributed on his behalf. See id. at 510. "The Union, however, contended that $37,906.79 was wrongly contributed to Oliver's account and demanded a refund." Id. The court recognized that the union's claim, if brought in state court, would be a claim for restitution. See id. at 512. The court acknowledged that, "Several district judges in this circuit as well as other courts of appeals have concluded that ERISA permits such a cause of action." Id. The court, finding that the union's request for relief was not a request for the court to imply a "new" cause of action under ERISA but rather a request "to fill in ERISA's interstices with federal common law[,]" held "that the Union may seek recovery of the disputed sum as a matter of federal common law." Id. at 512. Thus, the court, finding the cause of action "to be equitable in nature[,]" allowed restitution for the mistaken payments. Id. at 513.
"[R]estitution as normally understood in civil cases seeks to deprive the defendant of money or any other thing of value that he gained from tortious or otherwise wrongful activity or that it would be unconscionable for him to retain because received from the plaintiff in circumstances under which he knew or should have known that the plaintiff expected compensation." Reich v. Continental Cas. Co., 33 F.3d 754, 755 (7th Cir. 1994); see also Health Cost Controls v. Manetas, No. 94 C 0419, 1995 WL 441625, at *3 (N.D.Ill. July 20, 1995) ("Restitutionary relief, is 'available only when one party has been unjustly enriched at another's expense.'") (quoting Health Cost Controls v. Skinner, 44 F.3d 535, 538 n. 7 (7th Cir. 1995)). To establish entitlement to restitution, a plaintiff must demonstrate that: "(1) it had a reasonable expectation of payment, (2) the [defendant] should reasonably have expected to pay, or (3) society's reasonable expectations of person and property would be defeated by nonpayment." Harris Trust and Sav. Bank v. Provident Life and Accident Ins. Co., 57 F.3d 608, 615 (7th Cir. 1995) (quotation omitted).
In Harris Trust, 57 F.3d at 616, the Seventh Circuit recognized that "knowledge of the insurer's right to reimbursement" is a key factor in determining whether restitution is an appropriate remedy. The court held, "Absent that knowledge, the beneficiary could not 'reasonably have expected to pay' the insurer for benefits he or she received and the insurer could not reasonably have expected payment." Id. In that case, the court found restitution to be an available remedy because both the insurer and the beneficiary had knowledge of the insurer's right to reimbursement when the beneficiary requested and received benefits. See id. at 615-16. There is no evidence that either Hancock or Omaha had any knowledge of any reimbursement due Omaha when the premiums were paid.
Significantly, no enforceable agreement existed that bound Hancock to pay additional premium amounts to Omaha under any circumstances. See Health Cost Controls, 1995 WL 441625, at *3 (holding that neither party should have had a reasonable expectation of repayment when no enforceable agreement existed that bound the recipient of welfare benefit funds to repay the fund); see also UNUM Life Ins. Co. v. Thoma, No. 98 C 6287, 2000 WL 1036254, at *2 (N.D.Ill. July 24, 2000) (holding that insurer had reasonable expectation of repayment and insured reasonably expected to pay as a result of the plan's explicit provision concerning "repayment in the event of overpayment of benefits"); Romero v. Alexander Chem. Employee Health Care Plan, No. 98 C 239, 1999 WL 498638, at *5 (N.D.Ill. July 2, 1999) (holding that insurer and insured had knowledge of the insurer's right to reimbursement when payments were made on the insured's behalf because the insurance plan contained language regarding recovery of payments). Without knowledge of Omaha's right to reimbursement when Hancock paid the premiums under the contract, Hancock could not "reasonably have expected to pay" Omaha additional premium amounts, and Omaha could not reasonably have expected payment.
Nor can this court conclude that "society's reasonable expectations of person and property would be defeated by nonpayment." There is no allegation that Hancock violated any term of its contract with Omaha. Furthermore, it is undisputed that Hancock did not certify the truth or accuracy of Anderson's application. (See Def.'s Br. in Support at 5; Pl.'s Br. in Resp. at 2.) The facts of this case are such that restitution is not a proper remedy a with respect to Hancock and is thus unavailable to Omaha.
Note that even if the remedy Omaha seeks was classified as restitution, it is doubtful that federal question jurisdiction would exist here. Section 1132(a)(3) "does not, after all, authorize 'appropriate equitable relief' at large, but only 'appropriate equitable relief' for the purpose of 'redress[ing any] violations . . . or enforc[ing] any provisions' of ERISA or an ERISA plan." Mertens, 508 U.S. at 253. From an examination of the policy, it does not appear that Hancock violated any terms of the policy. Therefore, there exists no violation that needs redressed. See Health Cost Controls, 1995 WL 441625, at *4 (recognizing that subject matter jurisdiction may not exist when the indemnification provision under which the plaintiff sought section 1132(a)(3) equitable relief was not part of an ERISA plan).
Omaha approaches this case as though Hancock is vicariously responsible for Norman Anderson's conduct. If restitution is an issue at all in this case, it can only be of concern to Norman Anderson. Payments were made on his behalf by Omaha based on allegedly false information he provided. Hancock did not vouch for that information and did not receive any payments because of it. No viable legal theory makes Hancock responsible for benefits Anderson received.
The additional premium amounts that Omaha seeks from Hancock are compensatory damages, the quintessential legal remedy, and therefore are not permitted under section 1132(a)(3). See, e.g., Mertens, 508 U.S. at 255 (holding that "appropriate equitable relief" does not include compensatory damages). Omaha is not seeking to be reimbursed for mistaken payments made to Hancock. See Construction Indus. Retirement Fund of Rockford v. Kasper Trucking, Inc., 10 F.3d 465, 467 (7th Cir. 1993) ("[W]e held in UIU Severence Pay Trust Fund v. Steelworkers Local No. 18-U, 998 F.2d 509 (7th Cir. 1993), that ERISA lets courts establish a federal common law governing restitution of mistaken payments."). Rather, Omaha is seeking contract damages for Hancock's alleged beach of contract and/or misrepresentations. See Washington Nat'l Ins. Co. v. Hendricks, 855 F. Supp. 1542, 1553-54 (W.D.Wis. 1994) (holding that insurer sought contract damages, and not "the equitable remedy of restitution[,]" when it sought to recover unpaid premiums from an employer under section 1132(a)(3)(B)). If the relief Omaha seeks was to be classified as equitable relief and allowed under section 1132(a)(3), nearly ever breach of contract claim seeking compensatory damages could be rephrased as a claim seeking restitution. The relief Omaha seeks from Hancock is not equitable restitution, permissible as "other appropriate equitable relief" under section 1132(a)(3).
B. Federal Common Law
In its brief, Omaha requests this court to craft a cause of action that would allow Omaha to recover against Hancock by applying federal common law principles. (See Pl.'s Br. in Resp. at 9-10.) The only federal common law theory that Omaha advances is a theory of restitution, and restitution, as determined above, is not a proper remedy as to Hancock. No other common law theory exists under which Omaha would be entitled to equitable relief from Hancock.
Note that Omaha makes no mention of any federal common law cause of action in its Complaint.
III. Pendent Party Jurisdiction
This court has authority to exercise jurisdiction over Hancock and adjudicate Omaha's remaining state law claims brought against Hancock under the concept of pendent party jurisdiction. See 28 U.S.C.A. 1367(a) (West 1993); Hammond v. Clayton, 83 F.3d 191, 194 (7th Cir. 1996) ("[I]f a plaintiff asserted a federal law claim against one defendant, pendent party jurisdiction allowed the plaintiff to bring a related but jurisdictionally insufficient state law claim against an additional 'pendent party' defendant."); Brazinski v. Amoco Petroleum Additives Co., 6 F.3d 1176, 1181 (7th Cir. 1993) (holding that a certain plaintiff's suit was within federal jurisdiction by virtue of pendent party jurisdiction, despite absence of diversity jurisdiction and federal question jurisdiction over that plaintiff's claim). Pendent party jurisdiction under section 1367(a) permits a court to exercise jurisdiction over "claims involving parties not named in any independently cognizable federal claim." See Hammond, 83 F.3d at 194. Thus, this court in its discretion can decide on the merits the remaining state law claims brought against Hancock because Omaha's related claim against Anderson is within the federal question jurisdiction of this court.
Pendent party jurisdiction is appropriate here for at least two reasons. First, it is in the interest of judicial economy that this court exercise pendent party jurisdiction. See, e.g., Wright v. Associated Ins. Cos. Inc., 29 F.3d 1244, 1251 (7th Cir. 1994) ("[A] district court should consider and weigh the factors of judicial economy, convenience, fairness and comity in deciding whether to exercise jurisdiction over pendent state-law claims.") (citation omitted). If jurisdiction was refused, Omaha, in order to seek relief against both Hancock and Anderson, would be forced to bring two suits, one in state court and the other in federal court, both arising out of the same nucleus of operative facts. Secondly, although only state law claims remain, those claims have been preempted by federal law. See Graf v. Elgin, Joliet E., Ry. Co., 790 F.2d 1341, 1347 (7th Cir. 1986) (holding that when a court "can tell at a glance that the defendant has a complete and meritorious federal defense, the court has and can exercise the power to retain pendent jurisdiction, adjudicate the defense, and dismiss the case"). Therefore, this court will exercise pendent party jurisdiction over Hancock and resolve the remaining state law claims brought against it in Counts II and III of Omaha's Complaint.
A. Breach Of Contract
Hancock argues that Omaha's state law breach of contract claim brought in Count II of Omaha's Complaint is preempted by ERISA because Omaha alleges "that it was the ERISA plan itself that was breached." (Def.'s Br. in Support at 7). Omaha does not dispute Hancock's argument.
A state law breach of contract claim is preempted by ERISA "where a state law claim cannot be resolved without an interpretation of the contract governed by federal law." Panaras v. Liquid Carbonic Indus. Corp., 74 F.3d 786, 795 (7th Cir. 1996) (quotation omitted); see also 29 U.S.C.A. § 1144(a) (West 1999); Tolle v. Carroll Touch, Inc., 977 F.2d 1129, 1136 (7th Cir. 1992) ("In [Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139-40 (1990)] the Court held that claims brought under general state law are preempted when the existence of an employee benefit plan is a critical factor in establishing liability under this general law."). Omaha's breach of contract claim cannot be resolved without interpreting the policy, an ERISA plan governed by federal law.4 Thus, Omaha's breach of contract claim is preempted by ERISA.
B. Indiana Code Section 27-8-5-5
Count III of Omaha's Complaint seeks relief for Hancock's alleged violation of section 27-8-5-5(c) of the Indiana Code. That section provides:
The falsity of any statement in the application for any policy covered by this chapter may not bar the right to recovery thereunder unless such false statement materially affected either the acceptance of the risk or the hazard assumed by the insurer.
Ind. Code Ann. § 27-8-5-5(c) (Michie 1999). Although neither party addresses the issue, whether application of this section is preempted by ERISA must be determined in the first instance.
In enacting ERISA, Congress provided a broad, sweeping preemption clause in section1144(a), which the Supreme Court has interpreted as "deliberately expansive." Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46 (1987); see Security Life Ins. Co. of America v. Meyling, 146 F.3d 1184, 1188 (9th Cir. 1998) ("We have repeatedly emphasized that ERISA contains one of the broadest preemption clauses ever enacted by Congress.") (quotation omitted); Tolle, 977 F.2d at 1136 ("Not only has the Court noted the sweeping nature of ERISA's provisions, but Congress in enacting this comprehensive statute provided for broad preemption provision [sic] in Section 514 of ERISA, 29 U.S.C. § 1144."). "This sweeping preemption provision provides that ERISA shall 'supercede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan . . . .'" Tolle, 977 F.2d at 1136 (quoting 29 U.S.C. § 1144(a)). A state law "relates to" an employee benefit plan "in the normal sense of the phrase, if it has a connection with or reference to such a plan." Shaw v. Delta Airlines, Inc., 463 U.S. 85, 97 (1983). In order to recover the relief it seeks from Hancock under section 27-8-5-5 of the Indiana Code, Omaha must prove that false statements were made in the application for the insurance policy, an ERISA governed employee benefit plan. That being the case, it is clear that section 27-8-5-5 has a "connection with" the policy. See Davies v. Centennial Life Ins. Co., 128 F.3d 934, 939 (6th Cir. 1997) (holding that an Ohio statute had a connection with an ERISA governed plan when the relief afforded by the statute was rescission of the ERISA plan and denial of benefits thereunder); DeBruyne v. Equitable Life Assurance Soc'y of the United States, 920 F.2d 457, 468 (7th Cir. 1990) (holding that a New York insurance statute related to an employee benefits plan when the plaintiffs applied the statue to challenge representations made in the plan).
This is not, however, the end of the preemption analysis. ERISA contains a "savings clause" which provides that "nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities." 29 U.S.C.A. § 1144(b)(2)(A) (West 1999). In Pilot Life, 481 U.S. at 48, the Supreme Court "set out two tests for determining whether a state law falls under ERISA's savings clause because it regulates 'insurance.'" DeBruyne, 920 F.2d at 468.
The first test is a 'common sense view.' The second test, which mimics the 'business of insurance' test under the McCarran-Ferguson Act, 15 U.S.C. § 1011-1015, is a three factor analysis:
1. 'Whether the practice has the effect of transferring or spreading a policyholder's risk';
2. 'Whether the practice is an integral part of the policy relationship between the insurer and the insured'; and
3. 'Whether the practice is limited to entities within the insurance industry.'
Id. at 468-69 (quoting Pilot Life, 481 U.S. at 48-49) (internal quotation omitted). "However, the McCarran-Ferguson factors are simply relevant considerations or guideposts, not separate essential elements of a three-part test that must each be satisfied for a law to escape preemption." Security Life, 146 F.3d at 1888 (quotation omitted). Also relevant to the preemption issue is the language, structure, and legislative history of ERISA. See DeBruyne, 920 F.2d at 469 ("In addition to the two "insurance" tests, the Court used the language, structure and legislative history of ERISA as an additional basis for preempting state law.") (citing Pilot Life, 481 U.S. at 51-57).
"In order to fall within the common-sense definition of insurance regulation, a state law must do more than affect the insurance industry it 'must be specifically directed toward that industry.'" Davies, 128 F.3d at 941 (quoting Pilot Life, 481 U.S. at 50). While at first glance, it appears that section 27-8-5-5, which appears in Title 27 — Insurance of the Indiana Code, is "specifically directed" toward the insurance industry, such conclusion is not necessarily accurate. Upon examination of Indiana cases, it is clear that the principles articulated in that statute are principles firmly rooted in Indiana general contract law. See Ruhlig v. American Community Mut. Ins. Co., 96 N.E.2d 877, 880 (Ind.Ct.App. 1998) (holding that "[f]alse representations on an insurance application made by an insured concerning a material fact, which mislead, will void an insurance contract, just as in any other contractual relationship") (emphasis added); Bush v. Washington Nat'l Ins. Co., 534 N.E.2d 1139, 1142 (Ind.Ct.App. 1989) (holding that "false representations, concerning a material fact, which mislead, will avoid an insurance contract, just as any other contract") (emphasis added).
Although the Seventh Circuit has not directly addressed whether a statute similar to section 27-8-5-5 falls within the common sense definition of insurance regulation, the Sixth and Ninth Circuits have addressed the issue and are in agreement. The Sixth Circuit in Davies, 128 F.3d at 940-43, considered whether an Ohio insurance statute that provides:
The falsity of any statement in the application for any policy of sickness and accident insurance shall not bar the right to recovery thereunder, or be used in evidence at any trial to recover such policy, unless it is clearly proved that such false statement is willfully false, that it was fraudulently made, that it materially affects either the acceptance of the risk or the hazard assumed by the insurer, that it induced the insurer to issue the policy, and that but for such false statement the policy would not have been issued.
came within the ERISA savings clause. Id. at 938 (quoting Ohio Rev. Code Ann. § 3923.14 (Anderson 1989)). The Sixth Circuit did not directly answer the question of whether the statue "comports with the common-sense definition of insurance regulation[,]" instead finding that application of the McCarran-Ferguson criteria did not lead to the conclusion that the Ohio statute regulates the "business of insurance." Id. at 941. But, the court did opine that the insurance statute did not necessary "comport with the common-sense definition of insurance regulation" because the statute, "although associated with the insurance industry, has its roots firmly planted in the general principles of Ohio contract law." Id.
The Ninth Circuit in Security Life, 146 F.3d at 1188, went one step further than the Sixth Circuit and directly held that three sections of the California Insurance Code "do not fit a common sense understanding of insurance regulation" and were therefore preempted by ERISA. One of the three preempted statutes provides:
The falsity of any statement in the application for any policy covered by this chapter shall not bar the right to recovery under the policy unless such false statement was made with actual intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the insurer.
Id. at 1188 n. 2 (quoting Cal. Ins. Code. § 10380). The Ninth Circuit held, "Although the provisions are found in the Insurance Code, they do little more than codify long-standing principles of California contract law" which, "even when directed at the insurance industry, are not laws that regulate insurance and are not saved from ERISA preemption." Id. at 1188-89. In so holding, the Ninth Circuit directly relied on the Sixth Circuit's analysis in Davies. See id. at 1189.
This court need not answer the "close question" of whether section 27-8-5-5 comports with the common sense definition of insurance regulation, because, like the court in Davies, this court finds that the McCarran-Ferguson criteria does not lead to the conclusion that section 27-8-5-5 regulates the "business of insurance". Davies, 128 F.3d at 941. As to the first factor in the McCarran-Ferguson test, the issue is "whether the practice has the effect of transferring or spreading a policyholder's risk[.]" Pilot Life, 481 U.S. at 48 (quotation omitted). "The Supreme Court has made it clear that in this context, the 'spreading' of risk refers to the acceptance of a number of risks, 'some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability on it.'" Davies, 128 F.3d at 941 (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 128 n. 7 (1982) (internal quotations and citation omitted)). "In other words, the risk-spreading principle concerns the risk of injury that the insurer has contractually agreed to bear for the insured." Id. (citations omitted).
The Sixth Circuit in Davies, finding that the first McCarran-Ferguson criteria was not satisfied, held, "Although [the Ohio insurance statute at issue] forces the insurer to bear the legal relief associated with innocent misrepresentations in an insurance application, [it] does not alter the risks for which the insurer and the insured originally contracted — the specific accident and medical costs." Id. at 942. The Sixth Circuit's analysis relied on the Fifth Circuit's analysis in Tingle v. Pacific Mutual Insurance Co., 996 F.2d 105 (5th Cir. 1993). In that case, the Fifth Circuit considered whether a Louisiana statue that provides:
In any application for life or health insurance made in writing by the insured, all statements therein made by the insured shall, in the absence of fraud, be deemed representations and not warranties. The falsity or [sic] any such statement shall not bar the right to recovery under the contract unless such false statement was made with actual intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the insurer.
fell within the scope of ERISA's savings clause. Id. at 108 (quoting La. Rev Stat. § 22:619(B)). "The [Fifth Circuit] held that the statute did not shift policyholder risk, reasoning that although the statute spread the legal risks of innocent misrepresentations onto the insurer, it did not spread the risk of health insurance coverage for which the parties contracted." Davies, 128 F.3d at 941 (citing, e.g., DeBruyne, 920 F.2d at 469 (holding that ERISA preempts a New York insurance law prohibiting the misrepresentation of an insurance "contract's terms, benefits or advantages" because, among other things, the law does not spread policyholder risk; it "forces the insurer to bear the legal rights associated with [fraudulent] policy language") (alteration in original) (internal quotation omitted)). Like the courts in Davies and Tingle, this court concludes that section 27-8-5-5 does not alter policyholder risk because it does not spread the risk of health insurance coverage, and thus the first factor of the McCarran-Ferguson test is not satisfied.
The second and third factors of the McCarran-Ferguson test likewise fail. Section 27-8-5-5 does not regulate "an integral part of the policy relationship between the insurer and the insured" because it "does not define the terms of the relationship between" the insurer and insured. Pilot Life, 481 U.S. at 48, 51. The section "simply states that whatever the substantive terms of the contract for accident or health insurance may be, certain material misrepresentations in the application will justify rescission of the insurance contract. The statute does not affect the substantive terms of the contract." Davies, 128 F.3d at 942 (holding Ohio insurance statute fails to satisfy the second McCarran-Ferguson test) (citations omitted). Finally, as noted above, "even if [section 27-8-5-5] is specifically directed at the insurance industry, it is merely a codification of the general principles of contract law[.]" Id. (citing, e.g., Pilot Life, 481 U.S. at 51 (stating that savings clause is not applicable where Mississippi law of bad faith developed from general principles of tort and contract law)).
For the foregoing reasons, this court holds that section 27-8-5-5 does not regulate the business of insurance, and therefore does not come within ERISA's savings clause. Omaha's claim for relief under section 27-8-5-5 is therefore preempted by ERISA.
IV. Conclusion
Because Omaha is seeking a legal remedy against Hancock, section 1132(a)(3) has no application here. Moreover, Omaha is not entitled to relief under a federal common law remedy. Therefore, this court has no federal question jurisdiction, and Count I of Omaha's Complaint must be dismissed for lack of jurisdiction as it relates to Hancock.
It is proper for this court to exercise pendent party jurisdiction and reach the merits of Omaha's second and third counts brought against Hancock. ERISA preempts Omaha's causes of action in Counts II and III. Therefore, Hancock's motion for summary judgment on Counts II and III must be granted.
For the foregoing reasons, Count I will be DISMISSED as to Hancock Construction Company, and summary judgement will be GRANTED as to Hancock Construction Company on Counts II and III. As noted, other claims by United of Omaha Life Insurance Company against Norman Anderson remain. Until a disposition of those claims is reached, no final judgment as to the claims against Hancock Construction Company will be issued. It would be inefficient to create the potential for multiple appeals from this single case because the factual issues are intertwined.
ALL OF WHICH IS ORDERED this 19th day of September 2000.