In a recent decision, the Ninth Circuit Court of Appeals rejected a Plan participant’s attempt to extend California insurance law’s notice-prejudice rule to self-insured ERISA plans. Zagon v. Am. Airlines, Inc., 2015 BL 160778, 9th Cir., No. 13-55866 (5/21/15) (unpublished).
The pertinent case facts are these: Zagon, a former American Airlines flight attendant, filed suit in U.S. District Court for the Central District of California asserting a claim for long-term disability benefits against American Airlines, Inc. Long Term Disability Plan (the “Plan”). The Plan documents explicitly warned beneficiaries that the Plan would not, without exception, consider a claim filed beyond a one-year submission window. Ms. Zagon filed her claim several months late. The Plan moved for summary judgment, citing the untimely claim submission. In opposing the motion, Ms. Zagon argued that her claim was timely under California’s notice-prejudice rule. Under this rule, an insurer may not deny a claim solely due to an insured’s delayed notice of the claim, unless the delay caused the insurer substantial prejudice. The district court granted the Plan’s motion for summary judgment.
The Court of Appeals affirmed. The Court of Appeals explained ERISA’s primary interests in protecting contractually defined benefits and enforcing ERISA plans as written. The Court of Appeals determined that the Plan’s one-year claim submission deadline was reasonable and did not conflict with ERISA. While recognizing a general federal judicial duty to formulate federal common law to supplement the provisions and purposes of ERISA, the Court of Appeals found that no such judicial legislation was required.
The Court of Appeals reasoned that applying California’s notice-prejudice rule to Zagon’s claim would undermine, rather than effect, the statutory pattern Congress enacted. ERISA preempts all state laws that would otherwise govern employee-benefit plans except for those laws that govern insurance-based plans. California’s notice-prejudice rule is exclusively a creature of state insurance law. The Court of Appeals concluded that extending an insurance-based rule to uninsured plans, such as the Plan at issue, would defeat the distinction Congress made between insured and uninsured plans.
This case serves as a reminder that Congress explicitly made a distinction between insured plans and self-funded ERISA plans. With respect to the latter, ERISA generally trumps state insurance laws and courts may find claims by participants against ERISA plans rooted in state insurance laws to be preempted. Healthcare benefit litigation is on the rise. We expect to see more creative claims and lawsuits in the near future.