"Insurance contracts often include so-called ‘conformity clauses’ which ‘provide that clauses which are in conflict with [statutorily mandated coverage] are declared and understood to be amended to conform to such statutes." Kentucky League of Cities, Inc. v. General Reinsurance Corp.,174 F. Supp. 2d 532, 540 (W.D. Ky. 2001).
This is not really a "choice of law" provision, but a provision that is used so that insurers can issue policies in multiple states without running afoul of any particular state’s minimum statutory requirements. But see Kubes v. American Med. Sec., Inc.,895 F. Supp. 212 (S.D. Ill. 1995) (treating conformity clause as a choice of law provision). Even if a policy does not contain the conformity provision, it will be treated as if it contains the mandatory provision(s). Kentucky League, 174 F. Supp. 2d at 540-41; see also Hughes v. State Farm Mut. Auto. Ins. Co., 236 N.W.2nd 870, 885 (N.D. 1975).
Of course, these provisions only come into play if there is a direct or express conflict between a statutory provision and the policy at issue. Kentucky League, 174 F. Supp. 2d at 540 (citing cases).
When a plan is governed by ERISA, the preemption provisions of that law are intended to provide uniformity by preempting state laws that relate to the plan, thereby preventing inconsistent treatment of plans in multiple states. DaimlerChrysler Corp. Healthcare Benefits Plan v. Durden, 448 F.3d 918, 928 (6th Cir. 2006) (“Numerous issues which would otherwise be decided by state law are preempted by ERISA for the specific purpose of providing uniformity.”).
Are Conflicting State Laws Saved from Preemption?
The question then becomes whether the particular law that conflicts with the plan is saved from preemption because it regulates insurance under the test set forth in Kentucky Association of Health Plans, Inc. v. Miller,538 U.S. 329 (2003) (i.e., it is directed "specifically toward entities engaged in insurance" and it "substantially affect[s] the risk pooling arrangement between the insurer and the insured"). Id. at 341.
Some cases have concluded that this kind of "conform to" provision is immaterial if the laws of the state are preempted. For example, in Light v. Blue Cross & Blue Shield of Alabama, 790 F.2d 1247 (5th Cir. 1986), plaintiffs argued that ERISA did not preempt their claims against a self-funded plan, because the plan contained a provision stating: "The contracts [between the employer and the plan administrator] necessarily will conform to applicable state laws." The Fifth Circuit found that "[t]his argument lacks substance," reasoning that "[i]f ERISA preempts state law, there is no applicable state law with which the administrator must conform." Id. at 1248.
Similarly, in Louisiana Health Service and Indemnity Company v. Rapides Healthcare System, 461 F.3d 529 (5th Cir. 2006), the court considered two provisions in a group policy that funded an ERISA plan, one of which stated that assignments would not be honored "except as required by law." Because Louisiana had an "assignment statute," the issue was whether that statute was preempted.
The court disagreed with the district court’s holding that the policy’s provisions were "automatically amended to conform to the requirements of the assignment statute." Id. at 533 (citations and punctuation omitted). Rather, "ERISA plans must always conform to state law, but only state law that is valid and not preempted by ERISA." Id.
Thus, "[t]he presence of the phrase ‘except as preempted by law’ serves no additional purpose, as all state laws are potentially subject to ERISA’s preemptive force." The court went on to determine that the assignment statute was not preempted because it did not have an impermissible connection with the plan, but acknowledged that the Eighth and Tenth Circuits have held that ERISA preempts similar statutes.
The Sixth Circuit followed Light with respect to a self-funded plan in Kentucky Association of Health Plans, Inc. v. Nichols, 227 F.3d 352 (6th Cir. 2000). The fact that the plan was self-funded was critical, because the "any willing provider" statute at issue would have been saved from preemption but for application of ERISA’s deemer clause, which provides that self-funded plans will not be deemed insurance companies for the purpose of state laws directed at regulating insurance. 29 U.S.C. § 1144(b)(2)(B).
The effect of a true choice of law provision in an ERISA plan document − e.g., "This policy is issued in North Carolina and shall be governed by its laws" − essentially depends on the choice of venue for the litigation in which the provision becomes an issue. Currently, there is a split in authority with regard to whether a choice of law provision can be enforced when the document containing the provision is part of an employee welfare benefit plan governed by ERISA.
For example, in Buce v. Allianz Life Insurance Company, 247 F.3d 1133, 1147 (11th Cir. 2001), the group policy at issue stated that "the Plan is to be interpreted in accordance with the laws of the State of Georgia." The Eleventh Circuit determined that this provision gave "the vague terms of the policy ... cognizable doctrinal context...." Id. As a result, Georgia law was imported into the plan for the purpose of clarifying vague terms (in that case, the term "accident"), which was a different inquiry than whether the law of Georgia was preempted. ERISA still preempts Georgia law, but the court was not actually applying Georgia law, just using it for guidance to interpret the terms of the plan.
In Tyler v. AIG Life Insurance Company, 273 F. App’x 778, 785 (11th Cir. 2008), the Eleventh Circuit spoke further on the issue, holding that where the ERISA-governed policy contained a choice of law provision stating that a particular state’s law applied, the state law would be applied in situations where state law conflicted with federal common law.
Claim Decision Based on State Law
The Second Circuit also has upheld an administrator’s claim decision under an ERISA-governed policy where that decision was consistent with the law of the state designated in the choice of law provision. Greenberg v. Aetna Life Ins. Co.,421 F. App’x 124 (2d Cir. 2011) ("[T]he policy on its face elects Pennsylvania law as controlling in its interpretation and stipulates that it is to be delivered in Pennsylvania. [Plaintiff] has not provided any evidence to the contrary. Accordingly, as permitted under Pennsylvania law, and pursuant to the policy’s terms, he is permanently excluded from eligibility."). The court did so in the context of an arbitrary and capricious standard of review.
In contrast, the court in Jessen v. Cigna Group Insurance, 812 F. Supp. 2d 805, 814 (E.D. Mich. 2011), held that "[t]he statement on the front page of the policy that the ‘policy shall be governed by the laws of the state in which it is delivered’ does not alter the default rule that in evaluating questions of policy interpretation under ERISA, federal courts must develop and apply a body of substantive federal common law." Thus, the court applied federal common law "to give some unity to the concept of ‘accident.’" Id. at 814-15 (citing the Sixth Circuit’s definition of "accident" in Kovach v. Zurich Am. Ins. Co., 587 F.3d 323 (6th Cir. 2009)).
The Seventh Circuit has held (albeit in dicta) that a choice of law provision does not limit interpretation of an ERISA plan to state law. See Morton v. Smith, 91 F.3d 867, 871 (7th Cir. 1996). At least one district court within the Seventh Circuit has interpreted its decisional law to preclude application of state law in the manner employed by the Eleventh Circuit in Buce. See In Re Sears Retiree Group Life Ins. Litigation, 90 F. Supp. 2d 940, 951 (N.D. Ill. 2000) (“Even if Sears intended to adopt Illinois law for purposes of interpreting the Plan documents, ... ERISA preemption would negate such an attempt. A choice of law provision does not operate to waive the applicability of federal law regarding interpretation of an ERISA plan.”).
In Prudential Insurance Company of America v. Doe, 140 F.3d 785, 791 (8th Cir. 1998), the Eighth Circuit expressly held that “parties may not contract to choose state law as the governing law of an ERISA-governed benefit plan.” Nevertheless, “[a]lthough federal common law is applicable to [ERISA] case[s], [courts] may look to state law for guidance, provided state law does not conflict with ERISA or its underlying policies.” McDaniel v. Med. Life Ins. Co., 195 F.3d 999, 1002 (8th Cir. 1999).
Which Circuit’s Common Law Applies?
As to which circuit’s federal common law decisions apply, the court in Dabertin v. HCR Manor Care, Inc., 177 F. Supp. 2d 829, 839 (N.D. Ill. 2001), held that a choice of law provision designating the laws of Delaware did not subject the claims to Third Circuit decisional law. Rather, Seventh Circuit law was controlling because “[c]laims that are brought under federal law must be decided under the decisional law of the Circuit in which the claim was filed” and there was “no express choice of law provision in the Plan that selects Third Circuit decisional law.” Id.
Finally, with regard to “residual choice of law” provisions (i.e., provisions providing for the application of state law to the extent it is not preempted by ERISA), courts have applied two different tests. The Ninth and Eleventh Circuits have held that “[w]here a choice of law is made by an ERISA contract, it should be followed, if not unreasonable or fundamentally unfair.” Buce, 247 F.3d at 1149; Wang Labs., Inc. v. Kagan, 990 F.2d 1126, 1128-29 (9th Cir. 1993).
The Fifth and Sixth Circuits have employed the Restatement (Second) of Conflict of Laws “to decide whether to give effect to a choice of law provision in an ERISA plan.” Jimenez v. Sun Life Assurance Co. of Canada, 486 F. App’x 398, 407 (5th Cir. 2012); Durden, 448 F.3d at 922-23 (6th Cir. 2006).
Litigants in ERISA cases should be aware of whether plan documents contain conformity clauses or choice of law provisions, whether those provisions are treated similarly in the jurisdiction where the suit is pending, and how the jurisdiction applies choice of law provisions with respect to plan interpretation. In any event, the interpretation of plan terms must be consistent with the substantive provisions and the underlying objectives of ERISA. See West v. Aetna Life Ins. Co., 171 F. Supp. 2d 856, 880 (N.D. Iowa 2001).
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