ABA Section of Labor and Employment Law

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Issue: Summer 2014

Once an ERISA Plan, Always an ERISA Plan?

Despite its reputation in the legal community as a complicated area of the law that most lawyers wouldn't touch with a 10-foot pole, the Supreme Court sure seems to have a love affair with ERISA. In the last ten years alone, the Court has averaged 1.5 ERISA decisions per year:

Given its apparent determination to make sense of (or, some might argue, further complicate) ERISA jurisprudence, it seems natural that the circuits split on the issue of ERISA preemption of converted insurance plans, particularly life insurance plans, will garner Supreme Court attention when the right case pops up for review.

First, a life insurance conversion primer: When an ERISA plan participant loses employment status (quits, is fired, or is disabled and no longer considered an employee, for example), she has the right to convert her employer-sponsored life insurance policy to an individual policy. Why is this important? Because when converting, the participant does not have to submit health information to qualify for the new, converted life insurance policy. Therefore, particularly for someone who lost employment status due to disability, it is a lot easier to carry over a life insurance policy than it is to qualify for an individual life insurance policy. After converting, the individual then is responsible for paying the life insurance policy premiums, which will probably be higher than the group rate previously paid by the employer.

Employers are not obligated to provide notice of the life insurance conversion right unless the plan so requires. See Noel v. Laclede Gas Co., 612 F. Supp. 2d 1061, 1064, 46 EB Cases (BNA) 2005 (E.D. Mo. 2009) (determining that COBRA notice does not extend to life insurance conversion options). Some states impose a notice of conversion rights requirement, but courts are split on whether these state laws are preempted by ERISA. Compare Meyers v. Metro. Life Ins. Co., C.A. No 12-3699, 2013 WL 820591, *3 (E.D. Pa. March 6, 2013) (holding that a Pennsylvania law requiring notice of the right to convert was not preempted by ERISA because "the state law is specifically directed towards entities engaged in insurance" and the statute "substantially affects the risk pooling arrangement" by "lessen[ing] the risk associated with an insured not knowing her conversion rights, and distribut[ing] some of that risk to the insurer or policyholder") with Trovato v. Marcal Mfg. LLC, 11-CV-181 DMC MF, 2011 WL 4550169, *4 (D.N.J. Sept. 29, 2011) (holding that a New Jersey statute requiring notice was preempted because "the statute is not specifically directed to the insurance industry, but rather may be directed toward either the insurer or the employer" and "given that the statute simply regulates the notice of rights, it cannot be said to substantially affect the risk pooling between the insurer and the insured").

The courts are even more divided, however, on an issue that arises after a beneficiary makes a claim on a converted ERISA policy: Is the claim for benefits preempted by ERISA because it started as an ERISA plan even though it was converted to an individual plan? In other words, is "once an ERISA plan, always an ERISA plan" the law of the land? According to the Eighth, Ninth (sometimes), and Eleventh Circuits, the answer is "yes." In Glass v. United of Omaha Life Insurance, 33 F.3d 1341, 1347 (11th Cir. 1994), the court concluded that the "ability to obtain the converted life insurance policy arose from the ERISA plan, and the converted policy itself continued to be integrally linked with the ERISA plan." Therefore, ERISA governed the converted life insurance plan. As reasoned by the Ninth Circuit in a converted health insurance plan context, "[n]o conversion benefits would be available unless the party seeking the conversion policy was an eligible insured beneficiary of a group plan," and, therefore, ERISA continues to control. Greany v. W. Farm Bureau Life Ins. Co., 973 F.2d 812, 817 (9th Cir. 1992); accord Peterson v. Am. Life & Health Ins. Co., 48 E3d 404, 408 (9th Cir. 1995); Painter v. Golden Rule Ins. Co., 121 F.3d 436, 439-40 (8th Cir. 1997).

Other courts have determined that "conversion" is not merely a label; in fact, it converts an ERISA plan to an individual policy for all purposes. Creating an intra-circuit conflict by reasoning that its previous decisions on the issue were dicta, the Ninth Circuit reasoned in Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 876 (9th Cir. 2001) in the health insurance context that "A converted policy is created when an ERISA plan participant leaves the plan and obtains a new, separate, individual policy based on conversion rights contained in the ERISA plan. The contract under the converted policy is directly between the insurer and insured. It is independent of the ERISA plan and does not place any burdens on the plan administrator or the plan." Therefore, claims for benefits under the converted plans arise under state law rather than ERISA. The First and Sixth circuits employ similar reasoning. See Demars v. CIGNA Corp., 173 F.3d 443, 450 (1st Cir. 1999) ("what matters for ERISA purposes is not the nature of the conversion policy but rather the nature of the employer's ongoing administrative and financial ties to the policy. If no such ties exist, the policy should not be subject to ERISA regulation."); Mass. Casualty Ins. Co. v. Reynolds, 113 F.3d 1450, 1453 (6th Cir. 1997) ("[O]nce conversion has occurred and the policy is in force . . . there is no longer any ‘integral connection' between the individual conversion policy and the ERISA plan that gave rise to the right to convert.").

To the extent that the Supreme Court justices get as excited by ERISA circuit splits as readers of this publication do, they must be twitching in anticipation about authoring the resolution of preemption in converted ERISA plans. Meantime, plan participants should not assume that paying their own premiums on a life insurance policy they converted means that they are entitled to state law protections.

Cassie Springer Ayeni, Springer & Roberts LLP.