Guest Article

State Law Claims Against TPA, Stop Loss Insurer Regarding ASA/Policy Language Not Preempted

Summary: A federal district court ruled that ERISA did not preempt claims filed against a third-party administrator and stop-loss insurer because the plaintiff in this case met ERISA's definition of a fiduciary and had standing to sue under ERISA.

(July 19, 2000) - ERISA did not preempt state law claims against a third-party administrator (TPA) and stop-loss insurer regarding problems with claims processing, a federal district court in Indiana ruled. The court generally found that the claim processing dispute solely involved interpreting the administrative services agreement (ASA) or the stop-loss policy -- not the ERISA plan. Therefore, no ERISA issues were involved. The case is Analytical Surveys, Inc. v. Intercare Health Plans, Inc., 2000 U.S. Dist. LEXIS 7664 (S.D. Ind., April 25, 2000).

In deciding to switch from an insured to a self-insured health plan, Analytical Surveys, Inc. (ASI) considered using Intercare Health Plans, Inc. as its TPA. In doing so, ASI advised Intercare that a primary concern was the "turn-around" time of health claims. Among other things, Intercare indicated that its average turn-around time for health claims (measured from claim submission to the completion of processing) was nine days. Based on these representations, ASI entered into an ASA with Intercare in January 1998. An ASA amendment stated that "claims are guaranteed to be processed in 10 days or less."

ASI also purchased stop-loss insurance from John Alden Life Insurance Co. The stop-loss policy provided that: (1) claims must be submitted within 30 days after the deductible amount had been met; and (2) Alden would not refuse to reimburse for late claim submissions, as long as the claims were submitted "as soon as reasonably possible and within one year of the date notice was required by [Alden]." Additionally, a first notice-of-claim rule in ASI's plan, which the stop-loss policy referenced, stated that plan participants' claims must be filed within 90 days, but claims 15 months or older may be denied.

Intercare did not meet its turn-around time, which allegedly ranged from six to 21 months. In October 1998, ASI terminated the ASA with Intercare and contracted with another TPA, J.F. Molloy & Associates, Inc.

Molloy contacted Intercare asking it to submit to Alden for payment any claims that Intercare had processed negligently. In turn, because ASI had first paid those claims, Alden was to reimburse ASI.

However, Alden refused to reimburse ASI based upon its 30-day submission rule. ASI countered that the Alden policy also allowed for late claims within one year of notice; and furthermore, the ASI plan's first-notice-of-claim rule allows a 15-month period before a claim is denied. ASI contended that many denied claims were submitted within the 12- and 15-month provisions of the stop loss policy and ASI plan. Therefore, ASI sued Alden for breach of contract, and Intercare for gross negligence and breach of the ASA. Intercare and Alden argued that the claims were preempted by ERISA because they related to an ERISA plan.

The court had to determine whether ASI's state law claims were preempted by ERISA's civil enforcement provisions, which state that a civil action under ERISA may be brought by a participant, beneficiary or fiduciary. The 7th Circuit has a three-part test for determining when claims fall within those provisions, which involve whether:

1. the plaintiff is eligible to sue under those provisions;
2. the plaintiff's lawsuit falls within the scope of an ERISA rule that can be enforced by the civil enforcement provisions; and
3. the plaintiff's state law claim cannot be resolved without an interpretation of the contract governed by federal law; that is, the plan.

The court did find that ASI was eligible to sue as an ERISA fiduciary, defined as "anyone who has substantial control over the assets, management or administration of an ERISA plan."

However, ASI's claim did not meet the second factor because, among other things, as a fiduciary ASI must sue another fiduciary under ERISA for a breach of fiduciary duty. Intercare and Alden had no discretionary control over the plan and therefore were not fiduciaries. For example, the ASA stated that Intercare only provided "ministerial" services.

ASI did not meet the third factor because its claims did not require an interpretation of the plan, and ASI's relationships with Intercare and Alden were governed by two contracts that were independent of the plan, according to the court.

Specifically, the court noted that the ASA did not depend on plan interpretation to determine if Intercare breached or was negligent in its processing obligations, which were solely described under the ASA.

Regarding the stop-loss policy, the court found that the relationship between ASI and Alden was solely based upon that policy's terms. Applying the plan's 15-month provision depended solely upon an interpretation of the stop loss policy, which governed the timing of claims submissions, the court held. Therefore, the court ruled that ASI's claims were not preempted.

Excerpted from the July 2000 supplement to Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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