In Steigleman v. Symetra Life, the U.S. District Court for the District of Arizona has ruled that a small business owner could not sue an insurance company under state law for long term disability (“LTD”) benefits because ERISA preempts the state law.
Law. An employee benefit plan is defined as “any plan, fund, or program…established or maintained by an employer…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance…benefits in the event of…disability.” ERISA preempts most state laws that relate to ERISA-covered employee benefit plans except for state laws that regulate insurance, banking, or securities.
Notwithstanding the above, under an ERISA safe harbor provision, an insurance policy will not be considered an ERISA-covered employee benefit plan if the policy satisfies the following four criteria:
- No contributions are made by the employer or employee organization.
- Participation in the program is voluntary.
- The sole functions of the employer with respect to the program are, without “endorsing” the program, to permit the insurer to publicize the program, to collect premiums through payroll deduction, and to remit them to the insurer.
- The employer receives no consideration in connection with the policy other than reasonable compensation for administrative costs it incurs.
Facts. In Steigleman, the small business owner was a member of a trade association which had a contract with an insurer that allowed members to purchase LTD insurance. She purchased the LTD insurance coverage through her business for herself and her employees. Later, she filed a claim under the LTD policy, stating she was unable to work due to neck pain. After a series of disputes, the owner sued the insurer under state law for breach of contract and the tort of bad faith.
Court Ruling. The court first determined that the small business owner’s claims for breach of contract and bad faith did not involve insurance laws. It then noted that, “An employer…can establish an ERISA plan rather easily. Even if an employer does no more than arrange for a ‘group-type insurance program,’ it can establish an ERISA plan, unless it is a mere advertiser who makes no contributions on behalf of its employees.”
The court observed that once the small business owner offered her employees coverage under the LTD policy, and began paying the associated premiums, “it would be strange to conclude there was not an ERISA plan, of some type, in the picture…. From the employees’ perspective, their employer had created a program, that was maintained and paid for by their employer, for the purpose of providing benefits in the event the employees became disabled.”
The court then ruled that the LTD coverage at issue failed the first and third criteria for the ERISA safe harbor provision to apply and that the owner had established an ERISA-covered plan. The court, therefore, dismissed the portion of the lawsuit involving state law claims.