In this most recent case by the Eastern District of California, the Court remanded to state court what would appear to be a straight-forward ERISA complaint. However, due to an exclusivity provision under ERISA and an artfully pled complaint, the Plaintiff was successful in having the case remanded to state court.
Plaintiff, an employee of the City of Bakersfield, filed a Complaint in state court alleging claims of breach of contract, fraud, negligence, and breach of implied covenant of good faith and fair dealing arising out of Unum Life Insurance Company’s termination of her long term disability benefits. Plaintiff also named as a defendant the Insurance Broker who sold to the City the long term disability plan with Unum. Unum and the Insurance Broker removed the case to federal court on the basis of federal question asserting that the claims were ERISA based and preempted the state law claims. The defendants also asserted that the Insurance Broker was fraudulently joined for the sole purpose of defeating diversity. The Court disagreed and remanded the case back to state court.
The Court found that no federal question existed. The Court explained that section 502(a) of ERISA preempts state-law claims; however, ERISA specifically excludes “government plans” from ERISA coverage. Although the City purchased a disability benefits plan from a private insurer, it covered only city employees and did not include any private participants. Therefore, it was exclusively a government plan and was explicitly excluded under ERISA.
The Court also concluded that the Insurance Broker was a proper defendant so there was no diversity. Plaintiff alleged that the Insurance Broker knew that Unum administered insurance claims in a way as to deny benefits to sick insureds, and should have known that numerous terms contained within Unum’s policies had been held illegal under California law. The defendants asserted that the Plaintiff could not establish duty, or that the Insurance Broker breached the duty. However, even if there was a duty owed, it was directed to the City and not the Plaintiff. Relying upon California state law, the Court held that generally an insurance agent does not have a duty to volunteer to an insured that he or she should procure additional or different types of insurance. However, a duty exists when the agent misrepresents the scope of the coverage, there is a request for a particular type of coverage, there is an express agreement, or the insurance agent holds himself out to be an expert in a certain field. Based on plaintiff’s allegations that the City requested a specific type of disability coverage, the Court concluded that the Insurance Broker was properly pled in the Complaint.
The Court also held under California law that even in the absence of privity, the Insurance Broker had a duty to Plaintiff. In reaching this decision, the Court weighed several factors including whether Plaintiff was affected by the transaction between the City and the Insurance Broker, whether there was foreseeable harm, and the closeness of the connection between the defendant’s conduct and the injury suffered. The Court found based on the allegations in the Complaint there was a possibility of an existing duty. The Court further supported its decision by citing to other California state and federal courts holdings that an insurance broker owes a duty of care to an intended third party beneficiary.
For all of these reasons, the Court found there was no federal question or diversity, and remanded the case back to state court. Although this case is limited to California law, it serves as a reminder that not all disability benefit plans fall under ERISA, and is another example of how plaintiff’s can artfully plead their Complaint to avoid removal to federal court.
Click here for opinion
This decision may be cited now as persuasive non-precedential authority. The decision may be modified by further proceedings in the district court or on appeal.