Casselman v. American Family Life Assurance Co.

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 04-2370

KENNY CASSELMAN,

Plaintiff - Appellant,

versus

AMERICAN FAMILY LIFE ASSURANCE COMPANY OF
COLUMBUS,

Defendant - Appellee.

No. 04-2378

JOHN P. ETHRIDGE,

Plaintiff - Appellant,

versus

AMERICAN FAMILY LIFE ASSURANCE COMPANY OF
COLUMBUS,

Defendant - Appellee.

Appeals from the United States District Court for the District of
South Carolina, at Charleston. C. Weston Houck, Senior District
Judge. (CA-03-3859-12-2; CA-03-3953-2-12)

Argued: May 25, 2005 Decided: June 24, 2005
___________
Before LUTTIG and SHEDD, Circuit Judges, and Eugene E. SILER, Jr.,
Senior Circuit Judge of the United States Court of Appeals for the
Sixth Circuit, sitting by designation.

Affirmed in part, reversed in part, and remanded by unpublished
opinion. Judge Luttig wrote the opinion, in which Judge Shedd and
Senior Judge Siler joined.

ARGUED: William Stuart Duncan, Georgetown, South Carolina, for
Appellants. David Wright Overstreet, CARLOCK, COPELAND, SEMLER &
STAIR, L.L.P., Charleston, South Carolina; Patrick Connors DiCarlo,
ALSTON & BIRD, Atlanta, Georgia, for Appellee. ON BRIEF: Raymond
C. Fischer, DUNCAN, CROSBY & MARING, L.L.C., Georgetown, South
Carolina, for Appellants. Thomas S. Carlock, CARLOCK, COPELAND,
SEMLER & STAIR, L.L.P., Atlanta, Georgia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

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LUTTIG, Circuit Judge:

Plaintiffs-appellants Kenny Casselman and John Ethridge filed

suit in federal district court against defendant-appellee American

Family Life Assurance Company (AFLAC), seeking insurance coverage

for injuries under a policy they purchased from AFLAC. The

district court granted partial summary judgment to AFLAC on the

ground that ERISA preempted plaintiffs’ claims. The district court

also granted summary judgment to the defendant on the ground that

plaintiffs’ claims were not covered by the insurance policy and

defendant’s refusal to pay those claims was not in bad faith. For

the reasons that follow, we affirm the district court’s holding

that plaintiffs’ claims are preempted by ERISA, but reverse its

grant of summary judgment on the question of coverage and bad

faith.

I.

Casselman and Ethridge were employees of Georgetown Steel

Corporation (GSC). In the early 1990s, the Steelworkers Union

requested that the company permit hourly employees to purchase

supplemental insurance on a pre-taxed basis. J.A. 427. GSC

agreed, but required the employees to select two companies to offer

these plans, which the union did. J.A. 427-28. In 1995, AFLAC

became one of the companies whose policies were offered to hourly

employees. J.A. 428.

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 Casselman and Ethridge each purchased an AFLAC supplemental

insurance policy with a sickness rider and an off-the-job accident

disability rider. J.A. 159-60; 242-43. After they had purchased

the insurance policies, each was injured in a separate accident

that occurred while at work. J.A. 436. Casselman slipped and

fell, rupturing a disk in his back. J.A. 188. The ruptured disk

injured the sciatic nerve, causing problems with Casselman’s leg

and foot that precluded his return to work. J.A. 185. Casselman’s

doctor alleges that Casselman has a lumbar disc disorder. J.A.

309. Ethridge hurt his knee in a fall. J.A. 248-51. His doctor

submitted an affidavit that Ethridge suffered degenerative

arthritis of the right knee and a right knee disorder. J.A. 311.

Both men represent that their now disabling health problems did not

afflict them until after their on-the-job falls. J.A. 218-19, 253.

The plaintiffs sued AFLAC for coverage of their disabling

injuries under the sickness rider they had purchased from AFLAC,

alleging that these injuries fell under the policy’s definition of

sickness. They also alleged that AFLAC had acted in bad faith by

not paying their claims. The defendant sought partial summary

judgment on the grounds that ERISA preempted plaintiffs’ claims and

sought summary judgment on the question of coverage. The district

court granted both of these motions.

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 II.

On appeal, we review the district court’s grant of summary

judgment de novo. Higgins v. E.I. Du Pont de Nemours & Co., 863

F.2d 1162, 1167 (4th Cir. 1988). Summary judgment is appropriate

only if the moving party demonstrates that “no genuine issue of

material fact exists and that the moving party is entitled to

judgment as a matter of law.” Kimmell v. Seven Up Bottling Co.,

993 F.2d 410, 412 (4th Cir. 1993).

A.

The district court did not provide any reasoning for its

conclusion that ERISA preempted plaintiffs’ claims. Both parties

agree that the correctness of the district court’s determination

depends entirely on whether the AFLAC plan falls within a safe

harbor exception removing certain plans from ERISA coverage.

The safe harbor exception provides as follows:

(j) Certain group or group-type insurance programs. For
purposes of Title I of the Act and this chapter, the
terms “employee welfare benefit plan” and “welfare plan”
shall not include a group or group-type insurance program
offered by an insurer to employees or members of an
employee organization, under which

(1) No contributions are made by an employer or employee
organization;
(2) Participation [in] the program is completely
voluntary for employees or members;
(3) The sole functions of the employer or employee
organization with respect to the program are, without
endorsing the program, to permit the insurer to publicize
the program to employees or members, to collect premiums

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 through payroll deductions or dues checkoffs and to remit
them to the insurer; and
(4) The employer or employee organization receives no
consideration in the form of cash or otherwise in
connection with the program, other than reasonable
compensation, excluding any profit, for administrative
services actually rendered in connection with payroll
deductions or dues checkoffs.

29 C.F.R. § 2510.3-1(j). AFLAC maintains that GSC exceeded the

limited employer role outlined in (1), (3), and (4), thereby

removing the plan from the reach of the safe harbor provision.

Because the employer served functions other than those outlined in

(3), the safe harbor is inapplicable and we need not reach AFLAC’s

remaining arguments.

Courts applying the safe harbor exception have emphasized that

employers can only assume a very limited role with respect to the

plan if the third prong is to be satisfied. See Butero v. Royal

Maccabees Life Ins. Co., 174 F.3d 1207, 1213 (11th Cir. 1999) (“The

regulation explicitly obliges the employer who seeks its safe

harbor to refrain from any functions other than permitting the

insurer to publicize the program and collecting premiums.”)

(emphasis in original); Hansen v. Continental Ins. Co., 940 F.2d

971, 977 (5th Cir. 1991) (similar). Here, it is clear that the

limited functions outlined in the regulation -– permitting

publicizing of the program, collecting premiums, and remitting them

to the insurer –- were exceeded by the company.

The plan administrator testified in a deposition that GSC

“chose to exclude salaried employees from participation in the

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plan,” J.A. 344, an exclusion reflected in the plan documents.

J.A. 407. Notwithstanding the Union’s request for coverage

specifically for hourly employees, plaintiffs present no evidence

to contradict the administrator’s representation that the employer

selected the type of employees who would be eligible for the

program. Although the Union selected the plans that would be

offered based on a vote of its membership, J.A. 428, the employer

reviewed those plans, and the plan administrator testified that

“[i]f they had come in here with somebody that was marginal or, you

know, less than having a good company rating, we would have advised

them that we didn’t have much confidence in this carrier.” J.A.

366. To ensure that AFLAC was a “reputable and well thought of

insurance company,” GSC engaged a consulting firm to investigate

AFLAC. J.A. 387.

Both determining eligibility criteria and selecting the

insurance company have been found relevant to the determination of

whether the safe harbor is applicable. See Butero, 174 F.3d at

1213 (recognizing, in holding the safe harbor inapplicable, that

the employer picked the insurer and deemed certain employees

ineligible to participate). Given the unequivocal language of the

regulation limiting functions of the employer to the enumerated

tasks, we conclude that the employer exceeded the bounds of the

permissible interaction with the program under the safe harbor.

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 The plaintiffs urge a contrary conclusion by focusing on a

Department of Labor Advisory Opinion interpreting section 2510.3-

1(j), which describes an employer as “endorsing” a program within

the meaning of (j)(3) if “the employer or employee organization

expresses to its employees or members any positive, normative

judgment regarding the program.” Op. Dep’t of Labor 94-25a (1994),

1994 ERISA LEXIS 29, at *7. Plaintiffs argue that GSC did not

endorse the program under this definition, and thus that the safe

harbor applies. But the Advisory Opinion’s discussion of

endorsement does not purport to be a definition of section 2510.3-

1(j)(3) in its entirety, but only an explanation of what

constitutes “endorsement.” Contrary to plaintiff’s apparent

reading of section (j)(3), under the plain terms of that section,

an employer can violate (j)(3) by exceeding the specifically

enumerated permissible activities, even if such extra activity does

not involve “endorsement.” In fact, the advisory opinion held that

the safe harbor was not only inapplicable because the employer had

endorsed the program at issue, but also because the employer had

exceeded the specific function limitations of section 2510.3-

1(j)(3). Id. at *8. The advisory opinion thus does not impact our

conclusion that the employer’s functions exceeded those permitted

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by the safe harbor exception, regardless of whether such functions

entailed “endorsement.”1

The group insurance program under which the plaintiffs

purchased their insurance is thus an ERISA plan. And “when the

validity, interpretation or applicability of a plan term governs

the participant’s entitlement to a benefit or its amount, the claim

for such a benefit falls within the scope of” ERISA’s coverage

provision, 29 U.S.C. § 1132(a), which provides “the exclusive

vehicle for actions by ERISA-plan participants and beneficiaries

asserting improper processing of a claim for benefits.” Singh v.

Prudential Health Care Plan, Inc., 335 F.3d 278, 291 (4th Cir.

2003). Plaintiffs’ claims clearly depend upon the interpretation

of the language of the plan, specifically of the term “sickness.”

These claims are thus preempted under ERISA and the district court

properly granted partial summary judgment in favor of the defendant

with respect to ERISA preemption.

1
Although a plan that satisfies the provisions of the safe
harbor is necessarily excluded from coverage under ERISA, an
insurance plan that does not fall within the safe harbor may still
fail to qualify as a plan covered by ERISA. See Butero, 174 F.3d
at 1214; Hansen, 940 F.2d at 976-77. But plaintiffs do not argue
that the plan fails to qualify as an ERISA plan at all, but only
that it is excepted from ERISA coverage by the safe harbor
exception.

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 B.

We do not dismiss a claim that is preempted by ERISA, but

rather “treat it as a federal claim under [29 U.S.C. § 1132].”2

Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 195 (4th

Cir. 2002). We have held that “the plain language of an ERISA plan

must be enforced in accordance with ‘its literal and natural

meaning.’” United McGill Corp. v. Stinnett, 154 F.3d 168, 172 (4th

Cir. 1998). Looking to the literal meaning of the terms in the

AFLAC policy purchased by plaintiffs, it is clear that the district

court erred in granting summary judgment to the defendant.

The policy purchased by plaintiffs provides that “[i]f you

[plaintiffs] are Totally Disabled due to Sickness, we will pay you

one-thirtieth of the benefit shown in the Policy Schedule for each

day you remain disabled.” J.A. 124. “Sickness” is defined as “a

disease or disorder first manifested more than 30 days after your

Effective Date of coverage and while coverage is in force.” J.A.

109.

The defendant urges that any disorder that is caused by a

workplace fall is necessarily outside the rider’s definition of

“sickness.” But the sickness rider places no limitations on the

permissible causes of a disorder that can constitute “sickness.”

Plaintiffs allege that they now suffer from long-term physical

2
To the extent the claims seek remedies that fall outside the
scope of 29 U.S.C. § 1132(a), however, those claims are rejected as
preempted. Singh, 335 F.3d at 290.

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problems, namely lumbar disc disorder and right knee disorder. The

ordinary meaning of “disorder,” as it appears in the policy’s

definition of “sickness,” encompasses those problems regardless of

their direct cause. The ordinary meaning of “disorder” is “a

derangement of function: an abnormal physical or mental condition:

sickness, ailment, malady.” Webster’s Third New Int’l Dictionary

652 (1986). Each plaintiff clearly alleges that he suffers from a

debilitating condition which is both a derangement of function and

an abnormal physical condition, and thus each plaintiff suffers

from “sickness” under the policy definition, at least for the

purpose of defeating defendant’s motion for summary judgment. By

defining “sickness” in terms of “disorder” and without regard to

cause, the policy forecloses defendant’s narrow definition of

sickness and encompasses the plaintiffs’ physical disorders arising

from their on-the-job accidents.

To counteract the policy’s language, AFLAC focuses on the fact

that the plaintiffs selected a sickness rider and failed to select

an on-the-job disability rider, which also would clearly have

covered their claims. But the fact that the plaintiffs did not

select the on-the-job rider is irrelevant, given that the sickness

rider that they did select provides, by its terms, coverage for the

disorders for which they seek payment.

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 CONCLUSION

For the reasons stated herein, the judgment of the district

court that the plaintiffs’ claims are preempted by ERISA is

affirmed. The district court’s grant of summary judgment in favor

of defendants on the plaintiffs’ claims for coverage and bad faith

refusal to pay is reversed, and the case is remanded for further

proceedings consistent with this opinion.

AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED

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