O'Connor v. UNUM Life Insurance Co. of America

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 17, 1998 Decided July 7, 1998

No. 97-5244

Mary O'Connor,

Appellant

v.

UNUM Life Insurance Company of America,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 96cv02158)

Richard L. Davis and Tracy J. Power were on the briefs
for appellant.

J. Snowden Stanley, Jr. argued the cause and filed the
brief for appellee.

Before: Williams, Ginsburg, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Mary O'Connor sued her former
employer and its insurance company for their failure to pay
long-term disability benefits under an employee benefit plan.
The district court dismissed the case against the insurance
company because O'Connor failed to submit timely proof of
her claim, and transferred the case against the employer (and
the receiver thereof) to the Central District of California.
For the reasons stated below we reverse.

I. Background

Western Federal Savings and Loan Association provided
its employees with a long-term disability benefit plan insured
by the UNUM Life Insurance Company of America and
governed by the Employee Retirement Income Security Act,
29 U.S.C. s 1001 et seq. Under the terms of the plan an
injured employee must give UNUM written notice of any
claim "within 30 days of the date disability starts, if that is
possible" or else "as soon as it is reasonably possible to do
so." In addition, the employee must provide proof of the
claim "no later than 90 days after the end of the elimination
period," which ends 180 days after the onset of the disability,
or else "as soon as reasonably possible," but in no event more
than "one year after the time proof is otherwise required."
Therefore, the latest an employee may file a timely proof of
claim is 270 days plus one year after the onset of her
disability.

In 1991 O'Connor was an assistant manager in a Northern
California branch office of Western Federal, which had its
principal place of business in Southern California. In July
1991 O'Connor became disabled, took a leave of absence, and
received workers' compensation benefits. Western Federal
terminated her employment effective August 7, 1992.

O'Connor contends that despite her asking repeatedly
whether she was entitled to additional benefits Western Fed-
eral never told her about the long-term disability plan. Nor
did O'Connor ever receive a summary plan description, as
required by the ERISA.

In early 1993 O'Connor learned from a friend about the
long-term disability plan. On March 18 of that year O'Con-
nor submitted a notice of claim to Western Federal and sent
the physician statement portion of the proof-of-claim form to
her doctor, who forwarded the completed form to Western
Federal in May. UNUM received the proof-of-claim form in
mid-May, 42 or 43 days late. In July UNUM informed
O'Connor of its final decision to deny her claim because she
had not filed the proof of claim within the time limit set by
the plan.

Meanwhile, in June 1993 the United States had placed
Western Federal into receivership, and the Resolution Trust
Corporation had been appointed receiver. Subsequently, the
Federal Deposit Insurance Corporation succeeded the RTC
as receiver.

In September 1995 O'Connor filed suit against UNUM,
Western Federal, and the receiver in the United States
District Court for the Northern District of California. The
FDIC moved to dismiss and in September 1996 the court held
that the case was in the wrong venue because a claim against
the FDIC as receiver must be filed in either the district in
which the depository institution had its principal place of
business (in this case the Central District of California), or in
the District of Columbia. See 12 U.S.C. s 1821(d)(6). Based
upon O'Connor's preference the case was transferred from
the Northern District of California to the District of Colum-
bia.

After the transfer, however, O'Connor moved to retransfer
the case back to the Northern District of California; if venue
was not proper there for a case against the FDIC, then
O'Connor invited the court to dismiss the FDIC as a party.
In opposition UNUM argued that it was planning to move for
summary judgment and that in the interest of judicial econo-
my the court should decide its motion before deciding O'Con-
nor's motion to retransfer. In August 1997 the district court
granted UNUM's motion for summary judgment, holding that

the terms of UNUM's disability benefits policy are clear
and unambiguous, and ... pursuant to the policy's terms,

plaintiff was required to file her proof of claim for long
term disability benefits by no later than April 7, 1992 ...
and failed to do so.

The court thereupon transferred the case against the FDIC
to the Central District of California, and O'Connor appealed.

II. Analysis

O'Connor's primary argument is that the district court
erred in granting summary judgment to UNUM because
UNUM failed to submit any evidence that it was prejudiced
by O'Connor's failure to file timely proof of her claim. Here
O'Connor relies upon the so-called "notice-prejudice" rule of
California, which provides:

[A] defense based on an insured's failure to give timely
notice [of a claim] requires the insurer to prove that it
suffered substantial prejudice. Prejudice is not pre-
sumed from delayed notice alone. The insurer must
show actual prejudice, not the mere possibility of preju-
dice.

Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d
815, 845 (Cal. Ct. App. 1993) (citations omitted); see Clemmer
v. Hartford Ins. Co., 587 P.2d 1098, 1106-07 (Cal. 1978) (in
banc). UNUM argues not that it suffered substantial preju-
dice, but rather that the notice-prejudice rule is preempted
by the ERISA.

The ERISA provides broadly for the preemption of "all
State laws insofar as they may now or hereafter relate to any
employee benefit plan described in section 1003(a) of this
title," 29 U.S.C. s 1144(a), subject to certain exceptions. An
exception is to be found in the "saving" clause for "any law of
any State which regulates insurance, banking, or securities."
Id. s 1144(b)(2)(A).

The parties agree that the notice-prejudice rule "relate[s]
to an[ ] employee benefit plan" covered by the ERISA, id.
s 1144(a), and therefore falls within the general preemption
provision of the ERISA. What they dispute is whether the
saving clause applies.

In Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 48
(1987), the Supreme Court described the test by which we are
to determine whether a state law "regulates insurance" within
the meaning of the saving clause: Take a "common-sense
view" of the term "regulates insurance," and look to the three
factors the Court has previously identified for determining
whether an activity comes within the "business of insurance"
as that term is used in the McCarran-Ferguson Act, 15
U.S.C. ss 1011-1015. The three factors are:

"[F]irst, whether the practice has the effect of transfer-
ring or spreading a policyholder's risk; second, whether
the practice is an integral part of the policy relationship
between the insurer and the insured; and third, whether
the practice is limited to entities within the insurance
industry."

Pilot Life, 481 U.S. at 48-49 (quoting Union Labor Life Ins.
Co. v. Pireno, 458 U.S. 119, 129 (1982)); see Metropolitan
Life Ins. Co. v. Massachusetts, 471 U.S. 724, 742-44 (1985).

Applying these factors to a similar long-term disability
benefit plan issued by UNUM the Ninth Circuit, in Cisneros
v. UNUM Life Insurance Co. of America, 134 F.3d 939
(1998), pet. for cert. filed, 66 U.S.L.W. 3773 (U.S. May 20,
1998) (No. 97-1867), held that the California notice-prejudice
rule comes within the saving clause of, and therefore is not
preempted by, the ERISA. After first agreeing with UNUM
that the employee in that case had failed to comply with the
unambiguous deadline for submitting a proof of claim, id. at
943, the Ninth Circuit rejected UNUM's argument that the
ERISA preempted the notice-prejudice rule and reversed
summary judgment in favor of UNUM because the insurer
had not shown substantial prejudice from the delay.

The Cisneros court held that the notice-prejudice rule was
not preempted specifically because it is covered by the saving
clause. With respect to the "common sense" part of the test
laid out in Pilot Life, the court stated:

[B]y requiring the insurer to prove prejudice before
enforcing proof-of-claim requirements, the notice-

prejudice rule dictates the terms of the relationship
between the insurer and insured and so seems, as a
matter of common sense, to "regulate insurance." The
rule is directed specifically at the insurance industry and
is applicable only to insurance contracts.

Id. at 945. With respect to the McCarran-Ferguson factors,
the court held that the first factor did not favor saving the
notice-prejudice rule because "it does not alter the allocation
of risk for which the parties initially contracted, namely the
risk of lost income from long-term disability." Id. at 946.*
The second and third factors, however, "weigh[ed] heavily in
favor" of saving the notice-prejudice rule, respectively be-
cause that rule "dictates the terms of the relationship be-
tween the insurer and the insured, and consequently, is
integral to that relationship," and because it "applies only to
the insurance industry." Id.

The court concluded that although only two of the three
McCarran-Ferguson factors favored saving the notice-
prejudice rule from preemption, on balance that was enough.

[W]e can find no sense in concluding that this particular
state law does not regulate insurance when it so clearly
does. If California's rule does not regulate insurance,
what does it regulate? A rote application of the risk
spreading factor would work unreasoned mischief against
the broad purpose of the saving clause, eliminating Cali-
fornia's notice-prejudice insurance rule from its reach.

Id.

UNUM's primary argument against applying the notice-
prejudice rule here is that a state law "regulates insurance"
within the meaning of the saving clause only if all three
McCarran-Ferguson factors favor that characterization--a
position that the Fifth Circuit has expressly adopted, see, e.g.,
Cigna Healthplan of La., Inc. v. Louisiana, 82 F.3d 642, 650

__________
* O'Connor does not argue that the notice-prejudice rule has
the effect of transferring or spreading a policyholder's risk. There-
fore, while we adopt the reasoning of Cisneros, we have no occasion
in this case to decide whether Cisneros was correct upon that point.

(5th Cir. 1996); Tingle v. Pacific Mut. Ins. Co., 996 F.2d 105,
107, 110 (5th Cir. 1993), and the Eleventh Circuit has implicit-
ly followed, see Anschultz v. Connecticut Gen. Life Ins. Co.,
850 F.2d 1467, 1469 (11th Cir. 1988) (holding that statute
"fails to satisfy all of the criteria of the McCarran-Ferguson
Act and, thus, falls outside the ERISA saving clause"); cf.,
e.g., Brewer v. Lincoln Nat'l Life Ins. Co., 921 F.2d 150, 153
(8th Cir. 1990) (common-law rule of contract interpretation
not saved because it failed two factors); Howard v. Gleason
Corp., 901 F.2d 1154, 1158-59 (2d Cir. 1990) (insurance notice
statute not saved because it failed common sense test and two
of three factors); Kelley v. Sears, Roebuck & Co., 882 F.2d
453, 456 (10th Cir. 1989) (unfair practices statute not saved
because it failed two of three factors). In addition, UNUM
relies upon Group Life & Health Insurance Co. v. Royal
Drug Co., 440 U.S. 205 (1979) (holding that agreements
between insurer and pharmacies setting price of prescriptions
is not "business of insurance" within McCarran-Ferguson Act
for purpose of exemption from antitrust laws), for the propo-
sition that the first factor--whether the rule transfers or
spreads a policyholder's risk--is the most important.

These two related arguments are not persuasive. We think
the better reading of the Supreme Court's McCarran-
Ferguson Act cases is that none of the factors in the test is
by itself determinative of what constitutes the business of
insurance. Certainly nothing in Royal Drug means that any
practice outside the core risk-spreading function of insur-
ance--such as requiring notice and proof of a claim--cannot
still be a part of the "business of insurance." Indeed, in the
subsequent antitrust case in which the three-factor test first
appears, the Court clearly stated, albeit in a dictum, that
"[n]one of these criteria is necessarily determinative in itself."
Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982).
Similarly, in Metropolitan Life, where the Court first applied
the McCarran-Ferguson test in order to determine whether a
state law "regulates insurance" for the purpose of the ERISA
saving clause, the three factors were said to be "relevant" to
the question whether a state law is a regulation of the
"business of insurance." 471 U.S. at 743. That the factors

are merely "relevant" suggests that they need not all point in
the same direction, else they would be "required."

Moreover, because the notice-prejudice rule so clearly
passes the common sense part of the test set out in Metropol-
itan Life, we think it would be unreasonable to hold that the
rule does not regulate the business of insurance because it
does not transfer or spread a policyholder's risk. As the
Ninth Circuit asked rhetorically in Cisneros, "[i]f California's
rule does not regulate insurance, what does it regulate?"
Furthermore, the second McCarran-Ferguson factor strongly
supports the conclusion that the notice-prejudice rule regu-
lates the business of insurance; the rule directly regulates
the relationship between insurer and insured, which the Su-
preme Court has indicated is the "focus" of the term "busi-
ness of insurance" in the McCarran-Ferguson Act. "Statutes
aimed at protecting or regulating this relationship, directly or
indirectly, are laws regulating the 'business of insurance.' "
SEC v. National Securities, Inc., 393 U.S. 453, 460 (1969).

UNUM argues next that two other courts of appeals have
held that ERISA preempts state notice rules, here referring
to Nazay v. Miller, 949 F.2d 1323 (3d Cir. 1991), and Howard
v. Gleason Corp., 901 F.2d 1154 (2d Cir. 1990). Although the
court in Nazay did hold that the district court improperly
imported a state prejudice rule into the notice requirement of
a health insurance plan, see 949 F.2d at 1336-37, the opinion
addresses neither the preemption nor the saving provisions of
the ERISA. In Howard the court determined that the state
rule at issue fell outside the saving clause largely because it
applied both to insurers and to employers, see 901 F.2d at
1158-59; the notice-prejudice rule of California, however,
applies only to insurers. Therefore, neither Nazay nor How-
ard controls this case.

Finally, UNUM relies upon six cases upholding the deci-
sions of insurers not to provide benefits to employees who
failed to file timely proof of their claims. In four of the cases
UNUM cites there was no issue of preempting a state notice-
prejudice or similar rule. See Shealy v. UNUM Life Ins. Co.
of Am., 979 F. Supp. 395 (D.S.C. 1997), aff'd mem., --

F.3d --, 1998 WL 231258 (4th Cir. 1998); Lehmann v.
UNUM Life Ins. Co. of Am., 916 F. Supp. 897 (E.D. Wis.
1996); Kennedy v. System One Holdings, Inc., 835 F. Supp.
947 (S.D. Tex. 1993); Freeman v. UNUM Life Ins. Co., 1990
WL 640294 (D. Minn. Mar. 27, 1990). In the other two cases
the courts dismissed almost entirely without analysis the
argument that state law required a showing of prejudice. See
Oas v. Royal MacCabees Life Ins. Co., 1995 WL 664640, at *7
(E.D. Pa. Nov. 6, 1995) (citing Nazay and stating that there
the Third Circuit "rejected the idea of an Insurance Company
having to establish some sort of prejudice"), aff'd mem., 92
F.3d 1172 (3d Cir. 1996); Mackey v. UNUM Life Ins. Co. of
Am., No. C86-5265, at 5 (W.D. Wash. May 12, 1987) ("State
law is inapplicable in this ERISA case"). Therefore these
cases do not alter our conclusion.

III. Conclusion

We hold that the ERISA does not preempt the notice-
prejudice rule of California. Therefore, because UNUM did
not provide evidence of substantial prejudice the district court
erred when it granted UNUM's motion for summary judg-
ment. Accordingly we remand this matter for the district
court to determine whether, with UNUM still a defendant,
the case should stay in the District of Columbia or be
transferred elsewhere.

So ordered.