The Erisa Trap:
When Employees Can't Win
Workers Find Limited Rights To Sue Over Insurance Claims;
Pension Act `Turned on Its Head'

By Christopher Oster
The Wall Street Journal via Dow Jones

IN 1997, when Donya Anderson decided to deduct $7.36 a month from her paycheck to pay for disability-income insurance, she thought it was worth it for peace of mind.

Her decision seemed vindicated three years later, when, three months pregnant with her fourth child, she submitted a claim with the insurer, UnumProvident Corp. Citing complications with Ms. Anderson's previous pregnancies and a job at a carpet factory that required lifting 50-pound bales of fabric and pushing 1,000-pound carts, her obstetrician had told her she should stop working.

But UnumProvident denied the claim, leaving Ms. Anderson, 36 years old, no choice but to quit her job in the Andalusia, Ala., factory and apply for government assistance. Then, when she tried to sue in state court, the insurer successfully argued the case should be heard in federal court -- and she wasn't eligible to seek punitive damages. An UnumProvident spokesman said the company couldn't discuss the case in detail "because we do not have a signed authorization from Ms. Anderson to discuss the claim and it's our policy
to protect the privacy of our policyholders."

The unraveling of Ms. Anderson's safety net highlights a new frustration among hundreds of thousands of workers across the country who have used chunks of their paychecks to buy insurance policies, as Ms. Anderson did, through an employer.

The catch has come in the form of a 30-year-old law that long has hamstrung employees' ability to sue over disputes involving their employer-sponsored health-care coverage. Known as the Employee Retirement Income Security
Act, or Erisa, the law was passed in the early 1970s to protect individuals' pension rights. The law exempted employer-sponsored pension plans from state law and the Supreme Court later ruled that punitive damages couldn't be awarded in Erisa cases. Over the years, courts have ruled that insurance policies considered employee benefits also are subject to Erisa's state-law pre-emption. Long a bone of contention with plaintiffs' lawyers, the law has withstood multiple court challenges.

In a development with far-reaching implications for workers, Erisa's grasp now extends far beyond pensions and health insurance. During the past decade, insurers have ratcheted up sales of other policies through employers. Sales of so-called group policies are growing at twice the pace of individual policies. Disability-income insurance, dental coverage, long-term care and dread-disease coverage are among the most popular.

And in rapidly increasing numbers, workers themselves are paying the premiums. Many workers believe they are getting a better deal by buying insurance through their employers. The premiums typically are cheaper and the insurers aren't as likely to turn away applicants. But, like Ms. Anderson, many consumers aren't aware that the policies carry restrictions, should disputes arise, that policies bought by shopping around wouldn't.

Insurers and benefits consultants call this growing type of coverage a "voluntary" benefit. As recently as the late 1980s, insurance policies purchased through employers, but paid for by employees, were rare. But during the past decade, premiums collected by insurers for such coverage has grown roughly 15% a year, according to benefits-expert Eastbridge Consulting, of Avon, Conn. Between 1997 and 2002 alone, premiums paid on such policies jumped to $4 billion from $2 billion. Sixty-four percent of U.S. employers offer at least one
"voluntary" benefit, according to Eastbridge.

Insurers, including UnumProvident and MetLife Inc., say the increasing emphasis on selling insurance through employers has nothing to do with the advantages offered by Erisa. Instead, they say, the channel simply is more efficient than trying to peddle one policy at a time outside the workplace. They note it also allows them to spread their risks better.

But it is clear they have a lot to gain by going this route. While some policies sold through a workplace with employee-paid premiums aren't subject to Erisa, U.S. Department of Labor guidelines issued in 1975 specify that the
bar is high for exceptions. If an employer has endorsed a program or pays some portion of the premiums, then the policyholder likely will find that Erisa kicks in.

"They've turned Erisa on its head," says Joseph Belth, professor emeritus for insurance at Indiana University in Bloomington. "It was supposed to protect employees, and it's being used to protect insurers."

The insurers say Erisa has no bearing on their claims decisions. But a 1995 Provident Corp. memorandum, unearthed by policyholders' attorneys and introduced as evidence in a lawsuit in federal court in San Francisco decided last year in favor of a policyholder, shows that UnumProvident, at least, is aware of the benefits available under Erisa. (Provident Corp. and Unum Corp. merged in 1999 to form UnumProvident.) In the memo, a Provident assistant vice president wrote that a colleague had identified 12 claims settled for $7.8 million, that, if governed by Erisa, "our liability would have been between zero and $0.5 million." The memo states, "While our objective is to pay all valid claims and deny invalid claims, there are some gray areas, and Erisa applicability
may influence our course of action."

It adds: "The advantages of Erisa coverage in litigious situations are enormous."

UnumProvident says the memo was merely an attempt by the company to comply better with an employee-benefit law that governs many of its claims practices.

Consumers' frustrations with the legal restrictions that accompany their payroll purchases just now may be reaching a boiling point, with disability-income cases the first to surface in the legal system.

In Ms. Anderson's instance, she and her employer, Shaw Industries of Dalton, Ga., a unit of Berkshire Hathaway Inc., contend her disability-income insurance wasn't an employee benefit at all. In court documents filed by Ms. Anderson's lawyer, Shaw's head of human resources indicated the company's role was limited to referencing the optional insurance in its employment materials and withholding the premium payments from Ms. Anderson's paychecks, which it forwarded to UnumProvident. Shaw's "employee information portfolio," which describes the company's benefits package, contains no reference to Erisa. The actual disability-income insurance policy -- which Ms. Anderson never saw because the document wasn't routinely supplied to Shaw's insured employees does contain language noting Erisa's application.

Ms. Anderson's lawsuit, filed in federal court in Montgomery, Ala., says UnumProvident forced her "to choose between the welfare of her three children and the welfare of her unborn child." Ms. Anderson's lawyer, Thomas Sinclair of Campbell, Waller & Poer LLC, in Birmingham, Ala., says his client, if allowed, will seek punitive damages in federal court in an amount that would discourage UnumProvident from continuing what he says are "bad-faith claims practices." While the American Council of Obstetricians and Gynecologists guidelines require doctors to decide whether pregnant women are disabled, Unum overruled Ms. Anderson's physician after a single call from one of its nurses to a
billing clerk at the doctor's office, according to court filings by Mr. Sinclair. Unum's spokesman says the company didn't deny the claim based on the single phone call.

Mr. Sinclair filed a motion asking the court to reconsider a ruling from this past November that the policy is governed by Erisa. But last month, Judge Ira DeMent again ruled that it was an Erisa policy. He stayed Ms. Anderson's litigation, however, pending her lawyer's appeal of the Erisa matter to a federal appeals court.

In rare instances, judges have found ways to punish insurers despite Erisa. For instance, John G. Schwartz, a state judge in Redwood City, Calif., awarded attorneys' fees of $1.25 million in a case in which the plaintiff was awarded one-tenth that amount. When UnumProvident's lawyers sought for lower attorneys' fees, Judge Schwartz scolded that Unum's actions in denying the claim "shock my conscience." The case was heard in state court because a federal judge held that Unum hadn't proved the case concerned an Erisa plan and sent it back to state court. The state-court judge, however, determined the case was subject to Erisa.

The case involved Patricia Patrick, 56, a weigh-master at a rock quarry in Brisbane, Calif., who had paid her own disability-income insurance premiums through payroll deduction during the mid-1980s. She had lost her hearing while working at the quarry. Ms. Patrick challenged UnumProvident's decision to end her benefits in 1994, after she had collected benefits for five years.

Once Unum was successful in contending that Erisa applied, punitive damages were off limits to Ms. Patrick. But Judge Schwartz, in his decision awarding Ms. Patrick $124,664.15 in past benefits, took special note of the actions of a 23-year-old UnumProvident claims specialist who acknowledged he had "never been trained" in certain aspects of the company's claims processes. An appeals court later ordered the trial court to redetermine the amount of attorneys' fees and the parties settled for fees of $500,000.

Even some workers who consider themselves self-employed have falled under the Erisa shield. Bernard Turnoy, 48, is an independent insurance agent in Chicago who helps big businesses arrange life, health and disability-income insurance for their employees. So when he filed a disability-income claim in December 2001, after being diagnosed with a debilitating spinal condition, he understood the business well enough to know his insurer, Liberty Mutual Insurance Co., would ask questions.

But he never anticipated that Liberty, which denied his claim, would say his policy was an employee benefit. "It was unfathomable that someone who is an independent contractor and paying for his own insurance would be governed
by Erisa," says Mr. Turnoy, who filed suit in August 2002 against Liberty in federal court in Chicago, alleging the insurer wrongly denied his claim and seeking restoration of benefits, payment for emotional distress and punitive damages.

The court in January determined Mr. Turnoy's suit was pre-empted by Erisa because he had purchased it through Massachusetts Mutual Life Insurance Co., one of the insurers whose policies Mr. Turnoy sold. The court said Mr. Turnoy's lawyer, Mark DeBofsky of Daley, DeBofsky & Bryant in Chicago, would need to file an amended complaint alleging Erisa-based claims. Liberty declined to comment on the case, citing concerns about continuing litigation.