You may have heard of the case Benefit Recovery, Inc. v. Donelon, et al., 521 F.3d 326 (5th Cir. 2008); F.3d 2008 WL 642972 (5th Cir. La.), 43 Employee Benefits Cas. 1417.  It was likely brought to your attention by someone claiming there is a made whole rule in Louisiana that binds even self-funded employee benefit plans, coming within the purview of ERISA.  This is simply not the case.

In this case, the two sides debate the applicability of the Louisiana Insurance Commissioner’s Directive 175 to insurance policies, despite the applicability of ERISA.

Rest assured that if the Plan is a self-funded plan governed by ERISA, state law is preempted, including any law that requires a contribution to attorney’s fees or adherence to the made whole rule.  Please note that Benefit Recovery, Inc. v. Donelon, et al. does not hold that the made whole rule or common fund doctrine applies to self-funded plans coming within the purview of ERISA.  In fact, the case clearly states that “According to stipulated facts, Directive 175 applies only to insurance policies, not self-funded ERISA benefit plans or entities acting as ‘pure administrators’ of such plans.”

The dispute in the Benefit Recovery case involved the question of whether a fully funded policy of insurance, which is answerable to ERISA, may also be bound by a commissioner’s directive.  Indeed, both fully funded insurance policies and self-funded benefit plans are bound by ERISA.  The main difference between the two, however, is the fact that state laws may also direct policies of insurance thanks to ERISA’s savings clause.  That clause, however, does not allow state regulations to restrict self-funded plans.  The question, in Benefit Recovery, Inc. v. Donelon, et al., was whether, like state laws, directives may also use the savings clause to restrict policies of insurance. 

The court held that the rules described by the Directive 175 do not apply to self-funded plans, but that fully funded policies of insurance, which must obey provisions set forth in ERISA, must also obey the directive; that, like State laws, the directive also binds insurance carriers thanks to the savings clause.

Furthermore, the Plaintiff in this case failed to raise the matter of ERISA preemption at the lower court level.  As such, the Fifth Circuit Court of Appeals could not consider whether ERISA preemption would allow the Plan to avoid mentioning the Directive 175 in its subrogation forms sent to plan members. 

In a nutshell, the case merely asked whether fully funded policies of insurance may use ERISA to avoid directives; would the savings clause exclude or allow the directive.  The Court ruled in the affirmative, the directive is saved and does affect fully funded policies of insurance.

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This entry was posted by Adam V. Russo on Tuesday, October 28th, 2008 at 3:08 pm and is filed under ERISA, Louisiana, Made Whole Rule, Preemption. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.