ERISA did not preempt a Louisiana Department of Insurance directive that limits insurer’s subrogation and reimbursement rights to cases where covered individuals have been “made whole”, the 5^th U.S. Circuit court of Appeals ruled in Benefit Recovery Inc. v. Donelon, 2008 WL 642972 (5^th Cir. March 11,2008).

Louisiana’s Directive 175, issued Jan. 3, 2003, provided that ” any right of recovery from third parties on the part of the insurer, whether by subrogation or reimbursement, is subordinate to the insured’s right to be fully compensated for his damages. It also required insurers invoking a subrogation or reimbursement provision to “contribute to the attorney’s fees incurred in obtaining a recovery from the third party.”

A proposed health insurance form from Ochsner Health Plan was rejected for failing to include terms from Directive 175. In August 2003, Benefit Recovery Inc., a provider of subrogation services to Ochsner, sued Louisiana Commissioner of Insurance James Donelon, saying that ERISA preempted the directive.

The district court ruled in favor of the commissioner’s argument that the Directive 175 is spared from preemption, because the directive regulates the insurance industry and not ERISA plans.  ERISA’s preemption provisions contain an exception that allows states to continue to regulate “the business of insurance,” and it preempts only state and local laws that “mandate mployee benefit structures or their administration” or “refer to” ERISA regulated plans.

The appeals court concurred with the district court that Directive 175 targets insurers, allowing it to fit within ERISA’s savings clause, which protects state laws that regulate, insurance from preemption.

In Kentucky Assoc. of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003), the U.S Supreme Court developed a test to determine whether a state law fits in the ERISA savings clause. The court in Miller stated that the law in question must: be specifically directed toward entices engaged in insurance: and substantially affect risk pooling arrangements of insurer and insured.

As for the first test, the appeals court was unequivocal: “There can be no question that Directive 175 is specifically directed toward entities engaged in insurance, because it specially requires insurance companies to include certain terms in their contracts.”

For the second, the 5^th Circuit asserted that the directive substantially affected risk pooling ” by telling insurers and insured what bargains are acceptable.” The court ruled that it was saved from ERISA preemption.

Tags:

This entry was posted by Adam V. Russo on Tuesday, May 27th, 2008 at 12:58 pm and is filed under 5th, 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.