Bad Faith Insurance and ERISA: An Overview of Available Damages

erisa3In California, insurance companies owe a duty of good faith and fair dealing to the people who they insure.  This duty is often referred to as the “implied covenant of good faith and fair dealing,” and it automatically exists by operation of law in every insurance contract.  As a general rule, if an insurance provider violates the covenant of good faith and fair dealing, a policy holder may sue in tort in addition to bringing a standard breach of contract claim.  Suing in tort is advantageous to a plaintiff because it allows him or her to collect punitive damages in addition to general and special damages for the provider’s breach.  For this reason, attorneys prefer to include a cause of action in tort for bad faith insurance practices whenever possible.

Unfortunately, the Employee Retirement Security Act (“ERISA”) imposes significant limitations on the rights of policy holders to collect damages if their insurance plans fall under the Act.  As you may know, ERISA is a federal body of legislation that establishes minimum standards for retirement, health, and other welfare benefit plans offered by employers to their employees.  The Act expressly preempts all state legislation “relating to” an employee benefit plan, and federal courts have interpreted that phrase broadly, finding that a state law “relates to” a benefit plan “if it has a connection with or reference to such a plan.” (Shaw v. Delta Air Lines)  Courts have emphasized that the Act’s pre-emption clause is not limited to state laws specifically designed to affect employee benefit plans, but rather, extends to any state law allowing for recovery under an applicable plan.  The unfortunate result of this interpretation is that ERISA preempts all common law tort actions for bad faith insurance and, therefore, precludes plaintiffs from collecting common law punitive damages on claims involving covered insurance plans.

ERISA section 502 establishes the exclusive civil causes of action available under the Act.  Specifically, section 502 permits policy holders to recover benefits due under the terms of their plan, to enforce rights under the terms of their plan, or for clarification of rights to future benefits.  Further (and in some instances more importantly), section 502 permits a policy holder to bring a cause of action for breach of fiduciary duty against the persons actually managing and administering their plan.

The exact remedies to which a plaintiff is entitled for breach of fiduciary duty causes of action is currently a subject of legal controversy.  Some courts have suggested that plaintiffs are entitled to be “made whole” for the fiduciary’s breach.  However, it is unclear whether being “made whole” entails receiving damages that a plaintiff incurred as a consequence of the breach (for example, additional expenses that a plaintiff may have been forced to pay as a result of his provider delaying approval for a surgical procedure).

It is further unclear whether being “made whole” allows a plaintiff to collect punitive damages.  Courts have reached opposing conclusions in answering this question. In Russell v. Massachusetts Mutual Life Insurance Co.,the Ninth Circuit held that punitive damages against fiduciaries are contemplated and justified by the Act, although under very “limited circumstances.” To the contrary, the Eighth Circuit, in Dependahl v. Falstaff Brewing Co. gave a sweeping statement of the opposite view, saying that “punitive damages are [not] provided for in ERISA.”  What is clear, fortunately, is that ERISA permits courts to award attorney fees to the prevailing party in an action to collect unpaid benefits.  In terms of remedies available to a plaintiff, this is perhaps the only saving grace of the Act.

In summary, ERISA does not permit plaintiffs to bring state causes of action for bad faith and probably does not allow for consequential or punitive damages in the event of an insurance provider’s breach of fiduciary duty.  It is important to discuss any potential claim you may have regarding your insurance benefits with a qualified attorney to determine whether your benefit plan falls under the Act, and if so, the remedies under the Act that you are entitled to invoke based on the particular facts of your case.