Compliance March 3, 2003

ERISA Trumps Oklahoma Bad Faith Law: Court

March 3, 2003 (PLANSPONSOR.com) - A federal appeals court has agreed with a lower court's ruling that Oklahoma's bad faith law is preempted by ERISA
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The case ruled on by the US 10 th Circuit Court of Appeals involved a decision by a federal judge in the US District Court for the Northern District of Oklahoma that ERISA prohibited plaintiff Sallee Conover from pursuing a state bad faith claim against her employer’s long-term disability (LTD) insurance plan.

The ERISA preemption issue has generated a large amount of case law as federal courts around the country grapple with how extensive ERISA’s application should be when it comes to a variety of state statutes. Federal law provides that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” but does not legally interfere with state laws “regulat[ing] insurance.”   In their appeals court case, Conover’s lawyers argued that Oklahoma’s bad faith law is saved from preemption because of the insurance-regulation clause, but appeals judges rejected that contention.

According to the appeals ruling, Conover’s LTD insurance plan was administered by Aetna US Healthcare. Conover was injured in a car accident and submitted a claim to Aetna for disability benefits. Aetna approved her claim and began making monthly benefit payments to her.

After further investigation, however, Aetna determined Conover could perform her job and suspended her benefits. Conover responded by filing a lawsuit in Tulsa County District Court, alleging intentional breach of contract and bad faith. The bad faith claim was based on Oklahoma state law. Aetna successfully had the case transferred to federal court.

A few months later, Aetna reviewed additional information regarding Conover’s claim for disability benefits and determined she remained eligible for the benefits. Aetna reinstated her benefits and paid all back benefits due. Around the same time, Aetna asked the lower federal court for a determination regarding ERISA preemption. The lower court ruled that ERISA preempted Conover’s bad faith allegation and the appeals judges agreed in the latest decision.

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