You and I make a deal: You pay me monthly installments and when an event occurs, I will pay you a set amount of money (we’ll call this deal “life insurance”). After several years, I notify you that you have failed to return a required document, allowing me to void the life insurance. The event occurs and I refuse to pay. In most circumstances you could potentially make claims against me for negligent misrepresentation or fraud; constructive fraud; and negligent or intentional infliction of emotional distress. But if I were your employer, all of these claims would be preempted by the Employee Retirement Income Security Act (ERISA).
In Prince v. Sears Holdings Corp., No. 16-1075 (4th Cir. Jan. 27, 2017), the 4th Circuit reiterated that regardless of what a plaintiff calls a claim or how the plaintiff frames the claim, if ERISA applies, then ERISA pre-empts that claim. In 2011, Prince purchased a life insurance policy on his wife through his employer, Sears. Sears sent a confirmation letter and began withholding premiums from Prince’s pay. Later that year, Mrs. Prince was diagnosed with cancer. In 2012, Prince checked his benefits summary with Sears, which confirmed the life insurance. In 2013, Sears notified Prince that he had not returned a required document in 2011—Prince denied receiving the document but had no proof it had not been sent—and, therefore, Prince’s insurance would be canceled. Mrs. Prince died in 2014 and Sears denied Prince’s claim on the insurance policy.
Prince filed suit alleging two state law claims, “constructive fraud/negligent misrepresentation” and “intentional/reckless infliction of emotional distress,” based on Sears’ alleged misrepresentations. Prince framed his claims based on Sears’ actions prior to refusing to pay the proceeds of the insurance policy—i.e., Sears acknowledgements that Prince had the insurance policy and the withholdings from Prince’s pay. In fact, Prince did not dispute that Sears’ decision to deny benefits was proper.
Despite Prince’s framing of the facts and issues, the 4th Circuit easily found that Prince’s claims were pre-empted by ERISA. ERISA completely pre-empts state law claims when:
- The plaintiff has standing to pursue his claim under ERISA;
- the claim falls within the scope of an ERISA provision; and
- the claim requires an interpretation of the contract governed by ERISA.
Sonoco Prods. Co. v. Physicians Health Plan, Inc., 338 F.3d 366, 372 (4th Cir. 2003). As an employee of Sears, Prince met the first prong. The 4th Circuit also found that Prince’s claims satisfied prong 3 since they required interpretation of Sears’ ERISA plan contract. Both of Prince’s claims required an examination of Sears’ actions in administering the plan: The negligent misrepresentation claim examined Sears’ duty as plan administrator and the emotional distress claim examined if Sears’ compliance with its duties were “outrageous.”
Prince’s claims also fell within the scope of an ERISA provision: Sears’ duty to administer its benefits plans. Although Prince attempted to distinguish Sears’ actions in wrongfully stating Prince had coverage for two years and withholding premiums from Sears’ actions in denying payment of benefits, the 4th Circuit found that all of Sears’ actions were taken as the plan administrator. As plan administrator, Sears was required to make the premium withholdings and provide the documentation. Sears had no other independent legal duty to Prince with regard to the life insurance policy. Since all of Sears’ actions occurred in administering the plan, Prince’s claims fell within the scope of an ERISA provision.
The 4th Circuit’s opinion that ERISA pre-empted Prince’s claims was, for the most part, unsurprising in light of 4th Circuit precedent. Tucked away in the opinion’s final footnote is a reminder to all of us that litigating a claim instead of seeking alternative resolution may not be the best option. The district court dismissed Prince’s complaint without prejudice so that he could exhaust his administrative remedies—or mediate—and refile the suit. It appears that Sears had previously pushed for Prince to exhaust his administrative remedies and offered to reopen enrollment for Mrs. Prince based on her 2011 medical information. While proceeding through the administrative remedies or a mediation may not resolve Prince’s claim, it would likely have been more fruitful than engaging in over two years of litigation—and accumulating attorney’s fees and costs—to have the court dismiss his lawsuit.