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Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 17, 1998 Decided July 7, 1998

No. 97-5244

Mary O'Connor,

Appellant

v.

UNUM Life Insurance Company of America,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 96cv02158)

Richard L. Davis and Tracy J. Power were on the briefs

for appellant.

J. Snowden Stanley, Jr. argued the cause and filed the

brief for appellee.

Before: Williams, Ginsburg, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

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Ginsburg, Circuit Judge: Mary O'Connor sued her former

employer and its insurance company for their failure to pay

long-term disability benefits under an employee benefit plan.

The district court dismissed the case against the insurance

company because O'Connor failed to submit timely proof of

her claim, and transferred the case against the employer (and

the receiver thereof) to the Central District of California.

For the reasons stated below we reverse.

I. Background

Western Federal Savings and Loan Association provided

its employees with a long-term disability benefit plan insured

by the UNUM Life Insurance Company of America and

governed by the Employee Retirement Income Security Act,

29 U.S.C. s 1001 et seq. Under the terms of the plan an

injured employee must give UNUM written notice of any

claim "within 30 days of the date disability starts, if that is

possible" or else "as soon as it is reasonably possible to do

so." In addition, the employee must provide proof of the

claim "no later than 90 days after the end of the elimination

period," which ends 180 days after the onset of the disability,

or else "as soon as reasonably possible," but in no event more

than "one year after the time proof is otherwise required."

Therefore, the latest an employee may file a timely proof of

claim is 270 days plus one year after the onset of her

disability.

In 1991 O'Connor was an assistant manager in a Northern

California branch office of Western Federal, which had its

principal place of business in Southern California. In July

1991 O'Connor became disabled, took a leave of absence, and

received workers' compensation benefits. Western Federal

terminated her employment effective August 7, 1992.

O'Connor contends that despite her asking repeatedly

whether she was entitled to additional benefits Western Federal never told her about the long-term disability plan. Nor

did O'Connor ever receive a summary plan description, as

required by the ERISA.

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In early 1993 O'Connor learned from a friend about the

long-term disability plan. On March 18 of that year O'Connor submitted a notice of claim to Western Federal and sent

the physician statement portion of the proof-of-claim form to

her doctor, who forwarded the completed form to Western

Federal in May. UNUM received the proof-of-claim form in

mid-May, 42 or 43 days late. In July UNUM informed

O'Connor of its final decision to deny her claim because she

had not filed the proof of claim within the time limit set by

the plan.

Meanwhile, in June 1993 the United States had placed

Western Federal into receivership, and the Resolution Trust

Corporation had been appointed receiver. Subsequently, the

Federal Deposit Insurance Corporation succeeded the RTC

as receiver.

In September 1995 O'Connor filed suit against UNUM,

Western Federal, and the receiver in the United States

District Court for the Northern District of California. The

FDIC moved to dismiss and in September 1996 the court held

that the case was in the wrong venue because a claim against

the FDIC as receiver must be filed in either the district in

which the depository institution had its principal place of

business (in this case the Central District of California), or in

the District of Columbia. See 12 U.S.C. s 1821(d)(6). Based

upon O'Connor's preference the case was transferred from

the Northern District of California to the District of Columbia.

After the transfer, however, O'Connor moved to retransfer

the case back to the Northern District of California; if venue

was not proper there for a case against the FDIC, then

O'Connor invited the court to dismiss the FDIC as a party.

In opposition UNUM argued that it was planning to move for

summary judgment and that in the interest of judicial economy the court should decide its motion before deciding O'Connor's motion to retransfer. In August 1997 the district court

granted UNUM's motion for summary judgment, holding that

the terms of UNUM's disability benefits policy are clear

and unambiguous, and ... pursuant to the policy's terms,

plaintiff was required to file her proof of claim for long

term disability benefits by no later than April 7, 1992 ...

and failed to do so.

The court thereupon transferred the case against the FDIC

to the Central District of California, and O'Connor appealed.

II. Analysis

O'Connor's primary argument is that the district court

erred in granting summary judgment to UNUM because

UNUM failed to submit any evidence that it was prejudiced

by O'Connor's failure to file timely proof of her claim. Here

O'Connor relies upon the so-called "notice-prejudice" rule of

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California, which provides:

[A] defense based on an insured's failure to give timely

notice [of a claim] requires the insurer to prove that it

suffered substantial prejudice. Prejudice is not presumed from delayed notice alone. The insurer must

show actual prejudice, not the mere possibility of prejudice.

Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d

815, 845 (Cal. Ct. App. 1993) (citations omitted); see Clemmer

v. Hartford Ins. Co., 587 P.2d 1098, 1106-07 (Cal. 1978) (in

banc). UNUM argues not that it suffered substantial prejudice, but rather that the notice-prejudice rule is preempted

by the ERISA.

The ERISA provides broadly for the preemption of "all

State laws insofar as they may now or hereafter relate to any

employee benefit plan described in section 1003(a) of this

title," 29 U.S.C. s 1144(a), subject to certain exceptions. An

exception is to be found in the "saving" clause for "any law of

any State which regulates insurance, banking, or securities."

Id. s 1144(b)(2)(A).

The parties agree that the notice-prejudice rule "relate[s]

to an[ ] employee benefit plan" covered by the ERISA, id.

s 1144(a), and therefore falls within the general preemption

provision of the ERISA. What they dispute is whether the

saving clause applies.

In Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 48

(1987), the Supreme Court described the test by which we are

to determine whether a state law "regulates insurance" within

the meaning of the saving clause: Take a "common-sense

view" of the term "regulates insurance," and look to the three

factors the Court has previously identified for determining

whether an activity comes within the "business of insurance"

as that term is used in the McCarran-Ferguson Act, 15

U.S.C. ss 1011-1015. The three factors are:

"[F]irst, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether

the practice is an integral part of the policy relationship

between the insurer and the insured; and third, whether

the practice is limited to entities within the insurance

industry."

Pilot Life, 481 U.S. at 48-49 (quoting Union Labor Life Ins.

Co. v. Pireno, 458 U.S. 119, 129 (1982)); see Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724, 742-44 (1985).

Applying these factors to a similar long-term disability

benefit plan issued by UNUM the Ninth Circuit, in Cisneros

v. UNUM Life Insurance Co. of America, 134 F.3d 939

(1998), pet. for cert. filed, 66 U.S.L.W. 3773 (U.S. May 20,

1998) (No. 97-1867), held that the California notice-prejudice

rule comes within the saving clause of, and therefore is not

preempted by, the ERISA. After first agreeing with UNUM

that the employee in that case had failed to comply with the

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unambiguous deadline for submitting a proof of claim, id. at

943, the Ninth Circuit rejected UNUM's argument that the

ERISA preempted the notice-prejudice rule and reversed

summary judgment in favor of UNUM because the insurer

had not shown substantial prejudice from the delay.

The Cisneros court held that the notice-prejudice rule was

not preempted specifically because it is covered by the saving

clause. With respect to the "common sense" part of the test

laid out in Pilot Life, the court stated:

[B]y requiring the insurer to prove prejudice before

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prejudice rule dictates the terms of the relationship

between the insurer and insured and so seems, as a

matter of common sense, to "regulate insurance." The

rule is directed specifically at the insurance industry and

is applicable only to insurance contracts.

Id. at 945. With respect to the McCarran-Ferguson factors,

the court held that the first factor did not favor saving the

notice-prejudice rule because "it does not alter the allocation

of risk for which the parties initially contracted, namely the

risk of lost income from long-term disability." Id. at 946.*

The second and third factors, however, "weigh[ed] heavily in

favor" of saving the notice-prejudice rule, respectively because that rule "dictates the terms of the relationship between the insurer and the insured, and consequently, is

integral to that relationship," and because it "applies only to

the insurance industry." Id.

The court concluded that although only two of the three

McCarran-Ferguson factors favored saving the noticeprejudice rule from preemption, on balance that was enough.

[W]e can find no sense in concluding that this particular

state law does not regulate insurance when it so clearly

does. If California's rule does not regulate insurance,

what does it regulate? A rote application of the risk

spreading factor would work unreasoned mischief against

the broad purpose of the saving clause, eliminating California's notice-prejudice insurance rule from its reach.

Id.

UNUM's primary argument against applying the noticeprejudice rule here is that a state law "regulates insurance"

within the meaning of the saving clause only if all three

McCarran-Ferguson factors favor that characterization--a

position that the Fifth Circuit has expressly adopted, see, e.g.,

Cigna Healthplan of La., Inc. v. Louisiana, 82 F.3d 642, 650

__________

* O'Connor does not argue that the notice-prejudice rule has

the effect of transferring or spreading a policyholder's risk. Therefore, while we adopt the reasoning of Cisneros, we have no occasion

in this case to decide whether Cisneros was correct upon that point.

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(5th Cir. 1996); Tingle v. Pacific Mut. Ins. Co., 996 F.2d 105,

107, 110 (5th Cir. 1993), and the Eleventh Circuit has implicitly followed, see Anschultz v. Connecticut Gen. Life Ins. Co.,

850 F.2d 1467, 1469 (11th Cir. 1988) (holding that statute

"fails to satisfy all of the criteria of the McCarran-Ferguson

Act and, thus, falls outside the ERISA saving clause"); cf.,

e.g., Brewer v. Lincoln Nat'l Life Ins. Co., 921 F.2d 150, 153

(8th Cir. 1990) (common-law rule of contract interpretation

not saved because it failed two factors); Howard v. Gleason

Corp., 901 F.2d 1154, 1158-59 (2d Cir. 1990) (insurance notice

statute not saved because it failed common sense test and two

of three factors); Kelley v. Sears, Roebuck & Co., 882 F.2d

453, 456 (10th Cir. 1989) (unfair practices statute not saved

because it failed two of three factors). In addition, UNUM

relies upon Group Life & Health Insurance Co. v. Royal

Drug Co., 440 U.S. 205 (1979) (holding that agreements

between insurer and pharmacies setting price of prescriptions

is not "business of insurance" within McCarran-Ferguson Act

for purpose of exemption from antitrust laws), for the proposition that the first factor--whether the rule transfers or

spreads a policyholder's risk--is the most important.

These two related arguments are not persuasive. We think

the better reading of the Supreme Court's McCarranFerguson Act cases is that none of the factors in the test is

by itself determinative of what constitutes the business of

insurance. Certainly nothing in Royal Drug means that any

practice outside the core risk-spreading function of insurance--such as requiring notice and proof of a claim--cannot

still be a part of the "business of insurance." Indeed, in the

subsequent antitrust case in which the three-factor test first

appears, the Court clearly stated, albeit in a dictum, that

"[n]one of these criteria is necessarily determinative in itself."

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982).

Similarly, in Metropolitan Life, where the Court first applied

the McCarran-Ferguson test in order to determine whether a

state law "regulates insurance" for the purpose of the ERISA

saving clause, the three factors were said to be "relevant" to

the question whether a state law is a regulation of the

"business of insurance." 471 U.S. at 743. That the factors

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are merely "relevant" suggests that they need not all point in

the same direction, else they would be "required."

Moreover, because the notice-prejudice rule so clearly

passes the common sense part of the test set out in Metropolitan Life, we think it would be unreasonable to hold that the

rule does not regulate the business of insurance because it

does not transfer or spread a policyholder's risk. As the

Ninth Circuit asked rhetorically in Cisneros, "[i]f California's

rule does not regulate insurance, what does it regulate?"

Furthermore, the second McCarran-Ferguson factor strongly

supports the conclusion that the notice-prejudice rule regulates the business of insurance; the rule directly regulates

the relationship between insurer and insured, which the Supreme Court has indicated is the "focus" of the term "business of insurance" in the McCarran-Ferguson Act. "Statutes

aimed at protecting or regulating this relationship, directly or

indirectly, are laws regulating the 'business of insurance.' "

SEC v. National Securities, Inc., 393 U.S. 453, 460 (1969).

UNUM argues next that two other courts of appeals have

held that ERISA preempts state notice rules, here referring

to Nazay v. Miller, 949 F.2d 1323 (3d Cir. 1991), and Howard

v. Gleason Corp., 901 F.2d 1154 (2d Cir. 1990). Although the

court in Nazay did hold that the district court improperly

imported a state prejudice rule into the notice requirement of

a health insurance plan, see 949 F.2d at 1336-37, the opinion

addresses neither the preemption nor the saving provisions of

the ERISA. In Howard the court determined that the state

rule at issue fell outside the saving clause largely because it

applied both to insurers and to employers, see 901 F.2d at

1158-59; the notice-prejudice rule of California, however,

applies only to insurers. Therefore, neither Nazay nor Howard controls this case.

Finally, UNUM relies upon six cases upholding the decisions of insurers not to provide benefits to employees who

failed to file timely proof of their claims. In four of the cases

UNUM cites there was no issue of preempting a state noticeprejudice or similar rule. See Shealy v. UNUM Life Ins. Co.

of Am., 979 F. Supp. 395 (D.S.C. 1997), aff'd mem., --

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F.3d --, 1998 WL 231258 (4th Cir. 1998); Lehmann v.

UNUM Life Ins. Co. of Am., 916 F. Supp. 897 (E.D. Wis.

1996); Kennedy v. System One Holdings, Inc., 835 F. Supp.

947 (S.D. Tex. 1993); Freeman v. UNUM Life Ins. Co., 1990

WL 640294 (D. Minn. Mar. 27, 1990). In the other two cases

the courts dismissed almost entirely without analysis the

argument that state law required a showing of prejudice. See

Oas v. Royal MacCabees Life Ins. Co., 1995 WL 664640, at *7

(E.D. Pa. Nov. 6, 1995) (citing Nazay and stating that there

the Third Circuit "rejected the idea of an Insurance Company

having to establish some sort of prejudice"), aff'd mem., 92

F.3d 1172 (3d Cir. 1996); Mackey v. UNUM Life Ins. Co. of

Am., No. C86-5265, at 5 (W.D. Wash. May 12, 1987) ("State

law is inapplicable in this ERISA case"). Therefore these

cases do not alter our conclusion.

III. Conclusion

We hold that the ERISA does not preempt the noticeprejudice rule of California. Therefore, because UNUM did

not provide evidence of substantial prejudice the district court

erred when it granted UNUM's motion for summary judgment. Accordingly we remand this matter for the district

court to determine whether, with UNUM still a defendant,

the case should stay in the District of Columbia or be

transferred elsewhere.

So ordered.

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