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Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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FI LED 

United States Court of Appeals 

Tench Ci!'.cuit 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

AUG 2 t; 1990 

BETH BARNETT, by and through her ) 

husband and next friend LARRY BARNETT; ) 

LARRY BARNETT, individually and as ) 

Guardian Ad Litem of BETH BARNETT, ) 

) 

Plaintiffs-Appellants, ) 

) 

v. ) 

) 

GENERAL AMERICAN LIFE INSURANCE ) 

COMPANY, a foreign insurance ) 

corporation, ) 

) 

Defendant-Appellee, ) 

) 

LAKE ERIE INSTITUTE OF REHABILITATION, ) 

) 

Intervenor. ) 

ORDER AND JUDGMENT * 

&OBERT L. HOECKER 

Clerk 

No. 89-5072 

(D.C. No. 87-C-803-B) 

( N. D. Okla. ) 

Before SEYMOUR, BRORBY, and EBEL, Circuit Judges. 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App . P . 

34(a); 10th Cir. R. 34.1.9. 

submitted without oral argument. 

* 

The case is therefore ordered 

This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 1 
Plaintiffs-appellants Beth and Larry Barnett originally filed 

this bad faith insurance action against defendant-appellee General 

American Insurance Company (General American) seeking damages for 

the alleged failure to afford Beth Barnett benefits under a group 

health policy General American administered. The district court 

ruled as follows: (1) that plaintiffs' claims were preempted 

under the Employee Retirement Income Security Act (ERISA), 29 

u.s.c. § 1001, (2) that under ERISA, General American did not 

abuse its discretion in refusing to continue full payment of Beth 

Barnett's expenses, and (3) that General American was not 

obligated to indemnify the plaintiffs for certain expenses Beth 

Barnett incurred at Lake Erie Institute of Rehabilitation (LEIR) 

after General American's coverage denial on September 31, 1987. 

Barnetts appeal these rulings. We affirm. 

FACTS 

Beth Barnett was seriously injured in a motor vehicle 

accident on July 7, 1985. She sustained closed head injuries 

which left her with significant cognitive impairment. At the time 

of the accident, she was covered under a group health insurance 

plan obtained through NORDAM, her husband's employer. NORDAM was 

insured through a group health policy which General American 

administered. The NORDAM insurance plan was implemented pursuant 

to the requirements of ERISA. 

Following her initial hospitalization, Beth Barnett was 

admitted to LEIR. LEIR is a facility which specializes in 

rehabilitation of head trauma patients. From February 12, 1986, 

2 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 2 
through September 21, 1987, General American paid all of Beth 

Barnett's expenses at LEIR at a cost of approximately $20,000 per 

month. On August 21, 1987, General American sent Larry Barnett a 

letter indicating that it would no longer pay these expenses 

because recovery had plateaued and the policy did not cover 

"custodial care." All the physicians reviewing the file agreed 

that as of September, 1987, Beth Barnett had plateaued and did not 

require the intense treatment she was receiving at LEIR. 

Plaintiffs' counsel responded that a bad faith lawsuit would be 

filed if General American did not agree to continue covering the 

LEIR expenses. Suit was filed on September 30, 1987. 1 

In August, 1988, Beth Barnett was transferred to "Winning 

Wheels," an Illinois licensed skilled nursing home. 2 When General 

American discontinued total coverage at LEIR, it also indicated 

the policy would not cover all expenses at Winning Wheels because 

the care there would be largely custodial and was not "medically 

necessary" as defined in the insurance policy. Further, General 

American 

facility. 

determined that Winning Wheels was not a covered 

However, General American did agree to pay for 

1 Early in the case, General American filed a motion for 

partial summary judgment seeking a ruling that the bad faith 

claims Barnetts filed were preempted under ERISA. The parties 

agreed that if ERISA applied, plaintiffs' only claim would be for 

benefits under the policy. They also agreed that if ERISA 

applied, Barnetts would be required to proceed with the appeals 

procedures of ERISA. On March 3, 1988, the district court granted 

General American's motion. Plaintiffs then appealed the benefits 

denial under ERISA. General American affirmed its earlier 

decision and this case proceeded to trial. 

2 The transfer was the result of a partial settlement between 

the parties which was executed without prejudice to either side. 

3 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 3 
"medically necessary" treatment such as physical therapy, 

psychiatry, and prescriptions, which were covered under the 

policy. 

The remaining cost of Beth Barnett's treatment at LEIR from 

September, 1987, through August, 1988, was $107,805.50. LEIR 

intervened in this action and brought a claim for this amount. 

The district court entered judgment against Barnetts alone on this 

claim. Barnetts now seek indemnification of the $107,805.50 from 

General American and a determination that General American wrongly 

denied coverage for Beth Barnett's care at Winning Wheels. 

DISCUSSION 

We turn first to the preemption issue. Barnetts' argument is 

really twofold. First, they argue that this is not an ERISA 

governed plan because Larry Barnett paid a portion of the cost of 

Beth's dependent coverage. Second, they argue that their common 

law bad faith claims are not preempted. Because these are issues 

of law, we review them de nova. In re Ruti-Sweetwater, Inc., 836 

F.2d 1263, 1266 {10th Cir. 1988). 

It is undisputed that NORDAM implemented its group health 

insurance plan pursuant to the statutory requirements of ERISA. 

Beth Barnett was a beneficiary under NORDAM's plan. Facts 

indicating Larry Barnett paid part of the premium for her 

dependent coverage do not alter the assessment that her benefits 

came from an ERISA plan. See Roe v. General Am. Life Ins. Co., 

712 F.2d 450, 451-52 (10th Cir. 1983)(holding that group 

disability insurance was part of ERISA plan even where employee 

4 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 4 
paid premium); Brundage-Peterson 

Corp., 877 F.2d 509, 510-11 (7th 

v. Compcare Health Servs. Ins. 

Cir. 1989)(holding that plan 

which allowed choice of insurers and required employee payment of 

dependent coverage premium was ERISA plan). Consequently, we 

affirm the district court's ruling on this issue. 

Second, pursuant to recognized precedent, ERISA preempts 

Barnetts' common law bad faith claims. Pilot Life Ins. Co. v. 

Dedeaux, 481 U.S. 41, 57 (1987); Kelley v. Sears, Roebuck & Co., 

882 F.2d 453, 456 (10th Cir. 1989). Any common law cause of 

action which "relates to" an employment benefit plan falls under 

the broad preemptive sweep of ERISA. Pilot Life, 481 U.S. at 45. 

Therefore, we affirm this ruling as well. As a consequence of the 

preemption, the only claim Barnetts have is for the failure to 

provide insurance benefits under 29 U.S.C. § 1132(a)(l)(B). 

In this regard, Barnetts argue that the district court erred 

in determining that General American acted within its discretion 

in denying coverage for expenses at LEIR after September, 1987, 

and in failing to cover expenses at Winning Wheels. Specifically, 

plaintiffs assert General American breached the policy because it 

failed to find appropriate placement for Beth Barnett after she 

left LEIR. We review the district court's findings of fact under 

a clearly erroneous standard. Butler v. Hamilton, 542 F.2d 835, 

838 (10th Cir. 1976). 

The Supreme Court's recent decision in Firestone Tire & 

Rubber Co. v. Bruch, 109 S. Ct. 948 (1989), governs the standard 

of review to be applied when evaluating General American's 

decisionmaking. There, the Court stated: 

5 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 5 
Consistent with established principles of trust law, we 

hold that a denial of benefits challenged under 

§ 1132(a)(l)(B) is to be reviewed under a de novo 

standard unless the benefit plan gives the administrator 

or fiduciary discretionary authority to determine 

eligibility for benefits or to construe the terms of the 

plan. 

Id. at 956. The district court here correctly found that General 

American's policy does afford discretion in making eligibility 

determinations. 3 Therefore, the appropriate standard of review 

for considering General American's actions is whether they were 

arbitrary and capricious. Id. Using this standard, the district 

court found General American acted within its discretion in 

denying benefits. The court determined that it was not 

unreasonable for General American to reject Winning Wheels because 

it did not qualify as "a hospital or medically necessary" facility 

under the definition section of the policy. This finding is not 

clearly erroneous. 

The General American policy gives the company discretion in 

deciding what is medically necessary. The policy defines the term 

"hospital" and specifically excludes nursing homes from the 

definition. See Rec. Vol. I doc. 56 at 9 ~r 15. Further, Larry 

Barnett was aware General American had determined Winning Wheels 

was not a covered facility. As the Supreme Court recently stated, 

"(a] court of appeals would be justified in concluding that a 

3 The policy states: "In order to determine if care and 

treatment is medically necessary, the Company shall use a program 

which is run by the Company or by its authorized representative, 

with the specific goal of assessing the need for medical care and 

treatment and determining whether or not such care or treatment is 

appropriate." 

6 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 6 
.. 

district court had abused its discretion in making a factual 

finding only if the finding was clearly erroneous." Cooter & Gell 

v. Hartmarx Corp., 110 S. Ct. 2447, 2458 (1990). Here, the 

findings are not erroneous. In light of our ruling on this issue, 

we also conclude the district court was correct in determining 

that General American was not required to indemnify Barnetts for 

the judgment LEIR obtained against them. 

LEIR, as intervenor, argues that General American is 

operating under a conflict of interest because it has a financial 

stake in the outcome of its claims handling. 4 In Firestone, the 

Court noted that where an ERISA plan gives discretion to an 

administrator or fiduciary who is operating under a conflict of 

interest, that conflict must be weighed as a factor in determining 

whether the company abused its discretion in making a benefits 

determination. 109 S. Ct. at 956. The conflict here is minimal, 

at best. NORDAM's plan is not "funded" with a General American 

policy. Rather, the company acts only as a claims administrator. 

Claims are paid from NORDAM's general account. To the extent any 

conflict existed, the district court considered it in determining 

whether the company abused its discretion. We find no error. 

Accordingly, the judgment of the United States District Court 

for the Northern District of Oklahoma is AFFIRMED. 

ENTERED FOR THE COURT 

PER CURIAM 

4 We agree with General American that LEIR lacks 

attack the district court's ruling with respect 

American. However, we will briefly address this issue 

is a central component of the Firestone decision. 

7 

standing to 

to General 

because it 

Appellate Case: 89-5072 Document: 010110041604 Date Filed: 08/28/1990 Page: 7