Opinion ID: 75680
Heading Depth: 2
Heading Rank: 1

Heading: Alabama's Bad Faith Law

Text: In Pilot Life Ins. Co. v. Dedeaux, the Supreme Court ruled that Mississippi's law of bad faith was not saved from preemption by ERISA's saving clause. 481 U.S. 41, 107 S.Ct. 1549 (1987). The case before us bears great similarity to Pilot Life. Like the Mississippi law, the Alabama tort of bad faith refusal to pay insurance benefits, codified at Ala. Code § 27-12-24, allows for the award of punitive and/or extracontractual damages if an insurance company knowingly or maliciously refuses to pay a legitimate insurance claim. We must apply the test established in Metropolitan Life Ins. Co. v. Mass., 471 U.S. 724, 105 S.Ct. 2380 (1985), employed in Pilot Life, and most recently described in UNUM Life Ins. of Am. v. Ward, 526 U.S. 358, 119 S.Ct. 1380 (1999). 6 Our inquiry begins with the intent of Congress. Pilot Life, 481 U.S. at 45, 107 S.Ct. at 1552. The saving clause does not stand alone; rather, it is only one piece of an entire regulatory scheme. It is axiomatic that [i]n expounding a statute, we must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy. Id. at 51, 107 S.Ct. at 1555 (quoting Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 358 (1986) (additional citations omitted). In particular, our understanding of the saving clause must be informed by the legislative intent concerning the civil enforcement provisions provided by ERISA § 502(a), 29 U.S.C. § 1132(a). Id. at 52, 107 S.Ct. at 1555. We must consider the role of the saving clause in ERISA as a whole. Id. The Supreme Court found that Congress clearly expressed an intent that the civil enforcement provisions of ERISA § 502(a) [29 U.S.C. § 1132] be the exclusive vehicle for actions by ERISA-plan participants and beneficiaries asserting improper processing of a claim for benefits. Pilot Life, 481 U.S. at 52, 107 S.Ct. at 1555. The Court recently reiterated this when it stated that differing state regulations affecting an ERISA plan's 'system for processing claims and paying benefits' impose 'precisely the burden that ERISA preemption was intended 7 to avoid.'5 Egelhoff v. Egelhoff, 532 U.S. 141, 121 S.Ct. 1322, 1329 (2001) (quoting Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 10, 107 S.Ct. 2211, 2217 (1987)). The civil enforcement scheme represents a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans. Pilot Life, 481 U.S. at 54, 107 S.Ct. at 1556. This balance would be completely undermined if remedies rejected by Congress were available under state law. Id.; see also Corporate Health Ins., Inc. v. Tex. Dept. of Ins., 215 F.3d 526, 539 (5th Cir. 2000) (ERISA's civil enforcement scheme . . . preempts . . . supplemental state law remedies.). Congress' intent thus provides the backdrop for the saving clause test laid out in Metropolitan Life, which consists of two prongs: (1) whether, under a commonsense view, the law regulates insurance; and (2) whether the McCarran-Ferguson Act factors support the assertion that the law regulates insurance. Pilot Life, 481 U.S. at 48-49, 107 S.Ct. at 1553; Metropolitan Life, 471 U.S. at 740-44, 105 S.Ct. at 2389-91. 1. The Common-Sense View of the Tort of Bad Faith Refusal to Pay To pass the first prong of the test–whether under a common-sense view the 5 Egelhoff v. Egelhoff addressed only the preemption analysis, not the saving clause. The Court's findings of Congressional intent concerning preemption generally are nonetheless apposite to the role of the saving clause in ERISA as a whole. 8 law regulates insurance–a state law must be specifically directed toward the insurance industry, and not just have an impact on it.6 Pilot Life, 481 U.S. at 50, 107 S.Ct. at 1554. To determine whether a law is specifically directed at the insurance industry, we look at whether the roots of the law are firmly planted in the general principles of the state's tort and contract law, or whether the law sets forth a rule mandatory for insurance contracts, not a principle a court may pliably employ when the circumstances so warrant. Ward, 526 U.S. at 371, 119 S.Ct. at 1388; Pilot Life, 481 U.S. at 50, 107 S.Ct. at 1554; see also Corporate Health Ins., 215 F.3d at 538 (A law is ['specifically directed toward the insurance industry'] when the state has developed a specific scheme governing insurance, as opposed to a flexible rule used in many legal contexts.). Because there is virtually no distinction between the issue before us and that in Pilot Life, our analysis of the roots of Alabama's law is guided by Pilot Life and 6 We note that the Sixth Circuit has recently suggested that only this first prong may be required: It must be reiterated and emphasized that the three McCarran-Ferguson factors are not required to be satisfied before a state law can be found to be a law regulating insurance. They are . . . nothing more than checking points or guideposts. The basis test is whether, from a common sense view, the . . . laws in question regulate insurance. Ky. Ass'n of Health Plans, Inc. v. Nichols, 227 F.3d 354, 372-73 (6th Cir. 2000). Because we find that the common-sense view does not support application of the saving clause, we do not need to address whether it alone would be sufficient. 9 its progeny. We have ruled, in light of the decision in Pilot Life, that Alabama's tort of bad faith refusal to pay benefits has the same roots 'in the general principles of . . . tort and contract law' as was the case in [Pilot Life]. Belasco v. W.K.P. Wilson & Sons, Inc., 833 F.2d 277, 281 (11th Cir. 1987) (quoting Pilot Life, 481 U.S. at 41, 107 S.Ct. 1549, 1554); see also Amos v. Blue Cross-Blue Shield of Ala., 868 F.2d 430, 433 (11th Cir. 1989). This holding is binding upon us today.7 7 Because of the binding precedent in this Circuit, we need not revisit the roots issue. Moreover, our own review of the Alabama case law does not prompt us to suggest reconsideration en banc of Belasco’s conclusion that the Alabama tort of bad faith has the same roots in the general principles of tort and contract law as was the case with the Mississippi tort of bad faith at issue in Pilot Life. In analyzing whether Mississippi’s tort of bad faith failure to pay insurance benefits fell within the savings clause, the Court in Pilot Life held that although Mississippi “has identified its laws of bad faith with the insurance industry, the roots of this law are firmly planted in the general principles of Mississippi tort and contract law.” 481 U.S. at 50, 107 S.Ct. at 1554. In so holding, the Supreme Court pointed to Mississippi cases where the breach of contract was attended by some intentional wrong amounting to an independent tort. Our review of the Alabama cases indicates that the Alabama tort of bad faith refusal to pay insurance benefits has similar roots. Alabama’s tort of bad faith refusal to pay insurance benefits was first recognized as a holding of the Alabama Supreme Court in Chavers v. National Sec. Fire & Cas. Co., 405 So.2d 1 (1981). There, the court essentially adopted the reasoning of Justice Jones, specially concurring in Vincent v. Blue Cross Blue Shield of Alabama, 373 So.2d 1054 (1979). Moreover, in recognizing the tort, the Chavers court held: To hold otherwise would render meaningless the longstanding legal principle in this state which holds that every contract carries with it an implied in law duty of good faith and fair dealing. 405 So.2d at 6. The rationale of Justice Jones in Vincent—i.e., the rationale for the recognition of the tort by the Alabama Supreme Court in Chavers—clearly had roots in Alabama common law and relied upon old Alabama Supreme Court cases indicating that a tort, independent of the contract and constituting a breach of a duty implied by law and collateral to the contract, can give rise to an action on the case, i.e., a tort action. Vincent, 373 So.2d at 1057-58, (discussing and quoting dicta from Mobile Life Ins. Co. v. Randall, 74 Ala. 170 (1893), which was a case arising in the context of an employment contract where the court stated in dicta that a collateral duty can be implied in law arising “in light of great legal principles, which enter into and 10 2. The McCarran-Ferguson Factors Next we look at the three factors used to determine if a state law regulates the business of insurance under the McCarran-Ferguson Act, 15 U.S.C. §§ 10111015. These factors are guideposts, not separate essential elements. Ward, 526 U.S. at 374, 119 S.Ct. at 1389 (quoting Cisneros v. UNUM Life Ins. Co., 134 F.3d 939, 946 (9th Cir. 1998)). No one of them is necessarily determinative in itself, rather they are considerations that must be weighed. Ward, 526 U.S. at 373, 119 S.Ct. at 1389 (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3009 (1982)). There are three criteria to consider: (1) whether the rule at issue has the effect of transferring or spreading a policyholder's risk; (2) whether the rule is an integral part of the policy relationship between the insured and the insurer; and (3) whether the practice is limited to entities within the insurance permeate all human transactions,” thus implying “a proper regard for the rights of others”). Justice Jones concluded from the Alabama case law that: “It has long been the law of this state that every contract implies good faith and fair dealing between the parties.” Id. at 1058. Thus, the roots of the Alabama tort of bad faith are found in the Alabama case law and common law indicating that under certain circumstances a separate and independent duty can arise in the context of a contract, a duty implied by law and separate and independent from any contractual term, which duty can give rise to a tort action separate and independent from any action on the contract. Although Alabama, like Mississippi, has apparently “identified its law of bad faith with the insurance industry,” Pilot Life, 481 U.S. at 50, 107 S.Ct. at 1554, Alabama’s tort of bad faith has roots in the Alabama common law very similar to the roots of the Mississippi tort as described in Pilot Life. Our decision not to suggest revisiting the Belasco decision is supported by the fact that the Alabama Supreme Court in Seafarer’s Welfare Plan v. Dixon, 512 So.2d 53 (1987), concluded in light of Pilot Life that Alabama’s tort of bad faith refusal to pay insurance benefits was preempted by ERISA, thus implicitly recognizing that Alabama’s tort was similar to the Mississippi tort of bad faith which Pilot Life had held was preempted. 11 industry. Ward, 526 U.S. at 374-75, 119 S.Ct. at 1389-90; Pilot Life, 481 U.S. at 50-51, 107 S.Ct. 1554-55; Metropolitan Life, 471 U.S. at 743, 105 S.Ct. at 2391. The similarity between the cases means that our analysis is again guided by Pilot Life. The first factor looks to whether the state law has the effect of transferring or spreading policyholder's risk. There is nothing that distinguishes Alabama's tort from Mississippi's law in this regard. Thus Pilot Life directs us to the conclusion that there is no spreading of policyholder risk. Pilot Life, 481 U.S. at 50, 107 S.Ct. at 1554. Similarly, the connection to the insured-insurer relationship is attenuated at best. Id. at 5051, 107 S.Ct. at 1554-55. The bad faith tort does not define the terms of the relationship. Id. at 51, 107 S.Ct. at 1555. Rather, like the Mississippi law, it declares only that, whatever terms have been agreed upon in the insurance contract, a breach of that contract may in certain circumstances allow the policyholder to obtain punitive damages. Pilot Life, 481 U.S. at 51, 107 S.Ct. at 1555. Finally, the third factor–whether the practice is limited to entities within the insurance industry–fails for the same reasons that the common-sense view of the tort fails to prove it regulates insurance and for the same reason the Mississippi 12 law failed to satisfy this factor. The tort of bad faith refusal to pay benefits has developed from general principles of tort and contract law. Id.; see Belasco, 833 F.2d at 281. Therefore, at most, the Alabama tort of bad faith refusal to pay benefits satisfies only one of the McCarran-Ferguson factors. Even recognizing that [n]one of these criteria is necessarily determinative in itself, Ward, 526 U.S. at 373, 119 S.Ct. at 1389, it is significant that the Alabama tort of bad faith satisfies less than one of these factors. More importantly, given that our analysis is to be informed by the exclusivity of the ERISA civil enforcement scheme, there is no doubt that this is the proper outcome. Alabama's tort of bad faith refusal to pay benefits, like Mississippi's law, seeks a remedy for improper processing of claims that goes beyond the remedies and causes of actions authorized by ERISA. As in Pilot Life, the most important[] consideration here is the clear expression of congressional intent that ERISA's civil enforcement scheme be exclusive. Pilot Life, 481 U.S. at 57, 107 S.Ct. at 1558. The facts of this case are virtually identical to Pilot Life; we are bound to hold that Alabama's tort bad faith refusal to pay is not saved from preemption by ERISA's saving clause. 3. Eleventh Circuit Precedent Our earlier cases also dictate this outcome. We have held on more than one 13 occasion, in precedent binding on this Circuit, that the saving clause does not apply to this tort.8 Amos v. Blue Cross-Blue Shield of Ala., 868 F.2d 430 (11th Cir. 1989); Belasco, 833 F.2d at 277. We also noted in Amos that any change in the law's course will have to charted by the Congress or the Supreme Court. 868 F.2d at 433. The district court, however, followed a decision from the Northern District of Alabama, Hill v. Blue Cross Blue Shield of Alabama, 117 F.Supp.2d 1209 (N.D. Ala. 2000), which erroneously concluded that the Supreme Court decision in Ward was in conflict with our prior precedent. Reading footnotes 6 and 7 of Ward in tandem, the court in Hill concluded that the path was open to revisit the question of whether Alabama’s tort of bad faith refusal to pay was specifically directed toward the insurance industry. We believe that the Hill court’s rationale for revisiting the issue is flawed for several reasons. First, in addressing the extent to which the Alabama tort is limited to or identified with the insurance industry, the Hill court failed to examine the “roots” of the Alabama tort. The Hill court failed to recognize the binding precedent of Belasco, which held “the Alabama law of bad 8 We note that the Alabama Supreme Court reached the same conclusion in light of Pilot Life. Seafarer's Welfare Plan v. Dixon, 512 So.2d 53 (Ala. 1987) (in light of Pilot Life and Metropolitan Life overturning earlier decision and holding that the tort of bad faith refusal to pay is preempted by ERISA); see also Hood v. Prudential Ins. Co. of Am.[Hood II], 522 So.2d 265 (Ala. 1988) (reversing earlier decision). 14 faith appears to us to have the same roots ‘in the general principles of . . . tort and contract law’ as was the case in [Pilot Life].” 833 F.2d at 281(quoting Pilot Life, 481 U.S. at 50, 107 S.Ct. at 1554). Also, the Hill court focused solely on the Alabama cases that have refused to generally extend the tort of bad faith to the area of contract law, and failed to examine the roots of the Alabama tort of bad faith which we held in Belasco to be similar to the roots of the Mississippi tort of bad faith involved in Pilot Life. See also note 7, supra. Second, the Hill court erroneously perceived footnote 7 in Ward as being in conflict with the Eleventh Circuit precedent involving the Alabama tort of bad faith. However, we see nothing in Ward that is inconsistent with our binding precedent, Belasco and Amos, or indeed with Pilot Life. In any event, it is clear from Ward that the language upon which the Hill court relied is dicta.9 Indeed, the Ward opinion did 9 The Ward language upon which Hill relied is as follows: UNUM next contends that ERISA’s civil enforcement provision, § 502(a), 29 U.S.C. § 1132(a), preempts any action for plan benefits brought under state rules such as notice-prejudice. Whatever the merits of UNUM’s view of § 502(a)’s preemptive force,7 the issue is not implicated here. Ward sued under § 502(a)(1)(B) “to recover benefits due . . . under the terms of the plan.” The notice-prejudice rule supplied the relevant rule of decision for this § 502(a) suit. The case therefore does not raise the question whether § 502(a) provides the sole launching ground for an ERISA enforcement action. FN. 7: We dicussed this issue in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987). That case concerned Mississippi common law creating a cause of action for bad-faith breach of contract, law not specifically directed to the insurance industry and therefore not saved from ERISA 15 not discuss the congressional intent that ERISA’s enforcement provisions be exclusive because the state law rule involved in Ward did not implicate the exclusivity of ERISA’s enforcement scheme. Finally, and most importantly, the analysis conducted by the Hill court was flawed because of its total failure to consider “the clear expression of congressional intent that ERISA’s civil enforcement scheme be exclusive.” Pilot Life, 481 U.S. at 57, 107 S.Ct. at 1558. Unlike the state law rule at issue in Ward, the Alabama tort of bad faith at issue in Hill and at issue in this case does implicate the exclusivity of ERISA’s enforcement provisions in precisely the same manner as in preemption. In that context, the Solicitor General, for the United States as amicus curiae, urged the exclusivity of § 502(a), ERISA’s civil enforcement provision, and observed that § 502(a) was modeled on the exclusive remedy provided by § 301 of the Labor Management Relations Act, 1947 (LMRA), 29 U.S.C. § 185. The Court agreed with the Solicitor General’s submission. 481 U.S. at 52-56, 107 S.Ct. 1549. In the instant case, the Solicitor General, for the United States as amicus curiae, has endeavored to qualify the argument advanced in Pilot Life. See Brief 20-25. Noting that “LMRA Section 301 does not contain any statutory exception analogous to ERISA’s insurance savings provision,” the Solicitor General now maintains that the discussion of § 502(a) in Pilot Life “does not in itself require that a state law that ‘regulates insurance,’ and so comes within the terms of the savings clause, is nevertheless preempted if it provides a state-law cause of action or remedy.” Brief 25; see also id., at 23 (“[T]he insurance savings clause, on its face, saves state law conferring causes of action or affecting remedies that regulate insurance, just as it does state mandated-benefits laws.”). We need not address the Solicitor General’s current argument, for Ward has sued under § 502(a)(1)(B) for benefits due, and seeks only the application of saved state insurance law as a relevant rule of decision in his § 502(a) action. 526 U.S. at 376-77 & n.7, 119 S.Ct. at 1390-91 & n.7. 16 Pilot Life. 4. Conclusion Guided by the Supreme Court precedent in Pilot Life and by our precedent in Belasco, we hold that the common-sense view of the Alabama tort at issue here is that it does not “regulate insurance.” Indeed, there is virtually no distinction in this regard between the issue before us and that in Pilot Life. Similarly, with respect to the three McCarran-Ferguson factors, there is no material distinction between the instant case and Pilot Life. And most importantly, our analysis is informed by the clear expression of congressional intent that ERISA's civil enforcement scheme be exclusive. Pilot Life, 481 U.S. at 57, 107 S.Ct. at 1558. In this regard too, the instant case is indistinguishable from Pilot Life. Accordingly, we conclude, as did the Supreme Court in Pilot Life, that Gilbert’s state law tort claim is not saved by the savings clause, and thus is preempted by ERISA.