Opinion ID: 675124
Heading Depth: 3
Heading Rank: 2

Heading: The Saving Clause

Text: 30 Jack has contended that, regardless of the fact that the state law relates to the plan, it is nevertheless saved by the fact that it regulates the insurance industry. The saving clause allows the operation of state law despite ERISA in specified areas such as the insurance industry when the law in question regulates that area. The Supreme Court has set forth criteria for determining whether a state law regulates the insurance industry as required by the saving clause. First, a court must take what guidance is available from a common-sense view of the language of the saving clause itself. Second, the court must examine what are known as the McCarran-Ferguson factors: (1) whether the [law] has the effect of transferring or spreading a policyholder's risk; 11 (2) whether the [law] is an integral part of the policy relationship between the insurer and the insured; and 3) whether the [law] is limited to entities within the insurance industry. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48-49, 107 S.Ct. 1549, 1553, 95 L.Ed.2d 39 (1987). 12 31 In the present case, an examination of the considerations weighed in Pilot Life indicates that South Carolina's substantial compliance doctrine is not saved by ERISA's saving clause in that it does not regulate insurance. As noted in Pilot Life, [a] common-sense view of the word 'regulates' would lead to the conclusion that in order to regulate insurance, a law must not just have an impact on the insurance industry, but must be specifically directed toward that industry. Pilot Life, 481 U.S. at 50, 107 S.Ct. at 1554. The state common law doctrine of substantial compliance is not specifically directed toward the insurance industry. Rather, the doctrine merely has an impact on that industry. The roots of substantial compliance law are firmly planted in the general principles of South Carolina's equity law, and the doctrine is applied in a diversity of contexts. 32 As to the McCarran-Ferguson factors, the first criterion does not apply and, conceptually, cannot be reconciled with the doctrine. The state common law of substantial compliance does not spread policy holder risk. As to the second criterion, the substantial compliance doctrine is not an integral part of the policy relationship between the insured and the insurer. As the district court noted, the ability of the insured to change the designated beneficiary is governed by the terms of the written policy, not state law. The necessity for the application of the substantial compliance doctrine in the change of beneficiary context arises only after the death of an insured to assist in determining the proper beneficiary. In the words of the district court, [t]he doctrine of substantial compliance merely provides that in the event the policy sets forth a method for changing the beneficiary, the insured need not literally comply with every aspect of that method in order to effect such a change. Phoenix, 828 F.Supp. at 385. 33 Most importantly, South Carolina's substantial compliance doctrine is not limited to entities within the insurance industry. South Carolina courts have applied the doctrine of substantial compliance as a general principle of equity law in contexts other than the insurance industry. 13 The use of substantial compliance in the instant case presents a specific application of a general principle, merely an extension of the equitable maxim that equity treats as done that which in good conscience ought to be done. Wilkie v. Philadelphia Life Ins. Co., 187 S.C. 382, 197 S.E. 375 (1938). 14 34 Because the substantial compliance doctrine of South Carolina does not satisfy the saving clause's criteria, the district court was correct in ruling that the application of the doctrine is preempted by ERISA. 15 III. FEDERAL COMMON LAW 35 Although ERISA preempts the application of South Carolina's substantial compliance doctrine, the Act contains no provision expressly governing the change of beneficiaries pursuant to a given policy. ERISA is silent on the matter of which party shall be deemed beneficiary among disputing claimants. When ERISA fails to address an issue and the state law governing that issue has been preempted, the Supreme Court and the Fourth Circuit have authorized federal courts to develop federal common law of rights and obligations under ERISA-regulated plans. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S.Ct. 948, 954, 103 L.Ed.2d 80 (1989); Singer, 964 F.2d at 1452. 16 A. The Scope of the Power 36 As a preliminary matter, Jack has argued for the first time on appeal that the district court's power to fashion federal common law is limited and that the district court exceeded the scope of its power in the instant case. Rosita has argued that Jack's argument is procedurally barred because it was not raised below. United States v. One 1971 Mercedes Benz, etc., 542 F.2d 912 (4th Cir.1976). 17 Although we believe that Jack's argument is procedurally barred because it was not raised below, we acknowledge that the situation may present the exceptional circumstance contemplated in One 1971 Mercedes Benz in light of the fact that we are creating new, albeit limited, federal common law. Consequently, we will address the merits of his argument. 37 Bill Adams obtained a life insurance policy under the plan at issue that explicitly allowed him to change the beneficiary by written notice. Bill failed to file such a written notice with Texfi or with Phoenix. Jack claims that the court's application of the new federal common law effectively modified the written terms of the group life insurance policy at issue in violation of 29 U.S.C. Sec. 1102(a)(1) and (b)(3). 18 38 The statute requires that all ERISA plans be established and maintained pursuant to a written instrument, 29 U.S.C. Sec. 1102(a)(1), and that the written instrument describe the formal procedures by which the plan can be amended, id. Sec. 1102(b)(3). 39 Coleman v. Nationwide Life Ins. Co., 969 F.2d 54, 58 (4th Cir.1992). 19 Although Jack has acknowledged the court's general authority to create federal common law, he has suggested that 29 U.S.C. Sec. 1102(a)(1) and (b)(3) circumscribe the court's power, preventing the court from modifying or supplementing an ERISA plan. He has cited Singer for the proposition that federal common law should not be used when its application would conflict with the statutory provisions of ERISA ... or [would] threaten to override the explicit terms of an established ERISA benefit plan. Singer, 964 F.2d at 1452. 40 The doctrine of substantial compliance applied to discern the real beneficiary of a given life insurance policy does not effectively modify the ERISA plan by overriding explicit terms of the established plan. The plan at issue in the instant case permits the policy holder to change his beneficiary by taking prescribed steps. As the Peckham court noted, judicial recognition of an individual's attempt to take those steps and to comply with the requirements of his policy does not constitute a modification of the ERISA plan: 41 By definition, the doctrine of substantial compliance does not materially modify a plan, but rather is simply a doctrine to assist the court in determining whether conduct should, in reality, be considered the equivalent of compliance under the contract. 42 Peckham, 964 F.2d at 1052. Application of the doctrine in the instant context will not compromise any of the rights of or impose any additional obligations on plan administrators or sponsors. The doctrine does not conflict with ERISA's statutory provisions because ERISA is silent on the matter. 43 Jack has made the further argument that one of the fundamental goals of ERISA is uniformity of governing law. The most uniform execution of the law, as he sees it, would entail adherence to the explicit terms of a policy issued pursuant to a plan when such terms exist as they do here. He asserts that the Circuit Courts will apply a federal common law of substantial compliance differently both in their definition of substantial compliance and in the application of the doctrine to the facts. Although he presents a legitimate concern with respect to the latter point, the first point is without merit. 20 The district court's proposed definition should be adopted by other courts facing the issue as the federal common law definition. Although federal courts may differ in the way they apply the accepted doctrine to the facts of each case, they are not likely to differ substantially given a coherent, uniform formula. In any event, the risks of minimal non-uniformity of application should be weighed against the lack of substantial harm to plan administrators and sponsors and the relatively harsh results for employees and their families that would be engendered by a formalistic, overly technical adherence to the exact words of the change of beneficiary provision in a given policy. B. Creation of Federal Common Law 44 That ERISA preempts state law, including state common law, does not mean that all common law concepts are automatically inapplicable in the ERISA context. Thomason v. Aetna Life Insurance Co., 9 F.3d 645, 647 (7th Cir.1993). As noted in Pilot Life and in Firestone Tire, Congress anticipated the development of a federal common law of rights and obligations under ERISA. Pilot Life, 481 U.S. at 56, 107 S.Ct. at 1557-58; Firestone Tire, 489 U.S. at 110, 109 S.Ct. at 954. When state law has been preempted and ERISA is silent on the matter, federal common law may, in certain instances, be applied. 21 45 When it is appropriate for a district court to exercise its authority to create and apply federal common law as it is here, courts are constrained to fashion only those remedies that are appropriate and necessary to effectuate the purposes of ERISA. United States Steel Mining Co. v. District 17, United Mine Workers of Amer., 897 F.2d 149, 153 (4th Cir.1990). 22 One of Congress' purposes in enacting ERISA was  'to promote the interests of employees and their beneficiaries in employee benefit plans ...,' and 'to protect contractually defined benefits.'  de Nobel v. Vitro Corp., 885 F.2d 1180, 1185 (4th Cir.1989). In enacting the preemption provisions, Congress also wanted  'to ensure that plans and plan sponsors would be subject to a uniform body of benefit law; the goal was to minimize the administrative and financial burden of complying with conflicting directives among States or between States and the Federal Government.'  Singer, 964 F.2d at 1452. 46 We have recognized that federal courts may draw on state common law in shaping the applicable body of federal common law. In Provident Life & Acci. Ins. Co. v. Waller, 906 F.2d 985, 992-94 (4th Cir.), cert. denied, 498 U.S. 982, 111 S.Ct. 512, 112 L.Ed.2d 524 (1990), we recognized a remedy under the federal common law of ERISA by drawing on the preempted, state common law doctrine of unjust enrichment. In Singer, we rejected the district court's contention that courts should not look to state common-law causes of action that have been preempted by ERISA in fashioning federal common law. As we noted in Singer, [t]he potential for plans and plan sponsors to be subject to irreconcilable conflicting requirements is not presented by courts employing recognized state common law doctrines to assist in shaping the federal common law of ERISA. In fashioning federal common law, courts do not look to the law of a particular state, but rather should apply common-law doctrines best suited to furthering the goals of ERISA. Consequently, federal common law should be consistent across the circuits. Id. at 1452-53. 23 The district court in the instant case drew on recognized state common law of substantial compliance to formulate a federal common law of substantial compliance. 24 47 The court defined the federal common law doctrine of substantial compliance as follows: 48 [P]ursuant to federal common law, an insured substantially complies with the change of beneficiary provisions of an ERISA life insurance policy when the insured: (1) evidences his or her intent to make the change and (2) attempts to effectuate the change by undertaking positive action which is for all practical purposes similar to the action required by the change of beneficiary provisions of the policy. 49 Phoenix, 828 F.Supp. at 388. 50 The evidence in the record establishes both Bill's intent to change his beneficiary and his attempt to effectuate that change by working with Texfi's home office in Rocky Mount, North Carolina and with Jerry Holcombe. Although he did not submit a formal written notice, he attempted to do so by signing the dual purpose form intended to accomplish such changes. The change was not completed because Holcombe, the responsible Texfi employee, failed to make the change. 25 51 By definition, substantial compliance is less than actual compliance. The point of the doctrine, whether found in federal or state law, is to give effect to an insured's intent to comply when that intent is evident. The insured decedent need not actually comply, but need only substantially comply with the change of beneficiary provisions of the policy to effectuate the desired change. 26 A federal common law of substantial compliance requiring that an insured intend to change his beneficiary and that he take positive action to effectuate that intent furthers the purposes of ERISA without compromising the integrity of policies issued by plan sponsors. 52 The provisions in ERISA plans which govern the ability of insureds to change their beneficiaries present a unique context in which the doctrine of substantial compliance may be applied without prejudice to the interests of plan sponsors and insurers. It is important to note that this is not a case in which an insured or a beneficiary is attempting to use an equitable theory to establish liability on the part of the administrator or the insurer when the written terms of the ERISA plan provide otherwise. Phoenix has acknowledged its liability under the plan and has deposited the proceeds with the court. The dispute is between the claimants. 53 We do not hold that the federal common law of substantial compliance is applicable in any context other than that before the court in the instant case, the change of beneficiary provision in an ERISA plan. Thus, we limit our holding to the facts before us. Such a holding comports with ERISA's purpose to benefit insured employees and their beneficiaries.