Opinion ID: 11177
Heading Depth: 3
Heading Rank: 1

Heading: Assignment Under the Guaranty Act

Text: The fact that an assignee can have derivative standing does not end our inquiry. We must determine whether the Guaranty Association has a valid assignment of the claims. The Guaranty Act provides that any person receiving benefits from the Guaranty Association under the act “is considered to have assigned the rights under, and any causes of action relating to, the covered policy or contract to the [Guaranty A]ssociation to the extent of the benefits received under this Act.” TEX. INS. CODE Art. 21.28-D § 8(t).8 The Guaranty Act further provides that “[t]he [Guaranty 8 Tex. Ins. Code Art. 21.28-D § 8(t) provides that: A person receiving benefits under this Act is considered to have assigned the rights under, and any causes of action relating to, the covered policy or contract to the association to the extent of the benefits received under this Act, whether the benefits are payments of or on account of contractual obligations, continuation of coverage, or provision of substitute or alternative coverages. The association may require an assignment to it of the rights and cause of action by any payee, policy or contract owner, beneficiary, insured, or annuitant as a condition to the receipt of a right or benefit under 9 A]ssociation has all common-law rights of subrogation and any other equitable or legal remedy that would have been available to the impaired or insolvent insurer or holder of a policy or contract with respect to such a policy or contract.” TEX. INS. CODE Art. 21.28-D § 8(u). The Guaranty Association argues that when the Plan Administrators accepted benefits under the Guaranty Act, by operation of law they assigned to the Guaranty Association all policy rights and causes of actions related to the ELIC GICs. TEX. INS. CODE Art. 21.28-D § 8(t). The Guaranty Association contends that the Plan Administrators breached their fiduciary duties to the plan beneficiaries when they imprudently purchased the GICs of a failing company. The Guaranty Association asserts that the right to bring the breach of fiduciary duty action is a cause of action related to the ELIC GICs and, therefore, was assigned to the Guaranty Association. The Plan Administrators contend that the Guaranty Act does not assign fiduciary duty breach claims. These causes of action, they contend, do not relate to the covered policies. Instead, this provision only assigns the Plans’ right to sue ELIC. Both the Guaranty Association’s and the Plan Administrators’ arguments have merit, and it is unclear from the text of the Guaranty Act whether fiduciary duty breach claims are assigned. We this Act. The subrogation rights of the association under this subsection have the same priority against the assets of the impaired or insolvent insurer as that possessed by the person entitled to receive benefits under this Act. 10 have found only one Texas case that even mentions the Guaranty Act, and it does not discuss the issue of assignment. Unisys Corp. v. Texas Life Accident Health & Hospital Service Insurance Guaranty Association, 1996 WL 710769 (Tex. App. -- Austin 1996). We need not decide this novel and difficult issue of Texas law, though, because the result is the same under either party’s reading of the Act. If the Plan Administrators are correct that the Act does not assign the causes of action, then there is no valid assignment and, thus, no derivative standing. If the Guaranty Association is correct that the Act assigns the causes of action, there is also no valid assignment and no derivative standing, because, as we discuss below, the Act’s assignment provision is preempted by ERISA and there is no valid assignment under federal law. a. Preemption of the Guaranty Act’s Assignment Provision Congress included a broad preemption provision in ERISA. 29 U.S.C. § 1144. Congress provided that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. § 1144(a).9 “Courts have interpreted this preemption broadly. . . .” CIGNA Healthplan of 9 ERISA’s preemption provision is modified by the “saving clause,” which leaves in force state laws that regulate “insurance, banking or securities.” 29 U.S.C. § 1144(b)(2)(A); see II(a)(2)(c) below. The saving clause is in turn modified by the “deemer clause,” which provides that an employee benefit plan shall not “be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.” 29 U.S.C. § 1144(b)(2)(B). 11 Louisiana, Inc. v. Louisiana, 82 F.3d 642, 646-47 (5th Cir.), cert. denied, 117 S. Ct. 387 (1996). ERISA’s pre-emption provisions are designed to protect plan participants by eliminating the threat of inconsistent state and local regulation of employee benefit plans and establishing a uniform standard to govern employee benefit plans as an exclusive federal concern. See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138 (1990); Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 10-11 (1987). A law is preempted if it “relates to” an employee benefit plan. 29 U.S.C. § 1144(a). “A law ‘relates to’ an employee benefit plan . . . if it has a connection with or reference to such a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983). The relevant portion of the Guaranty Act does not refer to ERISA plans.10 See New York Conference of Blue Cross v. Travelers Ins., 115 S. Ct. 1671, 1677 (1995) (noting that statute in question did not “make ‘reference to’ ERISA plans in any manner”); District of Columbia v. Greater Wash. Bd. of Trade, 113 S. Ct. 580, 583 (1992) (striking down law that “specifically refers to welfare benefit plans regulated by ERISA and on that basis alone is pre-empted”). Because the Guaranty Act does not refer to ERISA, it will be preempted only if it has a connection with an ERISA plan. Travelers, 115 S. Ct. at 1677. 10 The Guaranty Act does state that it does not provide coverage for “a multiple employer welfare arrangement as defined by the Employee Retirement Income Security Act of 1974 (29 U.S.C. Section 1002).” TEX. INS. CODE Art. 21.28-D §3(4)(A). That provision has no connection whatsoever to this case or the Guaranty Act’s assignment provisions, so we do not consider it to be a sufficient reference to ERISA for preemption purposes. 12 The Supreme Court has cautioned that “[p]reemption does not occur . . . if the state law has only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general applicability.” Greater Wash., 113 S. Ct. at 583 n.1 (internal quotation and citations omitted). The Supreme Court recently held that ERISA did not preempt a state law that had “only an indirect economic effect on the relative costs of various health insurance packages” available to ERISA qualified plans. Travelers, 115 S. Ct. at 1680. Therefore, the Guaranty Act is connected with, and thereby related to, an ERISA plan only if its association is more than tenuous, remote or peripheral. If the Guaranty Act is related to an ERISA plan, it is preempted. The Guaranty Act’s assignment provision is connected with an ERISA plan. Upon the receipt of benefits, the Guaranty Act assigns by operation of law all causes of action related to the insurance policy. This includes assignment of causes of action for breaches of fiduciary duty under ERISA. 29 U.S.C. § 1109. A state law which has the effect of assigning an ERISA cause of action clearly is connected with and relates to an ERISA plan. The connection is direct and substantial, not indirect, tenuous, remote or peripheral. See Travelers, 115 S. Ct. at 1680; Greater Wash., 113 S. Ct. at 583 n.1. b. Insurance Saving Clause Because the Guaranty Act’s assignment provision relates to an ERISA plan, it is preempted unless it falls under an exception in 13 the saving clause.11 The Guaranty Association contends that the Guaranty Act regulates insurance and thus is rescued by the saving clause. In deciding whether a law regulates insurance for saving clause purposes, we apply a conjunctive two-step analysis. First, we determine whether the law in question fits the common sense definition of insurance regulation. Second, we consider three factors drawn from the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq.: (1) Whether the statute has the effect of spreading policyholders’ risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 742-43 (1985); CIGNA, 82 F.3d at 650. If the statute fits the common sense definition of insurance regulation and we answer yes to each of the questions in the three part test, then the statute falls within the savings clause, and is not preempted. CIGNA, 82 F.3d at 650. The relevant statute in the case at bar is the Guaranty Act and, more specifically, its provision that a policyholder assigns by operation of law all claims related to the policy when the Guaranty Association provides benefits. The Guaranty Act’s assignment provision applies to policyholders; it is, therefore, not limited to “entities within the insurance industry.” Metropolitan 11 The saving clause provides, in relevant part, that “[e]xcept as provided in subparagraph (b) [the deemer clause], nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(a)(2)(A). 14 Life, 471 U.S. at 743. Because the Guaranty Act fails the thirdprong of the McCarran-Ferguson factors, we need go no further. Accordingly, the Guaranty Act’s assignment provision does not fall within the saving clause and is, thus, preempted by ERISA.