Opinion ID: 453346
Heading Depth: 2
Heading Rank: 3

Heading: The Provisions and Policies of ERISA

Text: 63 Because state courts have had so much experience in this area, it is instructive and useful to begin our analysis by examining the treatment of escape clauses under state common law. Many state courts faced with a conflict between an excess and an escape clause have held the excess clause to be prevailing, reasoning that since a policy with an excess clause does not cover the insured's primary loss, the policy with the escape clause must be the primary insurer. See e.g., Grasberger v. Liebert & Obert, Inc., 335 Pa. 491, 6 A.2d 925 (1939); Annot., 46 A.L.R.2d 1163, 1165-67 (1956). 14 Although these courts have purported to rely on contract analysis, it appears that policy considerations play a large role in their refusal to give effect to an escape clause. See, e.g., Insurance Company of North America, 575 F.2d at 1073. Some state courts have explicitly refused to enforce escape clauses on grounds of public policy. See Rocky Mountain Fire & Casualty Co. v. Allstate Insurance Co., 107 Ariz. 227, 485 P.2d 552 (1971); 8A Appleman, Insurance Law and Practice Sec. 4910. In short, the majority rule is that escape clauses are disfavored and are not enforced as against excess clauses under state common law. See id. at 1073 & n. 1; 16 Couch on Insurance 2d Sec. 62:76. Underlying the judicial hostility toward escape clauses appears to be the sentiment that insureds who reasonably expect a certain level of insurance coverage should not be unexpectedly deprived of such coverage when one insurer attempts to avoid liability by shifting it to another whose policy terms may be much less favorable to the insured. See, e.g., Insurance Company of North America, 575 F.2d at 1074 n. 6 (The large coverages available under both policies here tends to obscure the very real interest of the insured in most situations to secure the benefit of both policies.) 64 The question is thus presented: should the majority rule of the state common law, which holds that escape clauses are unenforceable, be applied to ERISA-covered benefit plans? In order to answer this question, we start with an examination of the ERISA statute. 65 ERISA is a comprehensive statutory scheme designed to protect employees enrolled in pension and benefit plans. Under ERISA, the responsibility for administering a plan in the best interests of its participants and beneficiaries rests with the plan trustees, who must act in accordance with a standard of fiduciary conduct. The fiduciary duties of plan trustees are set out in the statute as follows, in pertinent part: 66 a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-- 67 (A) for the exclusive purpose of: 68 (i) providing benefits to participants and their beneficiaries; and 69 (ii) defraying reasonable expenses of administering the plan ... 70 29 U.S.C. Sec. 1104. 71 This court has held that a decision of trustees denying benefits to participants or beneficiaries meets the requirements of Sec. 1104 unless that decision is arbitrary and capricious. See Struble v. New Jersey Brewery Employees' Welfare Trust Fund, 732 F.2d 325, 333-34 (3d Cir.1984). As we recently stated in Edwards v. Wilkes-Barre Publishing Co. Pension Trust, 757 F.2d 52 (3d Cir.1985): 72 When the amount of benefits to which a distinct group of beneficiaries is entitled [is at issue], pension trustees must necessarily strike a balance between the interests of the beneficiaries who are in this group and beneficiaries who are not.... Because the trustees in these circumstances must reconcile competing interests of different beneficiaries, the trustees' choice cannot be said to violate their fiduciary duty unless it is arbitrary and capricious. 73 Id., slip op at 56. An other insurance clause in a ERISA-covered benefit plan is therefore enforceable unless it reflects an arbitrary and capricious judgment by the plan's trustees. 74 We believe that the incorporation of escape clauses in benefit plans reflects such impermissible conduct. A major impetus for Congress's enactment of ERISA was the alarming frequency with which employees who had been promised welfare or retirement benefits by employers were deprived of anticipated benefits because of the inequitable character or financial instability of their benefit plan. As Congress stated in ERISA's declaration of policy: 75 The Congress finds that ... the continued well being and security of millions of employees and their dependents are directly affected by [employee benefit plans]: ... that owing to the lack of employee information and adequate safeguards concerning their operation, it is desirable in the interests of employees and their beneficiaries, and to provide for the general welfare and the free flow of commerce, that disclosure be made and safeguards be provided with respect to the establishment, operation, and administration of such plans; ... that owing to the inadequacy of current minimum standards, the soundness and stability of plans with respect to adequate funds to pay promised benefits may be endangered; that owing to the termination of plans before requisite funds have been accumulated, employees and their beneficiaries have been deprived of anticipated benefits; and that it is therefore desirable in the interests of employees and their beneficiaries, for the protection of the revenue of the United States, and to provide for the free flow of commerce, that minimum standards be provided assuring the equitable character of such plans and their financial soundness. 76 29 U.S.C. Sec. 1001(a). 77 Thus, one very important policy underlying ERISA is that employees enrolled in a benefit plan should not be deprived of compensation that they reasonably anticipate under the plan's purported coverage. 15 Escape clauses, however, risk just such a result. An escape clause, such as the Exception to Eligibility clause in the ILGWU plan, does not contain any requirement that the coverage provided by the other plan be comparable to the coverage provided by the escaping plan before the latter plan will defer liability. In addition, unlike plans with excess clauses, a plan with an escape clause does not provide participants who receive less in benefits from the other plan with the opportunity to return to the first plan for the difference. As a result, a participant of a plan with an escape clause, who thinks that he is covered by that plan and who expects to recover medical expenses in accordance with the terms of that plan, automatically loses this coverage in the presence of another insurance plan, even if the benefits he is entitled to receive under the other plan are much less favorable than those of his own. In our view, trustees who incorporate in a plan a provision that has the potential to harm participants in this way have indeed acted in an arbitrary and capricious manner. 16 78 Accordingly, we hold that the escape clauses in ERISA covered employee benefit plans are unenforceable as a matter of law. 17 In the absence of its escape clause, the ILGWU plan is the primary insurer of Mrs. Fazio's medical expenses under its own terms and the terms of the Teamsters plan. We therefore reverse the district court's judgment in favor of the ILGWU Fund. 18