Opinion ID: 453346
Heading Depth: 1
Heading Rank: 3

Heading: liability of the ilgwu and teamsters funds to mrs.

Text: FAZIO
55 Although this case appears to present an issue of first impression in the context of the federal common law of benefit plans covered by ERISA, the conflict between other insurance provisions in policies that both arguably cover an insured is a common occurrence in the insurance industry and is the subject of extensive state common law jurisprudence and treatise discussion. The issue has most commonly been presented to the courts in connection with automobile insurance policies, but disputes between health insurers have recently begun to arise. See, e.g., Starks v. Hospital Service Plan of New Jersey, 182 N.J.Super. 342, 440 A.2d 1353 (App.Div.1981). We will begin our analysis by setting out some basic propositions of the relevant insurance law and determining to what extent and in what manner they are applicable in the ERISA setting. 56 The general common law rule is that the liability of insurers under overlapping coverage policies is to be governed by the intent of the insurers as manifested by the terms of the policies which they have issued. 16 Couch on Insurance 2d Sec. 62:44, at 480 (rev'd ed. 1983). [W]here such contractual provisions are not inconsistent with public policy, they will be enforced. 8A Appleman, Insurance Law and Practice Sec. 4907.65, at 367. Under state common law, then, the judicial task is first to determine from the contracts themselves what obligations the respective obligors intended to assume and then to determine whether these intentions are compatible not only each with the other but also with the insured's rights and expectations and with the controlling demands of public policy. Starks, 182 N.J.Super. at 351, 440 A.2d at 1358. We believe that this mode of analysis is fundamentally sound. In the ERISA context, courts should give effect to the intent of the trustees of the competing benefit plans, as evidenced by their incorporation of other insurance provisions, if the provisions are compatible, unless doing so results in the enforcement of a provision that conflicts with the language or policies of ERISA. We turn first to an analysis of the other insurance provisions of the two plans. 57
58 Both insurance contracts at issue in the case at bar contain other insurance provisions. As a general matter, other insurance clauses fall into three categories: pro rata, excess, and escape (or no-liability). Only the latter two types of clauses are of importance here. An excess clause purports to provide an insured with only secondary (or excess) protection when coverage from another insurance policy is available. An escape clause, on the other hand, provides for an outright exception to coverage if the insured is covered by another insurance policy. See Insurance Company of North America v. Continental Casualty Company, 575 F.2d 1070, 1072 (3d Cir.1978); 16 Couch on Insurance 2d Secs. 62:48, 63:85. 59 We are presented here with a conflict between a type of excess clause, called a coordination of benefits clause, and an escape clause. The relevant provision in the Teamsters plan, set out in the margin, 9 is a coordination of benefits clause: rather than indicating that the fund intends to be an excess insurer in all cases in which a participant or beneficiary is covered by other insurance, it contains a set of rules setting out when the fund intends to be a primary insurer and when it intends to be only secondary to another insurer. See Starks, 182 N.J.Super. at 344-45, 440 A.2d at 1354 (discussing coordination of benefits clauses). Regarding persons in Mrs. Fazio's position, the Teamsters plan's coordination of benefits provision states that if an individual is covered by another group insurance plan, and that plan covers the patient directly, rather than as an employee's dependent, that plan is the primary insurer and the Teamsters Fund is the excess insurer. Thus, if Mrs. Fazio is covered by the ILGWU plan, the Teamsters plan intends to provide her with only excess coverage. 60 The ILGWU plan also has a coordination of benefits provision, which applies to conflicts with all insurance policies except group insurance coverage provided by another employer. 10 In this latter case, which is relevant here, a clause entitled Exception to Eligibility applies and supersedes the coordination of benefits approach. 11 This Exception to Eligibility provision is an escape clause: it indicates that the Fund intends to escape all liability whenever a participant or beneficiary is covered by a spouse's group insurer if less than 50% of the cost of such coverage is paid for by the insured. 12 Thus, if Mrs. Fazio is covered by the Teamsters plan, the ILGWU plan intends to provide her with no coverage at all. 61 The foregoing analysis of the two other insurance provisions reveals that they are plainly incompatible. The Teamsters excess clause purports to defer primary liability for Mrs. Fazio's bills to the ILGWU plan if the ILGWU plan provides Mrs. Fazio with coverage. Under the ILGWU escape clause, however, the ILGWU plan provides coverage to Mrs. Fazio only if the Teamsters plan does not. In other words, in light of the two other insurance provisions, each plan provides primary coverage unless the other plan provides primary coverage. Under such circumstances, discerning from the language of the plans and the intent of the trustees which plan provides coverage given the existence of both plans is simply impossible. 62 Construing the other insurance provisions and determining their compatibility, however, is only the first step of a two step analysis. As we stated in part IIIA, supra, an other insurance clause is enforceable only if it is consonant with the provisions and policies of ERISA. The Teamsters Fund contends that the ILGWU escape clause violates the ERISA mandate against arbitrary and capricious conduct on behalf of fund trustees. If so, the ILGWU clause would be unenforceable, the incompatibility between the plans would disappear, and the ILGWU Fund would be Mrs. Fazio's primary insurer. We thus proceed to an examination of the ILGWU escape clause. 13
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