Morstein v. National Insurance Services, Inc.

United States Court of Appeals, Eleventh Circuit.

No. 94-9152.

Margery A. MORSTEIN, Plaintiff-Appellant, v. NATIONAL INSURANCE SERVICES, INC.; Pan American Life Insurance Company; The Shaw Agency; Scott Hankins, Defendants-Appellees.

Feb. 12, 1996.

Appeal from the United States District Court for the Northern District of Georgia. (No. 1:92-cv-2686-RLV), Robert L. Vining, Jr., District Judge.

Before KRAVITCH and BIRCH, Circuit Judges, and GOODWIN*, Senior Circuit Judge.

BIRCH, Circuit Judge:

This appeal focuses upon the preemption doctrine under the

Employee Retirement Income Security Act of 1974 ("ERISA"). 29

U.S.C. §§ 1001-1461 (1985). The district court found that

Morstein's state law claims related to the employee benefit plan

established by her employer and, therefore, those claims were

preempted by ERISA. We affirm the decision of the district court.

I. BACKGROUND Plaintiff-appellant, Margery Morstein, is the president,

director, and sole shareholder of Graphic Promotions, Inc.

("Graphic"). At all times relevant to this appeal, Morstein was

also one of two employees of Graphic. In 1991, Morstein met with

Scott Hankins, an insurance broker and employee of the Shaw Agency,

for the purpose of obtaining a replacement policy of major medical * Honorable Alfred T. Goodwin, Senior U.S. Circuit Judge for the Ninth Circuit, sitting by designation. insurance for herself and Graphic's other employee. The policy was

to be administered by National Insurance Services, Inc.

("National") and underwritten by Pan-American Life Insurance

Company.1 Morstein alleges that during her meeting with Hankins,

she advised him that any policy of major medical insurance that

would replace her current policy would be unacceptable if it

excluded from coverage medical treatment related to any preexisting

medical condition. Morstein asserts that Hankins assured her that

the policy that he proposed would provide the same coverage for

preexisting conditions as her current policy. The policy offered

by Hankins was issued to Graphic, and Graphic paid the initial

premium.

Over one year after the policy was issued, Morstein had

surgery involving a total hip replacement. When she submitted a

claim for payment for this procedure, National refused payment

because it asserted that Morstein's surgery involved a preexisting

condition, which she failed to disclose during the application

process. National then rescinded the policy and refunded the

premium payments to Graphic that were made on behalf of Morstein.

Because she claims that Hankins and the Shaw Agency fraudulently

induced her to purchase a policy of major medical insurance,

Morstein allowed a separate full-coverage insurance policy to

lapse. In doing so, she further alleges that Hankins and the Shaw

Agency were negligent in processing her application for insurance

and that she has state law claims against them for negligence and 1 Morstein voluntarily dismissed National Insurance Services and Pan-American Life Insurance Company before the commencement of this appeal, although defendants in the original action. fraud.

Morstein filed an action in state court, alleging negligence,

malfeasance, misrepresentations, and breach of contract.

Defendants removed the action to federal court on the basis that

Morstein's claims constituted an ERISA action. The district court

denied Morstein's motion to remand and found that defendants were

entitled to summary judgment as to the state law claims against

them. The district court concluded that Morstein's claims "clearly

relate to the employee benefit plan established by Graphic

Promotions; therefore, those claims are preempted by ERISA." R2-

29-3. Morstein now appeals the district court's grant of summary

judgment. We review a grant of summary judgment de novo. Forbus

v. Sears Roebuck & Co., 30 F.3d 1402, 1404 (11th Cir.1994) (citing

RJR Nabisco, Inc. v. United States, 955 F.2d 1457, 1459 (11th

Cir.1992)), cert. denied, --- U.S. ----, 115 S.Ct. 906 , 130 L.Ed.2d

788 (1995).

II. DISCUSSION Morstein alleges that the district court erred in applying

the preemption doctrine under ERISA to bar her state law claims.

Section 1144(a) of ERISA provides that its provisions "shall

supersede any and all State laws insofar as they may now or

hereafter relate to any employee benefit plan described in section

1003(a)...." 29 U.S.C. § 1144 (a) (1985) (emphasis added). A state

law "relates to" an employee benefit plan if the law "has a

connection with or reference to such a plan." Ingersoll-Rand Co.

v. McClendon, 498 U.S. 133, 139 , 111 S.Ct. 478, 483 , 112 L.Ed.2d

474 (1990) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85 , 96- 97, 103 S.Ct. 2890, 2900 , 77 L.Ed.2d 490 (1983)). The Supreme

Court has endorsed a broad interpretation of the phrase "relate to"

that extends to preempt certain state law tort and contract actions

brought by employees. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41,

47-48 , 107 S.Ct. 1549, 1553 , 95 L.Ed.2d 39 (1987). The Supreme

Court does acknowledge some limits to ERISA preemption: "[s]ome

state actions may affect employee benefit plans in too tenuous,

remote, or peripheral a manner to warrant a finding that the law

"relates to' the plan." Shaw, 463 U.S. at 100 n. 21, 103 S.Ct. at

2901 n. 21 (citation omitted).

In determining whether Morstein's state law claims against

Hankins and the Shaw Agency are related to Graphic's employee

benefit plan, we must examine our circuit precedent in this area.

The facts of the case before us are analogous to those in Farlow v.

Union Cent. Life Ins. Co., 874 F.2d 791 (11th Cir.1989). In

Farlow, plaintiff was a shareholder, president, and member of the

board of directors of Pace-Plus, Inc. Farlow and his wife were

designated beneficiaries under Pace-Plus's employee benefit plan.

The Farlows alleged that an insurance agent induced them to

purchase a new group health life insurance plan, and that the

insurance agent fraudulently misrepresented that, among other

things, the new policy would provide the same coverage as the

company's old policy. Id. at 792 . After switching to the new

policy, Farlow's wife became pregnant. The Farlows then discovered

that, unlike Pace-Plus's old policy, the new policy did not provide

maternity or pregnancy coverage. Id.

Our court found the conduct alleged by the Farlows to be "intertwined" with the refusal to pay benefits:

[T]he conduct alleged in these claims is not only contemporaneous with [the insurer's] refusal to pay benefits, but the alleged conduct is intertwined with the refusal to pay benefits. Finding the Farlows' state law claims not wholly remote in content from the [insurer] plan, we reject the Farlows' contention that simply because their claims invoke misconduct in the sale and implementation of the [insurer's] plan, their claims do not relate to the plan.

Consequently, we hold that ERISA preempts the Farlows' misrepresentation and negligence claims.

Farlow, 874 F.2d at 794 .2 The facts in the case before us are

quite similar to those in Farlow. As in Farlow, Morstein claims

the insurance agent made a fraudulent misrepresentation regarding

the coverage provided by the new policy. Like Farlow, Morstein

claims that her state law causes of action are not preempted by

ERISA because they are not related to the plan. We are bound by

the precedent set by this court in Farlow and other cases in this

circuit and hold that Morstein's state law claims are preempted by

ERISA.3 2 Our recent holding in Variety Children's Hosp. v. Century Medical Health Plan, Inc., 57 F.3d 1040, 1042 (11th Cir.1995), reiterated that state law fraud claims can be intertwined with benefit plans:

We agree with the Fifth Circuit's analysis in Hermann Hosp. v. MEBA Medical and Benefits Plan, 959 F.2d 569, 578 (5th Cir.1992), that where state law claims of fraud and misrepresentation are based upon the failure of a covered plan to pay benefits, the state law claims have a nexus with the ERISA plan and its benefits system. Therefore, Counts II and III were correctly dismissed as preempted. 3 The writer continues to be concerned about the law of this circuit by which this panel is bound. This case presents yet another example of an employee left without a remedy because of ERISA's broad preemption. See Sanson v. General Motors, 966 F.2d 618, 623 (11th Cir.1992) (Birch, J., dissenting), cert. denied, - -- U.S. ----, 113 S.Ct. 1578 , 123 L.Ed.2d 146 (1993). I continue to express my regret that the reach of ERISA preemption too often Morstein attempts to distinguish Farlow by arguing that,

unlike the insurance agent in that case, Hankins was acting as

Morstein's agent, not the agent of the Shaw Agency. Thus, she

argues that, "[i]t defies credibility to suggest that an agent of

a plan beneficiary, whose duties effectively terminate upon the

establishment of a "plan,' is insulated by ERISA from liability

undermines the stated purpose of the Act: to protect employees and beneficiaries of employee benefit plans. 29 U.S.C. § 1001

(1985). This is an issue that I hope will be revisited by our circuit soon.

I note that some district courts in our circuit have attempted to distinguish Farlow and provide a remedy for the plaintiffs before them. See Wiesenberg v. Paul Revere Life Ins. Co., 887 F.Supp. 1529, 1532-33 (S.D.Fla.1995); Barnet v. Wainman, 830 F.Supp. 610, 613 (S.D.Fla.1993); Martin v. Pate, 749 F.Supp. 242, 246-47 (S.D.Ala.1990), aff'd sub. nom Martin v. Continental Investors, 934 F.2d 1265 (11th Cir.1991). Other circuits have found ways to stay the preemption tide in cases similar to the one before us. See Perkins v. Time Ins. Co., 898 F.2d 470, 473 (5th Cir.1990) (concluding that "a claim that an insurance agent fraudulently induced an insured to surrender coverage under an existing policy, to participate in an ERISA plan which did not provide the promised coverage, "relates to' that plan only indirectly" and "does not affect the relations among the ERISA entities" and thus is not preempted by ERISA); Perry v. P*I*E Nationwide, Inc., 872 F.2d 157, 162 (6th Cir.1989) (reasoning that preemption applies "to a state law claim only if Congress has provided a remedy for the wrong or wrongs asserted"), cert. denied, 493 U.S. 1093 , 110 S.Ct. 1166 , 107 L.Ed.2d 1068 (1990).

We acknowledge that our circuit has placed some limits on the preemption doctrine when there is no nexus between the state law claim and an ERISA covered plan. Clark v. Coats & Clark, Inc., 865 F.2d 1237, 1244 (11th Cir.1989). We also recently held that ERISA preemption does not bar a state law claim of negligent misrepresentation brought by a health care provider against an insurer. Lordmann Enterprises, Inc. v. Equicor, Inc., 32 F.3d 1529, 1534 (11th Cir.1994) (reasoning that there is no preemption because "ERISA does not provide a cause of action for aggrieved health care providers that treat ERISA participants"), cert. denied, --- U.S. ----, 116 S.Ct. 335 , 133 L.Ed.2d 234 (1995). resulting from his malfeasance in performing duties for the benefit

of the beneficiary." Appellant's Brief at 9. We do not find that

the relationship between Hankins and Morstein differs from the

relationship between the insurance agent and the plaintiff in

Farlow.4 Bound together with Morstein's agency argument is her

contention that Hankins and the Shaw Agency are not each a "party

in interest" and therefore are not governed by ERISA. 29 U.S.C. §

1002 (14) (Supp.1995). While intriguing, this argument does not

hold any weight under the facts before us. In Farlow we looked not

to the relationship between the parties but to the relationship

between the alleged conduct and the refusal to pay benefits. If

the actions of a party, regardless of his "interest" in the plan,

are intertwined with the refusal to pay benefits, then the action

is related to the plan, and thus, it is preempted.

Morstein also argues that Forbus, supports her argument that

her state law claims are not preempted. Forbus, however, is

distinguishable from this case. In Forbus, we found no preemption

because the plaintiffs' claims centered on alleged fraud by Sears

concerning the elimination of plaintiffs' jobs, not fraud relating

to the amount or availability of pension benefits to the

plaintiffs. Forbus, 30 F.3d at 1406 . Here, Morstein's fraud 4 We note that this circuit has held that ERISA preemption extends to claims against an insurance agency or broker, such as the Shaw Agency, as well as an insurance company that issues the policy. Belasco v. W.K.P. Wilson & Sons, Inc., 833 F.2d 277, 281

(11th Cir.1987) (claims by parents who where beneficiaries of an insurance program provided by their employers, for medical and surgical benefits and for bad faith and fraud by the insurer were "related to" the employee benefit plan and therefore preempted by ERISA). allegations related to the availability of benefits for a

preexisting medical condition.

III. CONCLUSION Morstein challenges the district court's conclusion that her

state law claims against Hankins and the Shaw Agency are preempted

by ERISA. We conclude that we are bound by the precedent

established by this circuit in Farlow and its progeny.

Accordingly, the district court's grant of summary judgement is

AFFIRMED.

GOODWIN, Circuit Judge, Specially Concurring:

The application of ERISA preemption in removed cases arising

out of insurance twisting, common law fraud in the inducement, or

other illegal selling practices is not consistent in this circuit,

or between circuits. I concur only becauseFarlow v. Union Central

Life Ins. Co., 874 F.2d 791 (11th Cir.1989) appears to bind this

court to a rule that need not be cast in concrete, if it is wrong.

In Farlow, the plaintiffs alleged that the defendant insurance

agent wrongfully induced them to switch to a new insurance policy

by false representations that the new policy he was selling would

provide the same coverage as the old policy being replaced. The

new policy did not, however, provide pregnancy and maternity

coverage, which Mrs. Farlow learned to her dismay after she became

pregnant. The Eleventh Circuit held that ERISA preempted the

Farlows' claims:

[A] state law cause of action "relates to" an employee benefit plan if the employer's conduct giving rise to such claim was not "wholly remote in content" from the benefit plan....

The Farlows' complaint alleges that [the insurance agent] negligently failed to disclose that the Union Central plan did not provide maternity and pregnancy coverage and fraudulently misrepresented that the Union Central plan's coverage was coextensive with [the] former plan's coverage. [The] conduct alleged in these claims is not only contemporaneous with Union Central's failure to pay benefits, but the alleged conduct is intertwined with the refusal to pay benefits. Finding the Farlows' state law claims not wholly remote in content from the Union Central plan, we reject the Farlows' contention that simply because their claims involve misconduct in the sale and implementation of the Union Central plan, their claims do not relate to the plan.

874 F.2d at 794 .

The Fifth Circuit, a year later, announced a different rule.

Perkins v. Time Ins. Co., 898 F.2d 470 (5th Cir.1990). In Perkins,

as in Farlow, the plaintiff alleged that he was fraudulently

induced by the defendant insurance agent into surrendering coverage

under an existing policy in order to participate in an ERISA plan

that did not provide as broad coverage as the old. The insurance

agent told the plaintiff that his daughter's eye conditions, which

required surgery, would be covered under the new policy rather than

excluded as a preexisting condition. That representation was

false, and when the plaintiff's claim for benefits for his

daughter's eye surgery was denied, he sued the agent for fraud.

The Fifth Circuit held that ERISA did not preempt the claim:

Giving the ERISA "relates to" preemption standard its common-sense meaning, we conclude that a claim that an insurance agent fraudulently induced an insured to surrender coverage under an existing policy, to participate in an ERISA plan which did not provide the promised coverage, "relates to" that plan only indirectly. A state law claim of that genre, which does not affect the relations among the principal ERISA entities (the employer, the plan fiduciaries, the plan, and the beneficiaries) as such, is not preempted by ERISA.

Farlow, 898 F.2d at 473 (citations omitted).

The obvious tension between the Eleventh Circuit's holding in

Farlow and the Fifth Circuit's holding in Perkins has affected the district courts. See, Martin v. Pate, 749 F.Supp. 242

(S.D.Ala.1990), aff'd without op. sub nom. Martin v. Continental

Investors, 934 F.2d 1265 (11th Cir.1991). There, a district judge,

after reading Perkins, gave Farlow a narrow interpretation and

found no ERISA preemption in a fraud in the inducement case "quite

similar" to Farlow. Martin, 749 F.Supp. at 246 . As noted, we

affirmed, but without opinion, creating a covert intra-circuit

conflict in our own doctrine.

In Martin, the plaintiff sued an insurance agent for fraud in

the inducement, alleging that the agent knew or should have known

of the plaintiff's preexisting heart condition, and that despite

such knowledge the agent represented that the new insurance policy

would cover the condition. The insurance company refused to pay

benefits because of plaintiff's failure to disclose the condition.

Noting with approval the Fifth Circuit's decision in Perkins,

the district court reasoned that application of state fraud law

would not result in regulation of an ERISA plan: "What will be

regulated is conduct on the part of defendants, engaged in prior to

the time plaintiff became a beneficiary under the plan, i.e.,

representations made to induce plaintiff to enroll under the plan."

Id. The district court admitted that it was "cognizant" of Farlow,

then proceeded to criticize Farlow for relying on a case that was

not, in the district court's opinion, authority for finding

preemption in fraud in the inducement cases. Id. at 247 .

As a visiting judge from still a third circuit, one is

diffident about characterizing the conflict between Farlow and

Martin as a hazard to navigation for the district courts of this circuit. But compare Beal v. Jefferson-Pilot Life Insurance

Company, 798 F.Supp. 673 (S.D.Ala.1992) with Barnet v. Wainman, 830

F.Supp. 610 (S.D.Fla.1993).

In Beal, the plaintiff exercised a retirement option to

convert his ERISA group employee benefit plan to an individual

policy. The ERISA group plan contained language to the effect that

coverage would be similar after conversion to the individual

policy. The plaintiff suffered a heart attack, and learned to his

financial chagrin that many medical expenses were not covered by

his new policy. In his lawsuit, the plaintiff claimed that he had

been fraudulently induced to purchase the new policy, and that, but

for the fraud, he would have recovered benefits under the old

policy. Holding the plaintiff's claim preempted by ERISA, the

district court followed Farlow and distinguished Martin.

In Barnet, the plaintiff alleged that an insurance agent

fraudulently and negligently advised him that his failure to reveal

certain preexisting medical conditions on an application for a

health insurance policy would not affect his coverage under the

policy. When he applied for benefits, his application was

disallowed and his insurance rescinded on account of his failure to

disclose his preexisting condition. Holding that the plaintiff's

claim was not preempted by ERISA, the district court distinguished

Farlow and followed Martin.

Given the demonstrated difficulty faced by the district

courts, and the real possibility that Perkins is more consistent

than Farlow with federalism, state anti-twisting statutes, and the

intent to benefit workers which underlies the ERISA scheme, it may be timely and appropriate to suggest an en banc review of the

preemption matter. There is no apparent sign that ERISA filings

are declining in the district courts, and it is not impertinent to

suggest that clear direction from the Circuit is in order.