The Employee Retirement Income Security Act (ERISA) became federal law in 1974 and has been an obstacle to workers’ life, health, and disability insurance claims ever since. 29 U.S.C.S. § 1001.

ERISA was passed to protect employees by setting standards for their employment pension plans and health and welfare benefit plans. Although ERISA doesn’t mandate the provision of employee pension plans or welfare benefit plans, if the employer does offer such plans to its employees, then it must comply with ERISA funding and coverage requirements.

COBRA and HIPAA Are Part of ERISA

You may not be familiar with every ERISA provision, but you’ve probably heard or made use of COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985). As any Arizona insurance attorney will explain, COBRA gives certain employees and related beneficiaries the right to continue with the employer’s insurance coverage when, for example, their job with the company was terminated.

Another important amendment to ERISA came in the form of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Among other things, HIPAA protects certain employees with pre-existing medical conditions – insurers cannot refuse coverage for these workers.

The Road to Hell Is Paved with Good Intentions

ERISA, as a federal law, preempts state laws without providing a useful, reasonable substitute when insurers wrongfully reject insurance consumers’ claims. Your Arizona insurance attorney knows that under state laws like Arizona’s bad faith insurance laws there would be swift and painful financial consequences for an insurer’s fraudulent denial of a consumer’s insurance claim. By punishing insurers, state laws provide a strong deterrent against offending bad faith insurer acts and omissions.

But because of federal preemption of Arizona’s bad faith laws, ERISA hurts employees with respect to health and welfare insurance claims. When the insured sues the insurer for failure to pay on a legitimate claim, the remedies available under ERISA are minimal and, more often than not, will never approach making the worker whole again.

Under ERISA, if an insurer unreasonably delays or denies insurance policy claims, the most the insurance policyholder can recover is the insurance benefits owed. The court is allowed to award, but is not required to award, attorneys’ fees and interest. If the insured had any consequential damages (that is, she lost her home to foreclosure because the insurance company unreasonably refused to pay timely disability benefits, for example), then that is the insured’s problem, even though the insurer’s bad faith refusal to pay on a valid claim was the direct cause of nonpayment on the mortgage and subsequent foreclosure. Damages for emotional distress, punitive damages, and damages for any other losses caused by the insurance company’s proven bad faith conduct are not available to an insurance consumer under ERISA.

This is the result that an experienced Arizona insurance attorney will expect from an ERISA bad faith case:

The employee becomes disabled and can no longer work. He files a claim for disability benefits. The insurer wrongfully rejects his claim. He sues the insurer. In the interim, he files for bankruptcy protection from creditors. Years later, the employee wins the lawsuit. The insurer is ordered to pay the benefits it wrongfully denied. If the insured is fortunate, the judge will order his attorneys fees paid by the insurance company, too. But that’s all. In addition to coping with a disability, the worker’s financial life is shattered.

What Incentive Is There for Any Health, Life, or Disability Insurer to Pay on a Claim?

The answer from an Arizona insurance attorney is simple: None. Because insurance companies know that their liability for insurance claims subject to ERISA is limited to what they would owe if they paid the claim voluntarily and properly, they have little incentive to treat their insurance policy holders fairly and to pay the benefits owed. Instead, ERISA creates a strong incentive for insurance companies to refuse to pay insurance claims and to force insurance policyholders to file lawsuits. Insurers are not impartial benevolent trustees; they are businesses under pressure to turn very large profits for shareholders. Paying out on claims is the antithesis of insurance profits.

Under ERISA, these health, life, and disability insurers face no meaningful consequences and certainly no punishment for fraudulent bad faith refusals to pay on claims. The insurer can blatantly, fraudulently, wrongfully deny a claim and, should it lose the civil lawsuit, it knows full well that the only possible repercussions are paying what it originally promised to pay under the policy. Maybe it will have to pay the insured’s attorneys fees, a matter that is discretionary with the judge.

To make matters worse for the insured, ERISA also makes it exceedingly difficult for the insurance policyholder to win the lawsuit. There is no right to a jury trial in ERISA litigation – these are bench trials before a judge. Furthermore, discovery and admissibility of evidence is essentially limited to that which the insurer included in its claim file. In almost all ERISA cases, the court simply conducts a review of the administrative record that was before the insurance company and makes its decision completely on what information is in that record. Sometimes the insurance consumer can convince the court to hear additional evidence, but that is rare. This means the insurance policyholder does not get to tell his/her story to the judge and the insurance employees who wrongfully rejected the claim never have to testify. Lastly, because the insurance policy typically gives the insurer complete discretion over the decision to pay on a claim, at trial the plaintiff must prove that the insurer’s decision to refuse the claim was “arbitrary and capricious” – a fancy way of saying “completely off the wall.”

Insurance in Name Only Under ERISA

ERISA is extremely harmful to insureds, the preemption of state bad faith insurance and other laws has created a no-win situation for injured consumers. These employees are treated unfairly by workplace insurers who in bad faith deny claims without any risk of meaningful consequences. If your employer provides you with life, health, or disability insurance, then you are at the mercy of your insurer and ERISA. Be mindful that the insurer has every reason to deny your claim for any reason. If you sue and actually prevail at a bench trial, you’ll get the benefits you were denied, maybe attorneys fees, but nothing more.

Some Employees Are Not Subject to ERISA

The “good” news is that only about 85 percent of Americans who have group health insurance benefits through their employer are subject to the prohibitions of ERISA. Those not subjected to ERISA restrictions are individuals who work for governments (school teachers, police officers, etc.), churches, and with private insurance. These are the only people who have the right to bring a lawsuit for complete damages caused by their healthcare insurance provider’s bad faith claims handling practices. Everyone else can sue only for the cost of the treatment the insurance company was supposed to pay in the first place.

Contact Shane L. Harward, an AZ insurance attorney, for help (480) 874-2918

The important thing to know is that ERISA is very sticky subject to which many grey areas attach. If you feel you may fall into one of these grey areas and need help, it is important that you contact an insurance attorney as soon as possible.

Contact your Congressional Representatives

If you feel that federal law should not operate to encourage insurance companies to wrongfully refuse to pay legitimate insurance claims, we urge you to contact your representatives in Congress and to let them know you would like to see ERISA amended to allow state law to control lawsuits against bad faith insurance companies. The restrictions of ERISA, a program meant to help Americans, is unfairly turning honest citizens into desperate victims. ERISA should not give immunity to bad faith, dishonest insurance companies.

For any interesting law review article on the Revictimization of Personal Injury Victims by ERISA Subrogation Claims.