In an important victory for claimants, a United States District Court recently determined that a plaintiff who obtained an individual disability insurance policy through a conversion provision in an ERISA plan can pursue remedies in a state court under the newly issued individual policy. This ruling is important because the range of damages available through a lawsuit containing state law claims is much broader than the range of damages available through ERISA, and includes emotional distress damages and punitive damages.
In Marshburn v. Unum Life Ins. Co. of America, the insurance company, Unum, argued that the plaintiff, Julie Marshburn, could not pursue state law remedies to recover long-term disability insurance benefits because her plan was subject to ERISA. However, even though her initial group coverage, offered through her employer at the time, Cedars-Sinai Medical Center, was governed by ERISA, she was eventually given the opportunity to obtain a Conversion Policy for an individual plan. In this case, the court rejected Unum’s argument that Ms. Marshburn’s state law claims under the Conversion Policy were preempted by ERISA because the Plaintiff validly converted her group policy to a conversion policy.
Ms. Marshburn was admitted to a medicine residency program at Cedars-Sinai Medical Center in Los Angeles. During her residency, which consisted of a series of clinical rotations, she injured her shoulder while lifting a patient. Initially, Ms. Marshburn continued to work, but after the injury did not heal on its own as she had previously been advised, she was placed on certain work restrictions. .
Nearly three years after her shoulder injury, Ms. Marshburn underwent surgery to repair the labrum tear in her right shoulder. During this surgery, she suffered another injury, this time a torn ligament in her right thumb. The Plaintiff was then placed on additional work restrictions “prohibiting her from pushing, pulling, or lifting with her right upper extremity.” Under these restrictions, Ms. Marshburn would potentially be prevented from completing her internal residency program. Following her injuries, Ms. Marshburn continued to work as a resident at Cedars-Sinai and received her full salary. Her work at Cedars Sinai was terminated in June 2006.
After her termination in June 2006, the Plaintiff was given the opportunity to convert her group long-term disability coverage to an individual policy. Despite initially being denied conversion coverage due to a dispute as to the date the Plaintiff received the option, Ms. Marshburn was eventually issued LTD benefits under the Conversion Policy as of her termination date. She submitted a claim for LTD benefits in January 2011 under the Conversion Policy. Ms. Marshburn also suffered other injuries including insomnia, depression, chronic headaches and was unable to perform basic tasks.
The Plaintiff sued for breach of contract and breach of the implied duty of good faith and fair dealing. Unum moved for summary judgment, claiming that the Plaintiff was ineligible to convert her ERISA plan to and individual policy, which would be governed by state law.
The court first determined that while ERISA governs the right to convert, it does not overn the actual conversion policy:
In the Ninth Circuit, ERISA governs the right to convert an ERISA-governed policy to an individual conversion policy, but not conversion policies themselves. See Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 877 (9th Cir. 2001). By contrast, “state-law claims arising under a converted policy—even though the policy has been converted from an ERISA plan—are not preempted by ERISA.” Id. Accordingly, the Court looks to ERISA to determine whether plaintiff validly converted her group policy to a conversion policy. See White v. Provident Life & Accident Ins. Co., 114 F.3d 26, 28 (4th Cir. 1997).
Using the principle, the court first made clear that the insurance company seeking ERISA preemption bears the burden of proof to show that the insured was “disabled” under the relevant terms of the Group Plan (i.e., pre-conversion). Importantly, the court found that the Plaintiff was not disabled under the terms of her ERISA plan before her ERISA plan was converted because she received her full salary until the end of her employment. So while her injury occurred when her coverage was governed by ERISA, her entitlement to benefits did not arise until after her plan had been converted. Thus, her claims under the Conversion Policy were not pre-empted by ERISA, allowing her to pursue state law claims under that policy.