Significant Victory For Insurers Of ERISA Plans In New Jersey

Third Circuit Holds New Jersey's Anti-Subrogation Law Preempted by ERISA

April 2005

BY:  ELIZABETH A. VENDITTA, ANDREW I. HAMELSKY AND MICHAEL J. KOZORIZ

In Levine v. United Healthcare, 2005 WL 602436 (3d Cir., Mar. 16, 2005), the Third Circuit handed insurers a significant victory by ruling that the New Jersey anti-subrogation law was preempted by ERISA and that healthcare insurers are consequently entitled to reimbursement of medical expenses from their insureds who later win or settle a personal injury suit against a third party, i.e. from an insured’s thirdparty tort recovery.

The Court answered two questions: first, whether the New Jersey law that outlawed subrogation was saved from preemption by ERISA’s “savings clause,” and, secondly, whether the somewhat unique claims by plan participants against their healt h insurer for reimbursement of amounts previously recovered fall within ERISA’s civil enforcement provision to allow removal of the claim to federal court.

As to the issue of preemption, the Court held that the New Jersey anti-subrogation statute fails to satisfy the U.S. Supreme Court’s recently announced test for deciding whether a state law qualifies for the ERISA savings clause. In Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 123 S. Ct. 1471, 155 L.E.2d 468 (2003), the Supreme Court held that for a state law to be deemed a law that regulates insurance, it must satisfy two requirements. First, the state law must be “specifically directed toward entities engaged in insurance.” Second, the state law must “substantially affect the risk pooling arrangement between the insurer and the insured.” Given that the New Jersey antisubrogation law “explicitly regulates both insurance and non-insurance entities,” the Third Circuit held that the law was not “specifically directed” toward the insurance industry and was, thus, preempted by ERISA. Since ERISA preempts the New Jersey antisubrogation law, the Court held that the reimbursement provisions found in health insurance policies must stand. Accordingly, the Court, despite a strong dissent by Judge Garth who believed that New Jersey Supreme Court precedent regarding the collateral source rule was dispositive of the issue, dismissed the Complaint of the participants to recover the reimbursements previously taken by their healthcare insurers.

With regard to the issue of removal, the Third Circuit, following the Fourth and Fifth Circuits, held that where plan participants “claim that their ERISA plan wrongfully sought reimbursement of previously paid health benefits, the claim is for ‘benefits due’ and federal jurisdiction under section 502(a) of ERISA is appropriate.”

The important lesson of Levine is that the decision reopens the door for fully insured, ERISAcovered plans to pursue subrogation or reimbursement in New Jersey. Moreover, the decision allows health plans to remove to federal court claims brought by its members to challenge their right to recovery. Lastly, the Third Circuit has confirmed jurisprudence which expands the ERISA preemption doctrine to state statutes that clearly would have been “saved” from preemption in the past due to their regulation of insurance. Now, in the Third Circuit for a statute to be “saved” from ERISA, it clearly must be “specifically directed, and exclusively directed, toward the insurance industry.” Clearly, this decision is a win for insurers of ERISA plans.

About the Authors: Elizabeth A. Venditta (215-864-6392, vendittae@whiteandwilliams.com) and Andrew I. Hamelsky (201- 368-7206, hamelskya@whiteandwilliams.com) are partners at White and Williams LLP in the Philadelphia, PA and Paramus, NJ/New York, NY offices respectively, concentrating their practices in the defense of insurers and self-insureds in life, health, disability and ERISA litigation. Michael J. Kozoriz (201-368-7212, kozorizm@whiteandwilliams.com) is an associate in the Paramus, NJ/New York, NY offices and is also a member of the Life, Health and Disability Practice Group.