Academic journal article Journal of Risk and Insurance

Recent Court Decisions

Academic journal article Journal of Risk and Insurance

Recent Court Decisions

Article excerpt


UNUM Life Insurance Co. v. Ward, 119 S.Ct. 1380, 143 L.Ed.2d 462, 67 U.S.L.W. 4243 (United States Supreme Court April 20, 1999).

Holding that California's "notice-prejudice" rule is a law "which regulates insurance," the United States Supreme Court rejected an insurer's argument that the Employee Retirement Income Security Act ("ERISA") preempts California law regarding the consequences of an insured's late notice to its health insurer.

John Ward was insured under an employer-provided group disability policy issued by UNUM Life Insurance Co. of America, working for his employer from 1983 until he became permanently disabled from severe leg pain. He was diagnosed as having a diabetic neuropathy condition in December 1992. In early 1993, he qualified for state disability benefits and then informed his employer. In July 1993, he was ruled eligible for social security disability. He continued to communicate with his employer but UNUM did not receive proof of Ward's disability claim until April 1994, five months later than the time limit under the policy (November 1993 was the deadline in view of Ward's situation). He submitted his claim to UNUM after the time limit established by the policy. UNUM denied Ward's claim as untimely and he sued pursuant to ERISA's right of action to recover benefits.

California's general rule is that when an insured's claim is untimely, the insurer may use this as an effective defense only if the insurer can prove that it was actually prejudiced by the delay. Prejudice means more than mere inconvenience or the possibility of prejudice. The insurer must usually demonstrate that it is unable to adequately evaluate the claim or defend a third-party claim due to the delay in notice. For example, if a key item of evidence has vanished between the deadline for notification and the actual receipt of notice, the insurer often can demonstrate sufficient prejudice to defeat the claim (assuming that alternative, comparable evidence does not remain available). This form of "notice-prejudice" rule is the approach followed by most American jurisdictions (one notable exception is New York, which does not require the insurer to prove prejudice).

UNUM argued that as an insurer providing an employee benefit plan subject to ERISA, it was not governed by the California notice-prejudice rule because of ERISA's broad preemption provisions. Generally, ERISA preempts the operation of state law upon an employer-employee benefit plan. The statute provides that ERISA "shall supercede" state law to the extent that state law "relate[sj to any employee benefit plant. See 29 U.S.C. 1144(a). However, another provision of the statute exempts from the preemption provision "any law of any State which regulates insurance." See 29 U.S.C. 1144(b)(2(A). UNUM argued that the notice-prejudice rule in California was not a state law regulating insurance but only a state common law approach to late notice for insurance contract claims. The Court rejected the insurer argument, concluding that the California notice rule was part of the warp-and-woof of state insurance regulation.

In its first ERISA preemption case in 1987, the Court took an extremely broad approach to ERISA preemption, holding that ERISA preempted state bad faith law claims against insurers. See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41,107 S. Ct. 1549,95 L.Ed.2d 39 (1987). Since then, the Court has moved in somewhat halting steps toward a more restrained view on preemption. Today, the Court professes to decide preemption on a case-by-case basis measuring the reach of the statute's pre-emption provision "in context". In Ward, the Court inquired whether as a matter of "common sense," the provision in question regulates insurance". …

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