Health Plan Suit May Have Wide Impact in California

His sight failing from diabetes, Joseph V. Juliano underwent delicate eye surgery in early 1984 and, like countless other workers covered by group health plans, sent the bills to his employer’s insurance company. But the company refused the claim, finding that Juliano’s surgery stemmed from a condition that existed before he was covered by the plan. He then brought suit against the insurer and his employer, seeking punitive damages for their “bad-faith” refusal to pay him benefits.

The case has now reached the state Supreme Court, and the outcome could have far-reaching impact on private employers, employees and insurers throughout California.

The question before the justices is whether Juliano and others who believe they have been improperly denied benefits can sue under state law or whether they must proceed under federal law on the issue. The court’s answer is expected to affect millions of dollars in legal claims.

Under state law, unhappy claimants can go to court to seek potentially large compensatory and punitive damage awards for the wrongful denial of insurance claims. But under federal law, they are largely restricted to recovering only the benefits they were denied, plus attorneys’ fees.

In dollar amounts, the difference between proceeding under state or federal law can be substantial. For example, in one recent case a dissatisfied claimant was awarded $500,000 in punitive damages and $250,000 in emotional distress damages under state law. Under federal law, the claimant stood to regain only the $2,234.88 in benefits at issue and his legal costs. Plaintiffs’ lawyers argue that the threat of substantial damages is the only way to assure that insurers do not improperly delay or deny valid claims.

“This is a tremendously widespread problem,” said Leonard Sachs, an Encino attorney. “The outcome of this case could affect thousands of employers and millions of employees, because group insurance through an employer is very prevalent these days.”

“If plaintiffs don’t have a state law remedy, their rights to force a company to honor their policies are diluted,” Sachs said. “When the claim is denied, the employee, for the most part, is just stuck.”

But defense attorneys reply that federal law provides adequate regulation of the claim-filing process and that allowing big damage awards will drive up insurance costs and force employers to curtail group insurance plans, all to the detriment of the worker.

David L. Bacon, a Los Angeles attorney, noted that in recent years, jury verdicts in bad-faith cases against insurers have reached as high as $5 million and that thousands more of such suits are pending, as plaintiffs seek to cash-in against “deep-pocket” defendants.

“The importance of this issue really can’t be overstated,” Bacon said. “While most of these awards are reduced, they still present a very serious threat to employers and insurance companies. . . . Employers will be discouraged from providing group plans or will cut back on the plans or move to self-funded programs to avoid suits under state law.”

The federal law at issue is the Employee Retirement Income Security Act (ERISA), which was passed by Congress in 1974 to protect and regulate welfare and pension benefits provided to workers through plans established by unions and private employers.

The state law involved is a provision of the California Insurance Code imposing standards for handling claims and barring unfair practices by the industry.

In the case before the justices, Juliano, now 38 and living in Austin, Tex., said he had suffered a severe attack of diabetes but that doctors had told him that with proper treatment, they could save the sight in his left eye.

He said both he and his physicians obtained presurgery authorization from his health plan insurer, Commercial Life Insurance Co., but that after the operation, the company improperly refused to pay.

The company denied giving such authorization and, citing a standard clause in insurance policies, said denial of the claim was valid because Juliano’s treatment arose from a condition he had suffered from since age 15--about 20 years before he began working at the B&J; Electric Wholesale Co. and became covered by its group insurance plan.

Juliano contended that as a result of the denial of his claim, he was forced to seek follow-up care through a charitable foundation and that the stress and additional complications he suffered adversely affected subsequent surgery. Now, he said, he is totally blind.

Emotional Distress

The man brought suit in 1985 against both the insurer and his employer, seeking to recover $12,148 for the cost of his surgery, $350,000 for his emotional distress and unspecified punitive damages. However, before the case came to trial, the U.S. Supreme Court issued a decision that cast doubt on whether he could proceed under state law.

The federal high court, ruling last year in a case from Mississippi, held that ERISA was intended to preempt state suits based on common law--that is, law made by judicial decisions--for the improper handling of group insurance claims.

But the high court did not make clear whether its ruling also applied to state statutes, like California’s, that permit suits for the bad-faith--or consciously wrongful--handling of claims. Since then, state courts and lower federal courts have disagreed over whether ERISA preempts actions brought under state statutes.

One such case is pending before the U.S. 9th Circuit Court of Appeals in San Francisco. A decision in that case, or one by the state high court in the Juliano case, eventually could reach the U.S. Supreme Court for review.

Commercial Life, citing the federal high court’s 1987 ruling, sought to have Juliano’s suit dismissed. But both a San Diego Superior Court judge and a state Court of Appeal refused to do so, holding the suit could proceed under the state Insurance Code provision.

Specific Standards

The insurance company’s lawyers are contending to the state Supreme Court that ERISA clearly was meant to regulate all insurance claims-handling, setting forth specific standards for adequate notice of denial of benefits and providing for appeals and review in the courts.

Exposing insurers already covered by ERISA to suits based on state law would drastically enlarge the companies’ risks to varying and often-inconsistent legal standards, insurance attorneys say.

When state and federal laws conflict, the supremacy clause of the U.S. Constitution requires state laws to yield, they argue.

Lawyers for Juliano say that in enacting ERISA, it was not Congress’ intention to bar states from imposing their own additional protections for insurance claimants.

Removing the threat of punitive and compensatory damages will invite insurers to deny or delay claims, knowing that virtually their only penalty will be to pay what they were supposed to pay in the first place, the plaintiff’s attorneys say. People unfairly denied claims will be faced with high, unrecoverable expenses if they try to go to court--such as paying expensive fees for expert medical testimony--and thus will find it impractical to proceed, the lawyers contend.

In argument before the justices earlier this month, Curtis L. Metzgar of Los Angeles, an attorney for Commercial Life, argued that ERISA was intended to “completely replace and supplant” a patchwork of state laws involving pensions and benefit plans.

‘Six-Figure Awards’

Metzgar said that claimants would still be sufficiently protected under the federal law from unfair denial of benefits. The federal act’s goals, he said, could be met without “having to go to court and win six-figure awards for emotional distress.”

William M. Shernoff of Claremont, an attorney for Juliano, accused the insurance industry of trying to “escape regulation” by urging the court to bar suits based on state law.

Without state law protections, Shernoff said, “the vast majority of Californians will be left in the lurch . . . and a lot of them will be abused and defrauded.”