Court Denies Damage Suit on Insurance Group Plans

Insurance companies that improperly delay or withhold payment for claims under group insurance plans governed by a 1974 federal statute cannot be sued under state law for large damage awards, a federal appellate court ruled Tuesday.

A three-judge panel of the U.S. 9th Circuit Court of Appeals unanimously overturned Los Angeles U.S. District Judge Edward Rafeedie’s award of more than $750,000 to a Los Angeles couple who sued Connecticut General Life Insurance Co.

Theodore and Beatriz Kanne, according to Encino attorney Leonard Sacks, were left owing about $90,000 to doctors and medical centers for treatment of their son, Jonathan, 7, who was born in the Netherlands with a rare blood disease.

Although the insurance company eventually made good, Sacks said, the Kannes “were put on a cash basis by doctors.” He said they often had to “sneak out” of doctors’ offices after obtaining necessary treatment for the boy.

Emotional Distress

In their suit, the couple sought reimbursement for air fare from the Netherlands to the United States for surgery, as well as for emotional distress caused by delay of insurance payments. Rafeedie awarded them $225,234 in compensatory damages and $500,00 in punitive damages.

The San Francisco-based appellate court panel, however, ruled that the builders and contractors group policy covering Theodore Kanne, a floor designer, and his family comes under the federal Employee Retirement Income Security Act, which preempts state law.

Under state law, claimants can seek potentially large compensatory and punitive damage awards for the wrongful denial or improper delay of claims payments. Under federal law, they are largely restricted to recovering only denied benefits, plus attorneys’ fees.

Sacks called Tuesday’s decision a “windfall for the insurance companies” and said he believes that it is “a travesty that the insurance companies are protected by federal law this way.”

He said he intends to ask for a hearing before a full 11-judge panel of the appellate court and, if necessary, to seek consideration by the U.S. Supreme Court.

“There are just too many innocent, crippled people who will suffer to let this go,” Sacks said.

Watching Case

The lawyer said numerous other states have been watching this case because they, like California, have laws permitting suits for bad-faith or consciously wrongful handling of claims.

Insurance industry attorneys contend that federal law provides adequate regulation of the claim-filing process and that allowing big damage awards will drive up insurance costs, thus prompting employers to scale back their group insurance plans.