Most Employees Can’t Sue Group Health Insurers, State Supreme Court Declares

In a major victory for insurance companies, the state Supreme Court ruled today that most employees cannot sue for damages for fraud or delays in group health benefits.

The court ruled 5-2 that state laws that permit employees to sue for damages do not apply to disputes over benefits from federally regulated group health plans, which cover millions of workers.

“Ninety percent of working Californians are affected by this decision,” said David Bacon, a lawyer for Commercial Life Insurance Co., which won the case. Government employees and certain church employees are the only major groups of insured workers not affected, he said.

The court concluded that damage suits against group health insurers are prohibited by a federal pension and employee benefit law known as ERISA, the Employee Retirement Income Security Act of 1974.

That law allows a worker denied health benefits to sue for the benefits but does not provide additional damages for delays, bad faith, emotional distress or punitive damages.

Bacon said the ruling and similar recent decisions from federal courts “will help to encourage employers to set up and maintain employee benefit plans.”

But William Shernoff, a lawyer for a diabetic San Diego man whose suit over his denial of benefits was rejected by the court, said the ruling “allows insurance companies to basically commit fraud on group policyholders in the health area and get away with it.”

In today’s case, Joseph V. Juliano sued Commercial Life, his employer’s group health plan insurer, when it refused to pay most of the cost of eye surgery he needed. The suit sought damages for bad-faith denial of the claim, in violation of California law.

The majority opinion by Justice Edward A. Panelli said that ERISA, which regulated the health plan, also provided the sole remedy for violations and that additional damages under state law were not available.

In dissent, Justice Stanley Mosk, joined by Justice Allen E. Broussard, disagreed with the majority’s analysis of the relationship of ERISA to state law.

Today’s decision followed a virtually identical ruling in October by the U.S. 9th Circuit Court of Appeals. That decision is being appealed.