Here, the Policy contained a valid choice of law provision, which indicates that the parties intended for the Policy to be governed by Texas law to the extent that it is not preempted by ERISA. Thus, in order to decide this issue, we must ascertain how to determine whether or not to enforce an ERISA plan’s choice of law clause in accordance with federal common law. Although we have not previously addressed this issue, a review of our caselaw in other federal question cases and of caselaw from our sister circuits in ERISA cases reveals three possible approaches to resolving this choice of law issue.
First, our sister circuits have applied two different tests when deciding whether to enforce an ERISA plan’s residual choice of law clause. Two of our sister circuits have held that “[w]here a choice of law is made by an ERISA contract, it should be followed, if not unreasonable or fundamentally unfair.” Wang Labs., Inc. v. Kagan, 990 F.2d 1126, 1128-29 (9th Cir. 1993); Buce v. Allianz Life Ins. Co., 247 F.3d 1133, 1149 (11th Cir. 2001). By contrast, the Sixth Circuit has applied the Restatement (Second) of Conflict of Laws to decide whether to give effect to a choice of law provision in an ERISA plan; it applied the Restatement because it found an “absence of any established body of federal choice of law rules.” Durden, 448 F.3d at 922 (citation omitted). Specifically, the court applied § 187 of the Restatement, which addresses when to apply the law of the state chosen by the parties. Id. at 922-23.
We have likewise generally referred to the Restatement when deciding choice of law issues in some admiralty cases, see Albany Ins. Co. v. Anh Thi Kieu, 927 F.2d 882, 891 (5th Cir. 1991), and in a recent admiralty case we noted that § 187 supported our decision to enforce an insurance policy’s choice of law clause.
Jimenez v. Sun Life Assur. Co., 2012 U.S. App. LEXIS 17108 (5th Cir. La. Aug. 15, 2012)
This unpublished Fifth Circuit opinion addresses several sets of opposing principles in choice of law as applied in the ERISA context. While the court’s analysis is unremarkable, the issues raised by the parties suggest an interesting perspective on a familiar ERISA claims scenario.
The Plaintiff in the case at bar suffered serious injury while driving his automobile. The plan defended a claim under provisions that excluded coverage for injuries which were described as an “illegal acts” exception. The plan contended Plaintiff was injured while driving under the influence of alcohol which constituted an illegal act
While the controlling documents were in the typical disarray one would expect of a group insurance arrangement, the court ultimately settled on the terms of the plan as presented in the policy and a grant of discretion thereunder to the carrier. The court would ultimately conclude that the discretion granted in the policy trumped any issues of ambiguity under policy terms.
The Plaintiff’s best argument rested on choice of law principles. Under Louisiana law, the law of the forum, carriers are apparently prohibited from denying claims under an illegal acts defense unless the acts constitute felonies. Texas law contained no such limitation. The policy contained a choice of law provision in favor of Texas law.
Which law applies?
The court concluded that choice of law considerations involved a matter of federal common law. The court avoided addressing issue, stating that the Plaintiff “failed to satisfy his burden to establish that we should not enforce the Policy’s choice of law clause under any standard we would adopt.” (The record leaves some doubt as to that conclusion.) The court applied Texas law as specified in the policy, found substantial evidence to support the benefit denial and ruled for the plan.
Though the outcome in this case was for the plan, the choice of law framework provides an opportunity to evaluate some important fundamental issues that precede a substantive ruling on the merits. In many cases, once the issue reaches the merits a plan administrator’s discretionary authority and the presumptions that attach to its findings will be determinative. Thus, the preliminary question of applicable law may be very important where state law differs.
# 1 Evaluate applicability of state law insurance regulations
Note that even in the ERISA plan context, state law may be relevant. For example, three federal Courts of Appeals have ruled that a state law prohibition on discretionary clauses fall within ERISA’s savings clause and are not preempted by ERISA. See Standard Ins. Co. v. Morrison, 584 F.3d 837(9th Cir. 2009); American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009); Hancock v. Metropolitan Life Ins. Co., 590 F.3d 1141 (10th Cir. 2009).
# 2 Determine the relevant state law
Most plan documents or policies will contain a forum selection as well as a choice of law provision. Evaluate differing definitions of operative terms and standards.
# 3 Consider the relevant standard under federal common law
Unless another approach governs in the jurisdiction, the Restatement (2d) Conflict of Laws § 187 is a likely standard for consideration by the court.
# 4 Evaluate requirements of the burden of proof
Both at the administrative level and on judicial review, the party opposing the contractually selected law has the burden of proof.
# 5 Address policy issues implicated by choice of law
Although the federal common law lacks uniformity on the issue, questions of reasonableness and policy, vague as they are, nonetheless are key considerations. For example, it has been stated that:
Unreasonableness potentially exists where (1) the incorporation of the forum selection clause into the agreement was the product of fraud or overreaching; (2) the party seeking to escape enforcement “will for all practical purposes be deprived of his day in court” because of the grave inconvenience or unfairness of the selected forum; (3) the fundamental unfairness of the chosen law will deprive the plaintiff of a remedy; or (4) enforcement of the forum selection clause would contravene a strong public policy of the forum state. Haynsworth v. Corporation, 121 F.3d 956 (5th Cir. Tex. 1997)
Likewise, the restatement’s commentary states that a policy which protects people from the oppressive use of superior bargaining power is one example of a fundamental policy. Rest. 2d Conflict of Laws, cmt. g.
Note: The foregoing issues present important considerations for plan counsel and claimant’s counsel alike.
The Restatement (Second) of Conflict of Laws, Section 187 provides the framework for determining whether a choice of law provision in a contract is given effect:
§ 187. Law of the State Chosen by the Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either:
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
Rest. 2d Conflict of Laws § 187 (1971).