:: “Reverse Preemption” Rejected: The Emergence of RICO Claims In Lieu Of ERISA Claims

Specifically, Weiss alleges that his claim was targeted for termination because it exceeded $11,000 per month. He alleges that on October 3, 2001, defendants David Gilbert, Paul Keenan, George DiDonna, Lucy-Baird Stoddard, and others conspired at a roundtable meeting to terminate Weiss’s benefits and devise a rationalization for doing so. Weiss claims that DiDonna did not receive or examine his hospital records until the termination decision was reached, and that tests that would make clear the severity of his injury were purposely never ordered. He avers not merely a bad-faith denial of benefits limited to his case, but rather that his denial is one instance in a pattern of fraudulent activity by First Unum aimed at depriving its insureds with large disability payouts of their contractual benefits. Weiss v. First Unum Life Ins. Co., — F.3d —-, 2007 WL 968391 (C.A.3 (N.J.)) (April 3, 2007)

Weiss was an investment banker who was insured by First Unum through a group insurance policy with Tucker Anthony Sutro.

Weiss suffered an acute heart attack and applied for long term disability after repeated health failures. First Unum denied his claims.

Weiss claimed that First Unum applied an illegal policy and scheme First Unum designed to reduce expensive payouts.


Which is more damaging to a wayward defendant – an ERISA claim (no extra-contractual damages) or a RICO claim? Consider that RICO provides for treble damages, costs and attorneys’ fees.

Weiss has been called a “major setback for insurers”. Though victorious in its preemption defense, the carrier now faces prospect of the RICO hammer if it loses to Weiss. Little more need be said to emphasize the importance of this case.


The Weiss case is not an ERISA case though it began as one in a roundabout way. In the first place, Weiss brought action in state court against First Unum alleging that termination of his long-term disability (LTD) benefits violated state law.

First Unum removed the case on the grounds that Weiss’ state-law claims were preempted by ERISA. Then the case took a different turn.

Weiss amended his complaint to allege that First Unum violated the (RICO) by discontinuing payment of his disability benefits as part of its racketeering scheme involving intentional and illegal policy of rejecting expensive payouts to disabled insureds.

The district court dismissed his claim and he appealed to the Third Circuit Court of Appeals.

“Reverse Preemption”

Upon appeal, First Unum developed the thread of an earlier argument that the McCarran-Ferguson Act “reverse preempted” Weiss’ RICO claims. The Third Circuit remanded the case to the district court for further development of the record on this issue.

The district court held for First Unum, holding that the McCarrn-Ferguson Act did prevent assertion of federal RICO claims. Upon yet another appeal, the Third Circuit analyzed whether the McCarran-Ferguson Act precluded Weiss’ federal civil RICO claims and held that the district court erred.

The McCarran-Ferguson Act

What exactly is the McCarran-Ferguson Act?

Congress enacted the McCarran-Ferguson Act in response to the decision in United States v. South-Eastern Underwriters Association, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), which held that Congress could regulate the business of insurance with its Commerce Clause authority.

Section 1 of the Act, codified at 15 U.S.C. § 1011, expressed Congress’s “Declaration of Policy.”

The Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States. 15 U.S.C. § 1011.

Section 2 of the Act explains the federal-state balance that was intended:

(a) State regulation. The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

(b) Federal regulation. No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance:

Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law. 15 U.S.C. § 1012.

The Nub of the Issue

Here’s the issue in a nutshell: does the McCarran-Ferguson Act, requiring deference to State insurance regulation, preclude the availability of the federal remedy afforded via RICO? The answer, in the Third Circuit anyway (see note below for other jurisdictions), is no.

The Critical Phrase – “Invalidate, Impair, or Supersede”

The statute leaves room for interpretation in the application to specific fact situations. Putting aside the historical views of the key phrase, the Third Circuit considered what the U.S. Supreme Court had to say in a relatively recent opinion, Humana Inc. v. Forsyth, 525 U.S. 299 (1999)

Humana Inc. v. Forsyth Analysis

In Humana Inc. v. Forsyth, the Supreme Court provided a framework for assessing when federal law will not frustrate any declared state policy or interfere with a State’s administrative regime. In that case, the U.S. Supreme Court evaluated the impact civil RICO would have on the Nevada state insurance system.

The overarching goal of Section 2(b) of the Act, the Supreme Court stated, was to control the interplay between the federal and state laws not yet written. In its review of the Supreme Court decision in Humana, the Third Circuit observed that:

In charting the scope of Section 2(b), the Court rejected the view that “Congress intended to cede the field of insurance regulation to the States, saving only instances in which Congress expressly orders otherwise.” Id. at 308. At the same time that it rejected any notion of field preemption, it also rejected “the polar opposite of that view, i.e., that Congress intended a green light for federal regulation whenever the federal law does not collide head on with state regulation.” Id. at 309. With those extremes rejected, the Supreme Court established the following formulation for applying § 1012(b): “When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State’s administrative regime, the McCarran-Ferguson Act does not preclude its application.” Id. at 310.

In Humana, the Supreme Court ulimately ruled that RICO’s private right of action and treble damages provision complemented Nevada’s statutory and common-law claims for relief. In reaching this conclusion, the Court evaluated the specific interplay between RICO and the state insurance scheme employing a non-exclusive list of factors. The factors are as follows:

(1) the availability of a private right of action under state statute;
(2) the availability of a common law right of action;
(3) the possibility that other state laws provided grounds for suit;
(4) the availability of punitive damages;
(5) the fact that the damages available (in the case of Nevada, punitive damages) could exceed the amount recoverable under RICO, even taking into account RICO’s treble damages provision;
(6) the absence of a position by the State as to any interest in any state policy or their administrative regime; and
(7) the fact that insurers have relied on RICO to eradicate insurance fraud.

See, Humana, 525 U.S. at 311-314.

The Humana Analysis Applied

Turning to the case at bar, the Third Circuit held that the Humana factors favored permitting allowing the RICO action to go forward.

(1) Statutory Private Right of Action

The parties agreed that there is was no private right of action under ITPA, but differed as to the implications of this conclusion. The Court viewed the absence of a private right of action in ITPA as an obstacle to Weiss’s claim, “but by no means an insurmountable one”.

(2) Common Law Right

The parties agreed that New Jersey provided a common law right of action against insurers for the recoupment of wrongly withheld benefits. See, Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (N.J.1993) (recognizing a remedy for “bad-faith refusal” of benefits)

(3) Other State Laws

The Court noted that the New Jersey Consumer Fraud Act (CFA) made treble damages available to redress violations.This left the question of whether the scheme Weiss alleged was covered by the CFA. If it was, “that would likewise undercut any purported objection by the New Jersey legislature to the award of treble damages under RICO.”

The Court stated:

We conclude that while the New Jersey Supreme Court has been silent as to this specific application of CFA, its sweeping statements regarding the application of the CFA to deter and punish deceptive insurance practices makes us question why it would not conclude that the performance in the providing of benefits, not just sales, is covered, so that treble damages would be available for this claim under the CFA.

(4)-(5) Availability of Punitive Damages and Scope of Possible Damages

On these points, the Court stated:

New Jersey law also appears to be unclear as to whether punitive damages are available against insurance companies on facts such as these. Weiss contends that Pickett left the door open for punitive damages to be awarded in a suit based on common law. While Pickett stated that “wrongful withholding of benefits … does not thereby give rise to a claim for punitive damages,” 621 A.2d at 455, it nonetheless indicated that on some fact patterns a cause of action independent from the bad-faith denial of benefits could be sustained: “Carriers are not insulated from liability for independent torts in the conduct of their business. For example, ‘[d]eliberate, overt and dishonest dealings,’ insult and personal abuse constitute torts entirely distinct from the bad-faith claim.” Id. (quoting Farr v. Transamerica Occidental Life Ins. Co., 145 Ariz. 1, 699 P.2d 376, 383 (Ariz.1984)). Further, the Pickett Court added that “in order to sustain a claim for punitive damages, a plaintiff would have to show something other than a breach of the good-faith obligation as we have defined it.” Id. The parties have argued whether a racketeering scheme constitutes conduct so wrongful as to warrant punitive damages. We think it is at the very least arguable that a racketeering scheme by an insurer against its insureds would constitute a distinct and egregious tort under New Jersey law.

(6) Presence or Absence of State Brief

The District Court found a limiting policy implicit in the structure of the New Jersey scheme, and found it would be frustrated and impaired by RICO. On the contrary, the Third Circuit held that there was no “declared state policy” conspicuous from the structure of New Jersey law or the pattern of legislative history:

We can draw no specific conclusion from New Jersey’s silence; if anything, it weighs against First Unum.

(7) Reliance by State Insurers

The Third Circuit stated that depriving all players in the New Jersey insurance scheme of the right to sue under RICO “is not part of the state’s declared insurance policy, and we cannot simply presume such an atypical legislative aim from the structure of New Jersey’s insurance laws.”


In the final analysis, the Third Circuit held for the plaintiff, finding that:

the allowance of treble damages, or punitive damages analogous to the treble damages available under RICO, is not as clear. The issue, then, is whether the absence of extensive legislative regulation of claims against insurers or provision of remedies, coupled with judicial sanctioning of certain remedies for bad faith denials of benefits, indicates that RICO would impair the state regulatory scheme. We think not. There is nothing in the regulatory scheme that indicates that allowing other remedies as part of its regulation of insurance would frustrate or interfere with New Jersey’s insurance regime. To the contrary, the legislation permits additional remedies, see § 17:29B-12, and the New Jersey courts have felt free to fashion them. Moreover, the New Jersey Supreme Court’s reasoning in Lemelledo in connection with the CFA points to encouraging, rather than limiting, other remedies in this area. Furthermore, as Judge Seitz noted in Sabo, RICO embodies federal policies of an expansive nature. See Sabo, 137 F.3d at 194 (discussing “federal policies embodied in RICO, namely, the grant of a liberal federal remedy”); see also Sedima v. Imrex Co., 473 U.S. 479, 498 (1985) (“RICO was an aggressive initiative to supplement old remedies and develop new methods for fighting crime.”). The need for this type of regulation was not contemplated when McCarran-Ferguson was enacted. We should be wary of underestimating the significance of these federal policies and should not go out of our way to find impairment of a state scheme when such impairment is not clear.

After canvassing the Humana factors, we are left with the firm conviction that RICO does not and will not impair New Jersey’s state insurance scheme. Though RICO is a powerful tool, we conclude as the Supreme Court did in Humana that “we see no frustration of state policy in the RICO litigation at issue here.” 525 U.S. at 313. Indeed, in light of the common law and statutory remedies available, we do not read New Jersey’s scheme as intended to be exclusive. Nor do we find that RICO will disturb or interfere with New Jersey’s state insurance regime. RICO’s provisions supplement the statutory and common-law claims for relief available under New Jersey law. We conclude that RICO augments New Jersey’s insurance regime; it does not impair it.

Note: The Plaintiff suffered considerable costs in pursuing the many procedural and appellate turns in the case and held that these costs formed a part of the damages in the Plaintiff’s claims.

First Unum did not make Weiss whole with respect to fees and penalties he incurred while deprived of his long-term benefits, nor did First Unum account for the fact that Weiss sold real estate and various properties at a loss in order to obtain medical care while his benefits were being withheld. First Unum states that this repayment was due in part to representations by Weiss’s counsel that Weiss was in desperate condition, and that the litigation was harming Weiss. Weiss states that before he officially added the RICO claim, he made clear to First Unum in a pre-trial joint-discovery plan that he would be adding that claim to his allegations. Accordingly, Weiss argues that the reinstatement of benefits was an attempt to “pick off” his case before it could gather momentum and seek treble damages.

Injury To Property For RICO Purposes – In an important note, the Third Circuit stated:

We believe that our order vacating the previous decision of the District Court recognized that the losses alleged by Weiss (as a result of his having had to sell his home and personal property below the property’s fair market value as well as having incurred fees and penalties from the IRS) were out-of-pocket expenses fairly traceable to First Unum’s conduct, and thus qualify as an injury to property for RICO purposes. See Maio v. Aetna, Inc., 221 F.3d 472, 483 (3d Cir.2000) (injury to business or property exists where the plaintiff suffered “concrete financial loss” such that “actual monetary loss, i.e., an out-of-pocket loss” occurred).

Other Jurisdictions – As noted by the Third Circuit, other Courts of Appeal have weighed in on the issue.

In American Chiropractic v. Trigon Healthcare, 367 F.3d 212 (4th Cir.2004), cert. denied, 543 U.S. 979, 125 S.Ct. 479, 160 L.Ed.2d 356 (2004), the Fourth Circuit upheld the application of RICO in Virginia despite the absence of a private right of action in the state insurance regime for reasons corresponding closely to those we rely on. While the Tenth Circuit in Bancoklahoma Mortgage Corp. v. Capital Title Co., 194 F.3d 1089 (10th Cir.1999), followed a similar path and upheld the application of RICO in Missouri despite the absence of a private right of action under the state regime, the Eighth Circuit has held that RICO would impair Minnesota’s insurance system. In Doe v. Norwest Bank Minn., N.A., 107 F.3d 1297 (8th Cir.1997), the Eighth Circuit discussed the absence of a private right of action under Minnesota’s scheme, as well as the severe civil RICO penalties, and concluded that “[Appellee] makes a compelling case that the extraordinary remedies of RICO would frustrate, and perhaps even supplant, Minnesota’s carefully developed scheme of regulation.” Id. at 1307-08. The Eighth Circuit concluded on the basis of evidence before it that the “state of Minnesota … determined that its insurance market can best be regulated by the Commissioner’s pursuit of fines and injunctive relief.” Doe, 107 F.3d at 1307. [See also LaBarre v. Credit Acceptance Corp., 175 F.3d 640 (8th Cir.1999)]

Background on RICO – G. Robert Blakey is the final word on Racketeer Influenced and Corrupt Organizations Act (RICO). He drafted the statute and has published widely on its applicability. On a personal note, he was my criminal law professor and, in my opinion, he is a really great professor with a thoroughly logical and consistent approach to his subject.

ERISA Quirk – Recall that this case began as an action removed to federal court based upon ERISA preemption. The Third Circuit noted that:

In light of ERISA, the state-law claims were dismissed, and eventually the ERISA claims were also dismissed, leaving only the federal RICO claims. We find ourselves resorting to state-law theories and claims as justification for the application of civil RICO, despite the fact that those claims would be preempted by ERISA. As this quirk did not trouble the Court in Humana, we will not explore it further. See Humana, 525 U.S. at 304 n. 4 (“The complaint also presented claims under the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq., and § 2 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 2. The disposition of those claims is not germane to the issue on which this Court’s review was sought and granted.”).

Very Important – The Future of McCarran-Ferguson? Congress is considering changes to the statute in reaction in recent industry conduct:

For more than six decades, the insurance industry has operated largely beyond the reach of federal competition laws,” Senate Lott testified. “I truly believe that the McCarran-Ferguson Act’s antitrust exemption has allowed insurers to engage in anticompetitive conduct, and I can find no justification to exempt the insurance industry from federal government oversight. Such oversight could help make certain that the industry is not engaging in anticompetitive conduct such as price fixing, agreements not to pay, and market allocations. Senator Trent Lott (R) Mississippi

If Congress acts, then the insurance industry will feel the full weight of federal statutory regulation and remedies. You should listen to the following audio for a current status of hearings on the McCarran-Ferguson Act.