ERISA-Second Circuit Rules That New York Law Prohibiting Insurer Subrogation Is Not Preempted By ERISA

In Wurtz v. The Rawlings Company, LLC, No. 13‐1695‐cv (2nd Cir. 2014), the plaintiffs initially filed the complaint in this case in New York state court, seeking, among other things, to enjoin defendant insurers under N.Y. Gen. Oblig. Law § 5‐335 from obtaining reimbursement of medical benefits from plaintiffs’ tort settlements (that is, to enjoin the insurers from enforcing subrogation rights to obtain the settlement amounts). The defendants removed this action to the Eastern District of New York. There, the district court granted the defendants’ motion to dismiss under Rule 12(b)(6) for failure to state a claim on the basis that the plaintiffs’ claims were subject to both “complete” and “express” preemption under ERISA.

Upon review, the Second Circuit Court of Appeals (the “Court”) held, first, that the plaintiffs’ claims do not satisfy the Supreme Court’s test for being subject to complete ERISA preemption (in Aetna Health Inc. v. Davila) , which would have conferred federal subject‐matter jurisdiction. Such jurisdiction exists, however, under the Class Action Fairness Act (“CAFA”), 28 U.S.C.§ 1332(d). Accordingly, the Court then reached the merits of the express preemption defense, and concluded that N.Y. Gen. Oblig. Law § 5‐335 is saved from express preemption under ERISA § 514, 29 U.S.C. § 1144, as a law that “regulates insurance.” Accordingly, the Court reversed the district court’s judgment and remanded the case for further proceedings on the plaintiffs’ claims.

Two points to be considered here. First, the Court ruled that the claims were not subject to complete preemption under ERISA, since-contrary to the requirements of the Supreme Court (in Davila)- the claims could not be construed as claims for benefits under ERISA section 502(a)(1)(B), and there may be independent duties, aside from those arising under ERISA or any employee benefit plan, that the defendants may have breached.

The second point is why N.Y. Gen. Oblig. Law § 5‐335 is not subject to express preemption under ERISA. This provision states that a personal injury settlement presumptively “does not include any compensation for the cost of health care services” or other losses that “are obligated to be paid or reimbursed by a benefit provider” (such as an insurer), and that benefit providers have no “right of subrogation or reimbursement against any such settling party.” ERISA expressly preempts any state law that “relate[s] to any employee benefit plan,” but not if that law “regulates insurance.” ERISA § 514(a)‐(b), 29 U.S.C. § 1144(a)‐(b). In this case, the N.Y. Gen. Oblig. Law § 5‐335 regulates insurance, since this provision is specifically directed toward insurers and substantially affects risk pooling between insurers and insureds. As such, it is saved from express preemption.

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