HOW ERISA CHANGED THE NATURE OF INSURANCE
ERISA Has Redefined the Basic Concept of What Insurance Really Is.
By: Michael A. McKuin
Revised: July 2015
Every other "industry" in the world must deliver a product or a legitimate service to make a profit. The insurance industry, however produces nothing. Its existence adds nothing to our economy. It sells a "product" that consists of nothing more than an idea -- a belief that one is protected and secure, based upon a promise. It sells this idea to a fearful and dependent public. Basically, it moves money around. That’s all it does. Its primary motivation is to move as much money as possible from its policyholders' pockets to its shareholders' pockets. I suppose it can be argued that banks, stock brokerage firms, etc., all do the same thing -- move money around that is. The difference, however, is that banks make a percentage, by taking your money, paying you interest on it, and loaning it to someone else at a higher rate of interest. A stock broker gets a percentage of every trade. A Realtor gets a percentage of every sale. Even lawyers frequently get paid a percentage of any amounts recovered for the client. The insurance industry, however, does not operate in that manner. It makes its profit (or perhaps to put it more accurately - and fairly, it increases its profit) by not delivering on the very product it promises.
Under the basic "theory" that I was taught in law school, "insurance" involved a "pooling of risk". Under that theory, insurance was like a common fund that people paid into, to protect themselves from certain risks of loss. The money in this fund, at least constructively, was said to belong to the people who paid into it. The insurance company merely administered the fund and earned a reasonable fee for its services. Well that is not the way it works in the real world today.
Eventually, as our tort system grew, and as medical care became more sophisticated, more widely available and more expensive, our society became more and more dependent upon insurance "coverage". Without casualty insurance few tort claims are likely to be fully paid; and without health insurance, fewer hospital bills are likely to be fully paid. Without long term disability insurance, more people are likely to end up on welfare rolls.
But, something else also changed along the way. The whole concept of whose money the insurance company was holding changed. Today, when an insurance company receives premium dollars, it regards that money as its own. The more of that money it keeps, the greater its "profit". Therefore, insurance companies today are concerned only with reducing the amount they pay out for claims. The less money paid out in claims, the greater the bottom-line profit. The financial interests of the insurance company are clearly adverse to the financial interests of the policyholder that the insurance company is obligated (by contract) to protect. Even before there was a law called "ERISA", the relationship between insurance companies and their insureds bordered on a conflict of interest.
Enter ERISA: Redefining the Basic Concept of Insurance:
The only thing that has ever kept insurance companies in line were the various consumer-oriented state laws that applied to contract law in general (and to insurance policies derivatively). I'm not talking here about state laws that regulate the business of insurance in particular. (Those laws are not pre-empted by ERISA). I'm talking about general common-law principals, such as "breach of contract" and "breach of the implied covenant of good faith and fair dealing" (i.e. "bad faith"). Before ERISA, if an insurance company denied a legitimate claim in "bad faith", it could be held liable in a state court for punitive damages that might far exceed the amount of the claim. Today, those kinds of consumer laws are pre-empted by the federal ERISA statute, giving insurance companies a virtual licensed to steal. This also creates a classic "conflict of interest".
The problem we face with ERISA is the same problem we face with any bad law that has been on the books for a while (and ERISA is now in its fifth decade of existence), which is that society erects a whole series of financial interrelationships, expectations, and dependencies, based upon the bad law. For example, many might argue that the Social Security statute is a bad law, because there is no Social Security "trust fund". There is merely a system of transfer payments that will likely be broke by the time many of us retire. I'm certain that 90% of today’s young working adults would opt out of the Social Security system if they were given the choice. And it's for that very reason that they will likely never be given that choice. They are forced to be locked into the system to prevent its immediate collapse. It's a bad law that we're all stuck with.
At least with Social Security, we victimize ourselves. Under ERISA, we are all victimized by insurance companies. ERISA and the case law interpreting it is an enigma – a series of odd paradoxes, which drives anyone seeking to understand it to distraction. For example, ERISA was enacted to protect employee benefits, but the result of ERISA has been to strip employees of benefit protections. The U.S. Supreme Court held in Firestone v. Bruch, that the intent of Congress was that benefit claims under ERISA are to be reviewed by the Courts, under a de novo standard of review, but the effect of the Firestone opinion has been to impose deferential review on the widest scale imaginable.
ERISA provides for an award of attorney fees to a prevailing claimant, but it's difficult for a claimant to prevail, unless represented by a knowledgeable attorney, during the administrative appeals process; and ERISA provides for no award of fees for attorney fees incurred during that administrative appeals process. This discourages claimants from hiring counsel during the most critical early stages of claim review, when the "administrative record" is being assembled.
Under ERISA, insurance policies are still issued just the way they used to be, as if they were promises, subject to traditional contract law, but under ERISA, if that policy is sued upon, the Courts usually apply principles of trust law, which allows those policies to be interpreted and applied by the insurance companies who write them. So classic contract law principles go out the door, but ironically, so do classic trust law principles. What we’re left with is a complex, convoluted, body of case law that requires the expertise of a knowledgeable, experienced ERISA lawyer to even begin to deal with it effectively.
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