Unum Life Ins. Co. of America v. Ward, 526 U.S. 358 (1999)

Plaintiff was denied long term disability benefits because his application was untimely under the terms of the policy.  Plaintiff argued that it was not untimely under California’s notice/prejudice rule.  And if it there was prejudice, Plaintiff had given timely notice to his employer, and the employer would be an agent of the insurer in administering the plan.  The parties agreed that California’s notice/prejudice rule did fall under ERISA’s preemption clause.  The Supreme Court held that it was saved from preemption under the savings clause because it regulates insurance.  The framework for resolving the question is first to ask whether the contested prescription regulates insurance, and second, consider three factors to determine whether the regulation fits within the “business of insurance.”  Those are (1) does the practice have the effect of transferring or spreading a policyholder’s risk, (2) whether the practice is an integral part of the policy relationship between the insurer and insured, and (3) wehtehr the practice is limited to entities within the insurance industry. 

The Court found that the rule does regulate insurance as a matter of common sense because it’s directed specifically at the insurance industry.  Turning to the three factors, the Court indicated that Plaintiff does not have to show all three, but that they are factors to be weighed.  The Court found that factors (2) and (3) verified the common sense view and that held that the notice/prejudice rule is saved from preemption.

But the Court also ruled that the California agency rule would be preempted because it “relates to” an ERISA plan because deeming the employer an agent would have a marked effect on plan administration.