Last week, the US Fifth Circuit Court of Appeals (which governs Texas) handed down the troubling new insurance case of Amschwand v. Spherion Corp.

Mr. Amschwand was an employee of Spherion. During Mr. Amschwand's bout with cancer, Spherion switched insurance companies. At the time, Spherion told all employees they could switch their life insurance. Mr. Amschwand duly enrolled, and his human resources department orally confirmed that his policy had converted and that he was eligible for all benefits. As his condition grew worse, Mr. Amschwand made several calls to Spherion, and in each call, the company confirmed that he was covered. Upon Mr. Amschwand’s death, the insurance company refused to pay benefits, and Mrs. Amschwand eventually filed suit to recover the proceeds of the insurance policy.

Because the life insurance was a "benefit" offered by his employer, the claim was governed by ERISA (the Employee Retirement Income Security Act a federal statute). Analyzing a series of cases, the Court held that Mrs. Amschwand was not entitled to the proceeds, but was only entitled to "equitable relief," which the court found to be a refund of the amount of premiums that the Amschwand family paid for the insurance. As you can imagine, the amount due as a refund of the premiums was significantly less than the policy benefits.

This is a demonstration of the fundamental problem of ERISA. ERISA was passed in the early 1970s to be a consumer protection statute to help workers recover employee benefits that they were promised by employers. But since then, federal courts, particularly the Fifth Circuit, have been continuously narrowing the reading of ERISA. Now, we’re to the point where ERISA no longer helps consumers, but is a big benefit for employers. For instance, in this case, if ERISA did not exist, the couple would have been able to sue the company for a breach of contract claim or for violations of state insurance statutes (previous ERISA cases have held that ERISA preempts these claims, but there would be no preemption if ERISA was removed), and the Amschwand family could recover the benefits due them.

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