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3rd Circuit Revives RICO Claim Against Insurer -4/5/2007

Source: Law.com
3rd Circuit Revives RICO Claim Against Insurer
Thursday April 5, 2:50 am ET
Shannon Duffy, The Legal Intelligencer

In a major setback for insurers, the 3rd U.S. Circuit Court of Appeals has revived a RICO suit against First Unum Life Insurance Co., finding that a lower court erred when it held that such a claim would interfere with state regulation of insurers.

"There is nothing of record in this case that suggests that the availability of RICO would disrupt the playing field in the state insurance regime beyond what was clearly intended by state law," 3rd Circuit Judge Marjorie O. Rendell wrote in her 33-page opinion in Weiss v. First Unum Life Insurance Co.

In the suit, plaintiff Richard Weiss claims that First Unum had no valid reasons for terminating payment of his long-term disability claim, but did so only because it exceeded $11,000 per month.

The suit said that Weiss, an investment banker, suffered a massive heart attack and has never fully recovered. He claims he is disabled due to extremely low blood pressure that causes frequent lightheadedness, weakness and shortness of breath.

When First Unum cut off his benefits, the suit said, the decision was made without even consulting his medical records or ordering tests that would have confirmed the severity of his disability.

In his RICO claim, Weiss alleged that First Unum's bad faith handling of his claim was part of "a pattern of fraudulent activity" aimed at depriving its insureds with large disability payouts of their contractual benefits.

Initially, Weiss filed suit in New Jersey state court alleging only state law claims, including wrongful termination of insurance benefits and violations of the Consumer Fraud Act.

But First Unum's lawyers removed the suit to federal court, arguing that the claims were pre-empted by the Employee Retirement Income Security Act.

Weiss responded by adding federal and state RICO claims.

In the midst of the litigation, First Unum resumed paying Weiss' disability benefits. But Weiss pressed on with his claims, contending that the denial of benefits was illegal and triggered damages under RICO. U.S. District Judge Garrett E. Brown Jr. of the District of New Jersey ultimately dismissed the RICO claims, holding they were barred by the McCarran-Ferguson Act because allowing RICO claims would "impair" New Jersey's regulatory scheme.

Now the 3rd Circuit has reversed Brown's ruling, finding that he took too narrow a reading of the McCarran-Ferguson Act.

Rendell, in an opinion joined by 3rd Circuit Judge Dolores K. Sloviter and visiting U.S. District Judge Cynthia M. Rufe of the Eastern District of Pennsylvania, found that McCarran-Ferguson precludes applying a federal law only when doing so would "invalidate, impair, or supersede" state insurance law.

Nearly a decade ago, Rendell noted, the 3rd Circuit analyzed the relationship between RICO and Pennsylvania's Unfair Insurance Practices Act in Sabo v. Metropolitan Life Insurance Co., and held that RICO was not inconsistent with Pennsylvania insurance law.

And in 1999, Rendell said, the U.S. Supreme Court held in Humana Inc. v. Forsyth that RICO would not frustrate the goals of Nevada's insurance law.

In Humana, the justices instructed lower courts to consider a series of factors when deciding whether RICO claims against insurers should be allowed, including whether state laws allow for punitive damages that would be equal to or even exceed RICO's trebled damages, and whether the insurer had ever relied on RICO to eradicate insurance fraud.

In dismissing Weiss' RICO claim, Brown had concluded that New Jersey's insurance laws were far more limited than the Nevada laws at issue in Humana.

Brown noted that New Jersey's Insurance Trade Practices Act (ITPA) has no private right of action for insureds and does not allow punitive damages.

Although New Jersey allows a common law cause of action for bad faith against insurers, Brown said that fact did not tip the scales in favor of allowing RICO claims because the New Jersey Supreme Court had fashioned the claim in the absence of any statutory remedy.

On appeal, Weiss' lawyer, Avrom J. Gold of Mandelbaum Salsburg Gold Lazris & Discenza in West Orange, N.J., argued that Brown erred by failing to recognize that New Jersey has "long favored and approved cumulative private and public remedies to combat unfair insurance practices and insurance fraud."

Gold argued that there is no state policy mandating the exclusivity of the ITPA as a remedy for insurance frauds, and that ITPA is complemented, not impaired, by the presence of civil RICO.

But First Unum's lawyer, Steven P. Del Mauro of McElroy Deutsch Mulvaney & Carpenter in Morristown, N.J., argued that Brown correctly dismissed Weiss' RICO claim because the Supreme Court's Humana decision bars such a claim unless state law provides damages analogous to RICO's.

The 3rd Circuit sided with Gold, finding that Brown erred by focusing on the fact that ITPA does not provide a private cause of action.

"ITPA explicitly notes that its penalties are not intended to be exclusive," Rendell noted.

As a result, Rendell said, "we view the absence of a private right of action in ITPA as an obstacle to Weiss's claim, but by no means an insurmountable one."

Looking beyond ITPA, Rendell found that the New Jersey Consumer Fraud Act, like RICO, allows for trebled damages, and that Brown erred in holding that the CFA does not cover insurance fraud claims.

"We do not share the district court's conviction that the CFA and its treble damages provision are inapplicable to schemes to defraud insureds of their benefits," Rendell wrote.

Instead, Rendell said, "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."

After reviewing the totality of New Jersey's insurance regulatory scheme, Rendell concluded that Brown had erred in holding that RICO would impair it.

"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," Rendell wrote. "To the contrary, the legislation permits additional remedies ... and the New Jersey courts have felt free to fashion them."

Gold said Wednesday that he was very pleased with the court's decision and is confident that Weiss will ultimately prevail at trial on his claim that First Unum engaged in an illegal pattern of denying claims for no valid medical reasons.

Del Mauro could not be reached for comment.