ERISA vs State Law Health Insurance Claims | Federal Preemption

What Is ERISA?

ERISA (the Employee Retirement Income Security Act of 1974) is a federal law that governs most employer-sponsored benefit plans, including health insurance. While ERISA was intended to protect employees, its "preemption" provision has an unexpected consequence: it blocks most state law claims against insurers and severely limits the damages you can recover.

This means if your employer-sponsored health plan wrongfully denies a claim - even in bad faith - you may be limited to recovering only the cost of the denied benefit itself. No punitive damages. No emotional distress damages. No attorney fee recovery in most cases.

Why This Matters: The ERISA Problem

Under ERISA, even if an insurer acts in obvious bad faith - denying a clearly covered treatment, causing you serious harm - your recovery is typically limited to the value of the denied benefits. Critics call this the "deny first, ask questions later" incentive, because insurers face little financial consequence for wrongful denials.

ERISA vs. State Law: Key Differences

The type of health insurance you have determines which legal framework applies:

Factor	ERISA (Federal)	State Law
Applies To	Most employer-sponsored plans	Individual plans, some government plans, church plans
Damages Available	Limited to denied benefits only	Contract damages + bad faith + punitive + emotional distress
Bad Faith Claims	Generally preempted (blocked)	Available in most states
Punitive Damages	Not available	Available for egregious conduct
Attorney Fees	Court discretion (often denied)	Often recoverable under state law
Jury Trial	No right to jury trial	Jury trial available
Court Filing	Federal court (usually)	State or federal court
Review Standard	Often "abuse of discretion" (deferential)	"De novo" (fresh review by court)

The Practical Impact

If an insurer wrongfully denies a $50,000 surgery, under state law you might recover the $50,000 plus six figures in bad faith damages and punitive damages. Under ERISA, even if you win, you likely recover only the $50,000 - and maybe not even your attorney fees. This makes finding an attorney for ERISA cases much harder.

Federal Preemption Explained

ERISA Section 514(a) contains broad "preemption" language stating that ERISA "supersedes" any state laws that "relate to" employee benefit plans. Courts have interpreted this very broadly, blocking most state law claims against ERISA plans.

What Gets Preempted (Blocked)

State law bad faith claims against the plan or insurer
State insurance regulations (in many cases)
State consumer protection claims
State fraud claims related to benefit denials
Claims for emotional distress from wrongful denials

What Is NOT Preempted

Medical malpractice claims against providers (separate from coverage decisions)
Claims against parties who are not part of the ERISA plan
Some state laws that "regulate insurance" directly (the "savings clause")
Certain claims under other federal laws

The "Savings Clause" Exception

ERISA has a "savings clause" that preserves state laws that "regulate insurance." However, this exception has been narrowly interpreted. Fully insured plans (where the employer buys insurance from a carrier) may be subject to some state insurance regulations, while self-funded plans (where the employer pays claims directly) generally are not.

Is Your Plan Governed by ERISA?

The first question in any health insurance dispute is whether ERISA applies. Here is how to determine this:

ERISA Applies To:

Health insurance provided by a private-sector employer
Self-funded employer health plans
Most union-sponsored health plans
Plans offered through an employer's benefits package

ERISA Does NOT Apply To:

Individual health insurance - bought directly from an insurer or marketplace
Government employee plans - federal, state, and local government employers
Church plans - plans maintained by churches and religious organizations
Military health plans - TRICARE and similar programs
Medicare and Medicaid - government health programs

How to Check Your Plan

Look at your Summary Plan Description (SPD) or plan documents. If they reference ERISA, your plan is likely governed by it. You can also ask your HR department whether your employer's health plan is "self-funded" or "fully insured" and whether ERISA applies.

🐻 California Note

California has strong insurance consumer protections, including the right to sue insurers for bad faith (Insurance Code Section 790.03). However, these protections are largely unavailable if your plan is governed by ERISA.

For California state government employees, plans are NOT subject to ERISA, so state law remedies are available. Similarly, if you purchased an individual plan through Covered California, ERISA does not apply.

Your Rights Under ERISA

While ERISA limits your remedies, it does provide some protections:

Administrative Exhaustion Requirement

Before suing under ERISA, you must "exhaust" the plan's internal appeals process. This means filing an internal appeal and, in most cases, receiving a final denial before going to court. Failing to exhaust can result in your case being dismissed.

Right to Plan Documents

You have the right to receive copies of your Summary Plan Description (SPD), the full plan document, and documents relevant to your claim. The plan must provide these within 30 days of request, or face penalties of up to $110 per day.

Right to Full and Fair Review

ERISA requires plans to provide a "full and fair review" of claim denials, including:

Written notice of denial with specific reasons
Reference to specific plan provisions relied upon
Description of additional information needed
Description of the plan's appeal procedures
Right to review documents used in the decision

Build Your Record During Appeals

In ERISA cases, the court often reviews only the "administrative record" - the documents submitted during the appeals process. This means you must submit all supporting evidence during your internal appeal. New evidence may be excluded later.

Strategies for ERISA Claims

While ERISA limits your options, strategic approaches can improve your chances:

1. Build a Strong Administrative Record

Submit all medical records, doctor letters, clinical guidelines, and supporting evidence during the internal appeal. The court record is often limited to what was before the plan administrator.

2. Look for Procedural Violations

If the plan failed to follow proper procedures - like not providing required notices, missing deadlines, or failing to consult appropriate medical professionals - you may be able to argue the claim should be reviewed "de novo" (fresh) rather than under the deferential "abuse of discretion" standard.

3. Check for Conflicts of Interest

If the same entity both decides claims and pays them (a "structural conflict of interest"), courts may give less deference to the denial decision.

4. Identify Non-ERISA Claims

Some claims may fall outside ERISA preemption, such as claims against healthcare providers (medical malpractice) or claims under other federal laws. An experienced attorney can help identify these alternatives.

5. Consider the ACA External Review

Even for ERISA plans, the Affordable Care Act provides for external review by an independent organization. This can be a faster path to resolution than litigation.