Opinions of the United
1997 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-22-1997

McGurl v. Trkng Empl N Jersey
Precedential or Non-Precedential:

Docket 96-5330,96-5348




Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1997

Recommended Citation
"McGurl v. Trkng Empl N Jersey" (1997). 1997 Decisions. Paper 203.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/203


This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1997 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
iled August 22, 1997

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 96-5330 & 96-5348

MAUREEN McGURL; DEWEY CANNELLA; RICHARD E.
McFEELEY; ROBERT B. DAVIDSON; JOSEPH RIZZO;
HARVEY WHILLE; MICHAEL KINSORA; LOUIS
MARCUCCI, AS TRUSTEES OF THE UFCW LOCAL 1262
AND EMPLOYERS WELFARE FUND;
JOSEPH RIZZO; HARVEY WHILLE; MICHAEL KINSORA;
GILBERT C. VUOLO; JOHN POLDING; ROBERT F. ENNIS,
AS TRUSTEES OF THE UFCW LOCAL 1262 AND
EMPLOYERS HEALTH AND WELFARE FUND,
Appellants in No. 96-5330

v.

*TRUCKING EMPLOYEES OF NORTH JERSEY WELFARE
FUND, INC.,
Appellant in No. 96-5348

*(Amended as per the Clerk's 6/28/96 Order)

On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 94-cv-05176)

Argued March 25, 1997

Before: SLOVITER, Chief Judge, STAPLETON and
ALDISERT, Circuit Judges

(Opinion Filed August 22, 1997)
Myron D. Rumeld (Argued)
Deidre A. Grossman
Proskauer, Rose, Goetz &
 Mendelsohn
New York, N.Y. 10036

Attorneys for Appellants/Cross-
Appellees

Herbert New (Argued)
David W. New
New & New
Clifton, N.J. 07013

Attorneys for Appellee/Cross-
Appellant

Kenneth I. Nowak
Andrew F. Zazzali
Zazzali, Zazzali, Fagella & Nowak
Newark, N.J. 07102

Attorneys for Amici
Board of Trustees of Local Union
No. 863 IBT Welfare Fund; Board
of Trustees of Laborers Locals
472/172 of N.J. Welfare Fund

OPINION OF THE COURT

SLOVITER, Chief Judge.

In this case raising a question of first impression in the
federal courts, we are faced with an apparent conflict
between "other insurance" provisions in two self-funded
ERISA plans, each of which purports to provide at most
secondary coverage to the same claimants.

To resolve the conflict, the district court crafted a federal
common law order of benefits determination rule that
would impose primary liability on the fund whose
participants are the employers of the claimants, in this case
the Appellants. Appellants argue that the district court

                                  2
erred by concluding that the two plans are not reconcilable
on their terms, that the court should have adopted New
Jersey state law as the appropriate rule of decision for
resolving any apparent conflict between the plans, and that
the federal common law rule settled upon is a poor choice.

I.

BACKGROUND

A.

The Parties and Their Plans

Appellants are the trustees of two self-funded welfare
benefit plans of the United Food and Commercial Workers
Local 1262 and Employers Welfare Fund and the U.F.C.W.
Local 1262 and Employers Health and Welfare Fund
(collectively "Local 1262 Funds"), which cover employees of
several contributing employers in the supermarket
industry. Appellee Teamsters Local 560 Trucking
Employees of North Jersey Welfare Fund (the "TENJ Fund")
is also a self-funded welfare benefit plan that covers
employees of participating supermarkets. The respective
plans contain "other insurance" clauses, more particularly
referred to as "coordination of benefits" clauses in the
group health insurance industry, that set forth
circumstances under which the plans will assume primary
coverage liability for a claimant who is also covered by
another plan.

Group health care insurance plans have increasingly
included coordination of benefits clauses because the
enlarged number of two-employee families has increased
the possibility that a claimant could be covered under more
than one plan. By conditioning coverage on specified
circumstances, the clauses seek to limit their costs and
prevent a claimant from acquiring coverage from multiple
plans in excess of the claimant's covered medical expenses.
See Jack B. Helitzer, Coordination of Benefits: How and
Why it Works, 4 Benefits L. J. 411, 412 (1991).

                               3
This dispute concerns the obligation of the plans to
certain part-time supermarket employees who are covered
under both plans. The Local 1262 Funds describe their
coverage obligations to part-time employees under the
heading, "Coordination of Benefits":

If a Part-time Member who is a Covered Member . . . is
also covered under one or more Other Plans, the
Benefits payable under this Plan will be coordinated
with Benefits payable under all Other Plans. When
there is a basis for a claim under this Plan and the
Other Plan, this Plan is a Reimbursement Plan which
has its Benefits determined after those of such Other
Plan.

As this is a Reimbursement Plan for Part-time
Members who are Covered Members . . . payments will
be made after all other sources of coverage have been
exhausted.

App. at 89.

The Local 1262 Funds' Summary Plan Description also
states with respect to coverage for part-time employees:

[T]his Plan is always a reimbursement plan; if you
are covered under another medical plan, this Plan will
only take effect when the limits of your other Plan have
been exceeded. This means that, you can receive
benefits from this Plan (in the form of reimbursement
payments) only after the other plan pays benefits to the
full extent of the terms of that Plan.

App. at 143 (emphasis in original). Thus, the Local 1262
Funds attempt to defer any medical payments for their
part-time employees until after the employee has exhausted
all other possible sources of coverage, and the Funds refer
to this proviso alternatively as a "reimbursement clause,"
an "excess clause," or an "always secondary clause."

The TENJ Fund, in an effort to avoid always being left
with a claimant's bill, has a coordination of benefits
provision that disclaims liability altogether for employees
who are participants in a plan such as that of the Local
1262 Funds. The TENJ Fund plan provides:

                               4
In determining whether this plan is primary for a
spouse [or dependent] the following will apply:

"The Plan covering the patient as an employee or in
which the employee is a participant . . . will be the
primary plan. If the primary plan denies coverage
because of the application of a Rule which is unique to
that Plan and which is not a rule of this Fund, then
this Fund will provide only that coverage which it
would have provided if the primary plan had granted
primary coverage.

This Fund does not afford coverage to a participant's
dependent who herself/himself is a participant in a
Reimbursement or similar plan that affords coverage
only if there is no other health/welfare coverage."

App. at 217 (emphasis in original).

In an effort to further clarify the limits of its coverage, the
TENJ Fund describes the following hypothetical:

Mr. ABC is a participant under our Welfare Fund. His
spouse works for the XYZ company. Under normal
coordination of benefits, Mrs. ABC's medical claims are
submitted to her company first. After they pay the
claim, in accordance with their Plan, she submits the
claim with a copy of the explanation of benefits from
her Plan to our Fund showing the amount paid. Our
Fund then pays our portion of the claim under the
coordination of benefits rule as the secondary payor
and pays the difference up to the Fund's allowable
amount. However, if Mrs. ABC's XYZ Plan rejects her
claim because XYZ says its Plan is a Reimbursement
Plan and will not pay claims if there is any other
coverage, such as her being covered as a dependent
under her husband's plan, then our Fund will not pay
any portion of Mrs. ABC's claim.

In May 1993, Susan Armstrong, a part-time employee of
Shop-Rite Supermarkets, a contributing employer to the
Local 1262 Funds, submitted medical expense claims to the
Local 1262 Funds in an aggregate amount of $243,993.
Because Armstrong's father was a participant in the TENJ

                               5
Fund, she would ordinarily have also been eligible for
secondary coverage as a dependent under the TENJ Fund
plan. The Local 1262 Funds denied primary liability for
Armstrong's claims on the ground that it was a
reimbursement or excess plan only, and instead notified the
TENJ Fund that it was primarily liable for paying
Armstrong's expenses. In the following months, the Local
1262 Funds received similar claims from Karen Iler, Esther
Owens, and Patricia Kelly, all of whom were also part-time
employees of contributing employers to the Local 1262
Funds as well as dependents of participants of the TENJ
Fund. The Local 1262 Funds similarly denied these claims
and sent notification that the TENJ Fund bore primary
responsibility.

In response, the TENJ Fund likewise denied primary
coverage liability for the four part-time employees' claims. It
took the position that, because the Local 1262 Funds
provided only a reimbursement plan for the part-time
employees, it was relieved from any liability by the express
terms of the TENJ Fund. In a letter dated June 4, 1993, the
TENJ Fund informed the Local 1262 Funds that "Since
TENJ does not cover Susan Armstrong, your fund provides
sole coverage." App. at 154.

In order to avoid undue hardship to the claimants
throughout the period of time in which the two funds
debated their respective liabilities, the Local 1262 Funds
paid the claimants' benefits, without prejudice to their right
to proceed against and seek reimbursement from the TENJ
Fund. The TENJ Fund agreed to pay secondarily for the
time being, but also "without prejudice to the rights of
either party." App. at 413.

B.

District Court Proceedings

On October 26, 1994, the Local 1262 Funds filed an
action in the district court in New Jersey seeking a
declaration that the TENJ Fund was primarily liable on the
contested claims and an order directing the TENJ Fund to
reimburse them for money paid to claimants in their

                               6
assumed role as the primary provider. The Local 1262
Funds argued that the provision of the TENJ Fund plan
which disclaims liability entirely if a beneficiary is covered
by an alternate reimbursement plan was an invalid "escape
clause." They then contended that once the escape clause
is read out of the TENJ Fund plan, the remaining terms of
both plans assign primary liability to the TENJ Fund plan.
In response, the TENJ Fund argued that its plan did not
contain an escape clause and that, regardless, the Local
1262 Funds plan was primarily responsible for the claims
at issue according to its own coordination of benefits
provision because the claimants are employees of
participants of that plan.

In a thoughtful opinion, the district court granted the
TENJ Fund's motion for summary judgment. See McGurl v.
Teamsters Local 560 Trucking Employees of New Jersey
Welfare Fund, 

(D.N.J. 1996). The court
agreed that the provision of the TENJ Fund purporting to
deny any liability if a beneficiary is separately covered by a
reimbursement plan is an escape clause and thus
unenforceable. 

The court then concluded that
the TENJ Fund's remaining coordination of benefits
provision and the excess clause in the Local 1262 Funds
plan were "mutually repugnant" because both attempted to
deny primary coverage to these claimants, and would
provide secondary coverage only if the other accepted
primary liability. 

In rejecting the Local 1262
Funds' suggestion that the remainder of the plans were still
reconcilable in favor of the Local 1262 Funds, the court
declined to apply the decision in Starks v. Hospital Serv.
Plan of N.J., Inc., 

, 350 (1981), aff'd, 

(1982), which held that an excess clause was
secondary to an ordinary other insurance provision in an
insurance contract. See 

.

The district court in this case found the two plans at
issue to be irreconcilable and chose to create a uniform
federal common law rule in order to resolve the issue of
how to prioritize the payment of benefits between two self-
funded ERISA plans which have mutually repugnant
coordination of benefits provisions. 

The court
adopted an "employer first" rule, recommended by the

                               7
Model Regulations of the National Association of Insurance
Commissioners ("NAIC"), which would impose primary
liability for coverage on the plan which covers claimants as
employees rather than as dependents. 

also
rejected the Local 1262 Funds' suggestion that the better
federal common law rule would be to apportion liability on
a pro-rata basis, reasoning that such a rule would provide
an undesirable incentive for ERISA-regulated plans to
include excess provisions. 

The Local 1262 Funds appeal from the district court's
order, and the TENJ Fund, although successful, cross-
appeals to preserve its argument that the district court
erred in determining that its plan contains an
unenforceable escape clause.

II.

JURISDICTION AND STANDARD OF REVIEW

Both the Local 1262 Funds and the TENJ Fund are self-
funded employee benefit plans, meaning that they do not
purchase insurance policies in order to satisfy their
obligations to pay for medical and disability benefits of their
participants and they are, therefore, covered by the federal
Employee Retirement Income Security Act of 1974
("ERISA"), 29 U.S.C. §§ 1001-1461, § 1002(1). ERISA
provides comprehensive regulation of employee benefit
plans, §§ 1021-1031, §§ 1101-1114, and broadly preempts
state laws that "relate to" such plans, § 1144(a). However,
ERISA does not regulate the substantive terms of plans, see
Shaw v. Delta Air Lines, Inc., 

, 91 (1983), and
makes no express mention about how to resolve conflicts
between coordination of benefits clauses.

The district court had jurisdiction pursuant to 28 U.S.C.
§ 1331 because the case involved a dispute over the
disbursement of payments under ERISA. See Northeast
Dep't ILGWU Health and Welfare Fund v. Teamsters Local
Union No. 229 Welfare Fund, 

, 159, 166 (3d
Cir. 1985). We have jurisdiction pursuant to 28 U.S.C.
§ 1291 and exercise plenary review over the district court's

                               8
grant of summary judgment. United States v. Capital Blue
Cross, 

, 1271-72 (3d Cir. 1993).

III.

THE TENJ FUND'S ESCAPE CLAUSE

We begin with approval of the district court's
construction of the coordination of benefits provision in the
TENJ Fund plan. Under that provision, "[t]he Plan covering
the patient as employee . . . will be the primary plan," but
if that dependent is an employee of a plan that attempts to
provide only reimbursement coverage, the TENJ Fund will
not provide any coverage to the dependant at all. App. at
217 ("This Fund does not afford coverage to a participant's
dependent who herself/himself is a participant in a
Reimbursement or similar plan that affords coverage only if
there is no other health/welfare coverage.")

This latter provision is indeed an escape clause, which,
as we have previously explained, is one which "provides for
an outright exception to coverage if the insured is covered
by another insurance policy." 

.
In Northeast, we recognized that both a well-developed body
of state common law of insurance and the policies
underlying ERISA are hostile to the inclusion of escape
clauses in benefits plans because they undermine the
reasonable expectations of a beneficiary who may have his
or her coverage shifted to another insurer with less
favorable terms. 

Such clauses are
particularly harsh because,

[A] plan with an escape clause does not provide
participants who receive less in benefits from the other
plan with the opportunity to return to the first plan for
the difference. As a result, a participant of a plan with
an escape clause, who thinks that he is covered by that
plan and who expects to recover medical expenses in
accordance with the terms of that plan, automatically
loses this coverage in the presence of another
insurance plan, even if the benefits he is entitled to
receive under the other plan are much less favorable
than those of his own.

                                9


We concluded that a decision by a plan's
fiduciary to include an escape clause is "arbitrary and
capricious" and thus unenforceable under ERISA's
regulatory scheme. 

under the TENJ Fund plan, a dependent-
beneficiary of the TENJ Fund, who is also an employee
beneficiary of the Local 1262 Funds, and who would
anticipate receiving secondary benefits from the TENJ
Fund, will get nothing because the Local 1262 Funds are
excess only. According to the analysis in Northeast,
therefore, this provision in the TENJ Fund plan is an
unenforceable escape clause.

The TENJ Fund nevertheless argues that "in practice" it
has not followed the categorical exclusions of the purported
escape clause, but has treated it as a secondary liability
provision once a competing plan abandons its
reimbursement provision and assumes primary
responsibility. That argument is unpersuasive. First, it is
clear from the record that the TENJ Fund has expressed its
right to categorically deny any payment obligations based
on its escape clause, as it did in its June 4, 1993 letter to
the Local 1262 Funds' manager. App. at 154. That the
TENJ Fund did, in fact, pay secondarily in this case was
merely a litigation convenience undertaken expressly
"without prejudice to the rights of either party," app. at 413;
it was not done as a modification or amendment of the
language of its plan.

Second, interpretation of self-funded plans cannot
depend on the unilateral understanding or ad hoc
application by the plan, lest the comprehensibility,
predictability, and assurance that ERISA intends to provide
be lost. See, e.g., Coleman v. Nationwide Life Ins. Co., 

, 56 (4th Cir. 1992), cert. denied, 

(1993). Finally, when we were presented with a similar
categorical/as-applied distinction in Northeast, we expressly
chose a remedy of "total invalidation of escape clauses" and
"put the onus on trustees of plans with escape clauses to
rewrite the 

n.17. Thus, only by
express revision can the TENJ Fund transform the escape
clause into a secondary liability clause, should it so choose.

                               10
IV.

CONFLICT BETWEEN THE TERMS OF THE PLANS

Once the district court found the TENJ Fund plan's
escape clause unenforceable, it proceeded to examine
whether, if the escape clause were read out of the TENJ
Fund plan, the two plans were reconcilable or, in other
words, if the plans themselves could still provide a coherent
order of benefits scheme. The TENJ Fund plan, as redacted,
would read: "The Plan covering the patient as an employee
or in which the employee is a participant . . . will be the
primary plan," and thus would deny primary coverage if a
claimant is an employee of a participant in another plan.
The Local 1262 Funds plan denies primary coverage to
their participants' part-time employees when those
employees are in any way covered by another plan. The
district court held the plans to be "mutually repugnant"
because "[b]oth deny primary coverage and are willing to
provide benefits in a secondary capacity only after the other
accepts the responsibility of primary coverage." 

.

The Local 1262 Funds urged the district court to apply
the analysis of Starks, 

(1981). In
Starks, individual claimants were employee-beneficiaries of
the Amalgamated Welfare Fund and were also covered by
Blue Cross/Blue Shield, an insurer, as dependents of
beneficiaries. The Amalgamated Fund plan was similar to
that of the Local 1262 Funds in that it would only provide
reimbursement or "always excess" benefits after a claimant
exhausted coverage from another plan. The Blue Cross/
Blue Shield plan contained a coordination of benefits
provision under which it would be secondary to a plan that
covered one of its member's dependents as a direct
beneficiary. 

court held that Blue Cross/Blue
Shield was primarily liable, reasoning that the Blue Cross/
Blue Shield plan contemplated being primarily liable in
some instances, i.e., where the claimant is an employee,
but the Amalgamated Fund plan never contemplated being
primarily liable vis-a-vis another plan. Therefore, the two
plans could be ranked hierarchically. 

                               11
The Starks court concluded that the Amalgamated Fund's
trustees contemplated a "tertiary" role when competing
against any other secondary coverage provider, and stated
that "[w]here the two coverages are not, however, primary
and secondary but rather secondary and tertiary, there
being no primary coverage in the usual sense, the only
rational result is to require the secondary coverage to pay
first and the tertiary to pay second." 

Despite
the rather complex reasoning, the essence of Starks'
ultimate holding was that the plans at issue "d[id] not
support the predicate of mutual repugnancy." 

The district court declined to follow Starks based on its
authority derived from ERISA's broadly worded preemption
provision to categorically ignore state rules of decision that
relate to the regulation of self-funded plans. See PM Group
Life Ins. Co. v. Western Growers Assurance Trust, 

, 546 (9th Cir. 1992). In so ruling, the court also
expressed its disagreement with the logic applied by the
Starks court.

The Local 1262 Funds argue that we should construe the
two plans as the Starks court did, and interpret their plan
as secondary to the TENJ Fund plan's coordination of
benefits provision on the ground that the TENJ Fund plan
(like the Blue Cross/Blue Shield plan) recognizes certain
situations in which it could be primarily liable, whereas the
Local 1262 Funds plan is always secondary. We do not
agree.

First, it is not helpful to speak in terms of secondary and
tertiary, and indeed it is somewhat misleading. The Starks
court ranked the plans in this manner to emphasize that
neither of the plans before it accepted primary liability and
it was thus forced to rank the payment obligations of a plan
that it construed as providing some coverage, albeit
secondary, and a plan that was always excess, which it
denominated as "tertiary". However denominated, the task
required in this case is to determine which Fund's plan is
primary. It would be arbitrary to adopt the Local 1262
Funds' suggestion that because the TENJ Fund concedes
primary liability in the situation of another plan's
beneficiary but who is an employee of its participant, it
must always be primary vis-a-vis Local 1262 Funds' always

                               12
excess clause. In fact, the TENJ Fund plan flatly denies
primary coverage when presented with a claim of a
dependant-beneficiary such as Susan Armstrong's. The
mere fact that in other circumstances the TENJ Fund
would be primary does not obviate the inescapable fact that
it is not primary in the circumstances here. However the
Starks court chose to interpret the language of the Blue
Cross/Blue Shield plan before it, we cannot fairly ignore
the certain, evident conflict from the faces of the two plans.

Second, there would be substantial and adverse fiscal
consequences were a court to impose primary coverage on
a plan, such as that of the TENJ Fund, which intended to
provide the nominal, secondary coverage for this group of
claimants merely because the plan provides primary
coverage for certain other claimants. As the district court
recognized, "a court cannot deem one plan primary without
shifting unanticipated costs to that plan and frustrating the
intent of its trustees." 

.

The Local 1262 Funds argue that the district court erred
in failing to follow what they claim is the majority view that
entitles a plan that describes itself as a pure excess plan to
pay secondarily because its coverage is not implicated until
another policy's limits have been exhausted. See Insurance
Co. of N. America v. Continental Cas. Co., 

,
1071 (3d Cir. 1978) ("[s]ince [an excess clause] does not
provide that supplemental protection until the other policy
has been exhausted, it is `excess' to the other coverage");
Institute for Shipboard Educ. v. CIGNA Worldwide Ins. Co.,

, 419 (2d Cir. 1994) (excess plan " `kicks in' to
provide additional coverage once the policy limits of other
available insurance are exhausted"). They argue based on
these cases that their excess clause exempts their plan
from any coordination of benefits with other plans, so that
their coverage will "kick in" only after any other plan's
coverage is depleted.

As the TENJ Fund points out, the concept of "excess
insurance" typically applies to casualty insurance policies
which cover a single party for a single risk. See, e.g., Couch
on Insurance 2d §§ 62.48-49. The cases cited by the Local
1262 Funds fall within that category. These "pure" excess
policies, which are also commonly referred to as "umbrella"

                                13
policies, are contingent on the existence of another, primary
policy, and are intended to provide a separate, additional
layer of coverage, never primary coverage. An insured will
purchase this separate layer typically at a discounted price
because it "will pick up where primary coverages end in
order to provide extended protection." Occidental Fire and
Cas. Co. of North Carolina v. Brocious, 

, 53 (3d
Cir. 1985). Since such layered policies are "not an attempt
by a primary insurer to limit a portion of its risk by
labelling it `excess' nor a device to escape responsibility,
they are regarded as a `true excess over and above any type
of primary coverage, excess provisions arising in regular
policies in any manner, or escape clauses.' " 

J. Appleman, Insurance Law and Practice § 4909.85 at
453-54 (1981)). Rates for excess insurance are set"after
giving due consideration to known existing and underlying
basic or primary policies". 46 C.J.S. Insurance Law § 1138.
Such policies are categorically separate and do not attempt
to coordinate with other policies.

The TENJ Fund argues that pure excess coverage as
applied in casualty insurance cannot apply to group health
plans covering numerous persons where duplicate,
overlapping coverage is often likely.1 Coordination of
benefits rules have evolved to cover these circumstances
and are routinely followed.

We need not resolve the parties' disagreement as to
whether it is theoretically possible or desirable to have pure
excess coverage in the group health care context. The
relevant portions of both plans' terms are in fact
coordination of benefits clauses because both represent a
method for determining how and when two plans may be
responsible for covering a common beneficiary. In this case,
where the claimants are dependent-beneficiaries of the
TENJ Fund plan and part-time employee-participants in the
_________________________________________________________________

1. One, if not the only, example of a pure excess policy in the health care
context referred to by either party is a Medigap policy, a privately issued
health insurance contract which supplements Medicare by covering
expenses not covered by the federal government, such as deductibles or
coinsurance amounts. See 42 U.S.C. § 1395ss(g)(1) (1992); United States
v. Capital Blue Cross, 

(3d Cir. 1993).

                               14
Local 1262 Funds plan, each of the plans views itself as
"excess" or "secondary" and each looks to the other as
primary. Thus, both plans attempt to coordinate benefits
with potentially competing plans.

The very terms of the Local 1262 Funds plan manifest an
intent to coordinate benefits with other competing welfare
plans. Under the heading "Coordination of Benefits," the
Local 1262 Funds plan states that: "If a Part-time Member
who is a Covered Member . . . is also covered under one or
more Other Plans, the Benefits payable under this Plan will
be coordinated with Benefits payable under all Other Plans."
App. at 89 (emphasis added).

Moreover, unlike the prototypical pure excess or umbrella
policy, the Local 1262 Funds plan itself contemplates
assuming primary liability in instances where there is no
other coverage available, and thus no other plan with which
to coordinate benefits. The plan's Summary Plan
Description states:

This Plan has a coordination of benefits provision for
both Full-time and Part-time members. In most
instances, this means that if your covered dependents
are covered primarily under another medical plan, they
can also receive benefits . . . from this Plan, up to the
amount this Plan would have paid as your primary
plan, but only after they receive reimbursement from
the other Plan. . . . The benefits you receive from this
Plan cannot exceed the amount this Plan would have
paid if it was your primary plan.

App. at 142-43 (emphasis added).

Thus, we agree with the TENJ Fund that the Local 1262
Funds plan's "so called `always excess' provision is no more
than a subtle attempt to impose coordination of benefits
using a biased order of benefits determination rule." Brief of
Appellee at 27. In sum, the disputed reimbursement
provision in the Local 1262 Funds plan is essentially a
coordination of benefits provision, and, therefore, does not
have a categorically secondary status to every plan with
which it comes in conflict. In this case, the coordination of
benefits provisions are "mutually repugnant," forcing the

                               15
court to look outside the plans to resolve the apparent
conflict.

V.

ESTABLISHMENT OF ORDER OF BENEFITS
DETERMINATION RULE

A.

Federal Common Law

Because the plain terms of the individual plans would
not resolve the conflict, the district court exercised its
authority to devise federal common law, and settled on the
"employer first" rule suggested by the National Association
of Insurance Carriers ("NAIC"). See 

. Before examining the merits of the district court's
selection, we consider the Local 1262 Funds' objections to
the courts' federal common law-making authority to impose
a rule of decision independent of state law.

Federal common law refers to the development of legally
binding federal rules articulated by a federal court which
cannot be easily found on the face of a constitutional or
statutory provision. See Larry Kramer, The Lawmaking
Power of the Federal Courts, 12 Pace L. Rev. 263, 267
(1992); see also Thomas W. Merrill, The Common Law
Powers of Federal Courts, 52 U. Chi. L. Rev. 1, 5 (1985)
(" `Federal common law' . . . means any federal rule of
decision that is not mandated on the face of some
authoritative federal text -- whether or not that rule can be
described as the product of `interpretation' in either a
conventional or unconventional sense."). Notwithstanding
the decision in Erie Railroad Co. v. Tompkins, 

(1938), which curtailed development of general federal
common law, the power of federal courts to craft federal
rules of decision is established in cases in which a federal
common law rule is "necessary to protect uniquely federal
interests," Banco Nacional de Cuba v. Sabbatino, 

, 426 (1964), such as federal proprietary interests,

                               16
federal interests in international law and to resolve conflicts
among the states, or where "Congress has given the courts
the power to develop substantive law," Texas Indus., Inc. v.
Radcliff Materials, Inc., 

, 640 (1981).

The Court has recognized that while at times state law
would be appropriate, "[t]he desirability of a uniform rule is
plain" where "identical transactions subject to the vagaries
of the laws of the several states" would lead to great
diversity in results. Clearfield Trust Co. v. United States,

, 367 (1943). This would be true not only
when the issue involves the rights and duties of the United
States, as it did in Clearfield Trust, but also when a federal
statute encompasses a broad mandate that requires
uniform rules to effectuate the congressional purpose. See,
e.g., Textile Workers Union of America v. Lincoln Mills of
Alabama, 

, 456-57 (1957) (upholding federal
jurisdiction for labor-management disputes because of
congressional authorization to develop federal common law
pursuant to the LMRA); National Soc'y of Prof'l Eng'rs v.
United States, 

, 688 (1978) (in enacting
Sherman Antitrust Act, Congress made "perfectly clear that
it expected the courts to give shape to the statute's broad
mandate by drawing on common-law tradition").

Justice Jackson, in his famous concurrence in D'Oench,
Duhme & Co., Inc. v. FDIC, 

, 470 (1942), noted
that the need to make common law stems from the inability
of legislators to anticipate every possible contingency and
the impracticability of judges returning all unanswered
questions to the legislature. He stated, "Were we bereft of
the common law, our federal system would be impotent.
This follows from the recognized futility of attempting all-
complete statutory codes, and is apparent from the terms of
the Constitution itself." 

explained
further that, "Federal common law implements the federal
Constitution and statutes, and is conditioned by them.
Within these limits, federal courts are free to apply the
traditional common-law technique of decision and to draw
upon all the sources of the common law." 

(citing
Board of Comm'rs v. United States, 

, 350
(1939)).

                               17
Relevant to the determination whether to adopt a federal
rule in this case is the scope of the ERISA preemption
provision which states that the provisions of ERISA "shall
supersede any and all State laws insofar as they may now
or hereafter relate to any employee benefit plan."2 29 U.S.C.
§ 1144(a). That provision, "conspicuous for its breadth,"
FMC Corp. v. Holliday, 

, 58 (1990), was drafted
expansively in order to establish pension and welfare
benefits "as exclusively a federal concern," Alessi v.
Raybestos-Manhattan, Inc., 

, 523 (1981), and
to relieve plans of the burden of adhering to diverse state
regulations.

Thus, by preempting any law that even relates to ERISA
plans Congress anticipated the development of a "federal
common law of rights and obligations under ERISA-
regulated plans." Pilot Life Ins. Co. v. Dedeaux, 

,
56 (1987). As one court aptly stated, "[w]here state law is
preempted and no specific federal provision governs, a
court is forced to make law or leave a void where neither
state nor federal law applies. In such a situation it is a
reasonable inference that Congress intended some law, and
therefore federal law, to apply." Wayne Chemical Inc. v.
Columbia Agency Serv. Corp., 

, 322 (N.D.
Ill.) (internal quotations omitted), aff'd on other grounds,

(7th Cir. 1977); see also Fox Valley & Vicinity
Constr. Workers Pension Fund v. Brown, 

, 281
(7th Cir.) (en banc)("When ERISA is silent on an issue, a
federal court must fashion federal common law to govern
ERISA suits."), cert. denied, 

(1990).

Therefore, although a federal court has the discretion to
adopt state law as part of a federal rule of decision in order
to resolve ERISA-related disputes, see Clearfield 

, a federal court certainly has the power
_________________________________________________________________

2. The "savings clause," as set forth in 29 U.S.C. § 1144(b)(2)(A), exempts
from ERISA's preemption provision state laws regulating insurance,
except for those regulations covered by the "deemer clause." The deemer
clause, in turn, forbids states from deeming employee benefit plans "to
be an insurance company or other insurer . . . or to be engaged in the
business of insurance," and thereby relieves the plan from state laws
"purporting to regulate insurance." 29 U.S.C.§ 1144(b)(2)(B). See FMC

.

                               18
pursuant to ERISA to reject any state rules, particularly a
non-legislative rule such as that promulgated in Starks,
which do not complement ERISA's policy goals. As we
stated in Northeast, "judge-made rules regarding
interpretation of insurance contracts are not the kind of
state insurance regulations that the Congress intended to

n.8.

The Local 1262 Funds argue that a uniform coordination
of benefits rule sacrifices an important pursuit of intrastate
uniformity for an overstated goal of interstate uniformity.
Specifically, they contend that because state law governs
coordination of benefits disputes for non-ERISA regulated
plans, the plans will face the risk of different outcomes
depending upon whether the competing plan is regulated
by ERISA or not. By way of example they cite the
unpublished opinion in Zalkin v. Teamsters Local 469
Welfare Fund, No. 92-477 (D.N.J. 1993), which held that
under New Jersey order of benefits determination rules the
Local 1262 Funds plan, which was an excess plan, would
not be primarily liable for an employee-participant of its
plan vis-a-vis a non-ERISA regulated plan.

ERISA's statutory mandate is to impose uniformity and
predictability for the administration of self-insured plans so
that beneficiaries can be guaranteed their expected benefits
and so that administrators are not subject to " `conflicting
or inconsistent State and local regulation of employee
benefit plans.' " Shaw v. Delta Air Lines, Inc., 

,
99 (1983) (quoting remarks of Senator Williams, 120 Cong.
Rec. 29933 (1974)); see also FMC 

;
Pilot 

.

It is not difficult to foresee the complications and
"considerable inefficiencies" that would arise from having a
"patchwork scheme" of differing state coordination of
benefits rules. See Fort Halifax Packing Co., Inc. v. Coyne,

, 11 (1987); Keystone Chapter, Associated
Builders and Contractors, Inc. v. Foley, 

, 954
(3d Cir. 1994), cert. denied, 

(1995). See
generally Helitzer, Coordination of Benefits at 411-15. For
example, an ERISA-regulated plan may cover thousands of
participants, some of them residing in jurisdictions that
follow NAIC order of benefits determination rules and some

                               19
residing in jurisdictions that do not. That plan's obligation
to assume primary liability for a claimant would depend on
the fortuity of a claimant's place of residence and
application of that state's coordination of benefits law, a
consequence clearly disfavored by ERISA. See 

(ERISA preempts state statute that would
force employer to adopt different payment formulae for
employees inside and outside state). As stated by the Ninth
Circuit in PM Group, such indeterminacy and conflict
"would almost certainly lead to litigation, thereby burdening
the insured employees, the providers of covered services,
and the plans themselves as well as the federal courts.
Adoption of a uniform federal rule avoids such confusion
and expense, and thus best serves the purposes of 

; see also FMC 

("To
require plan providers to design their programs in an
environment of differing state regulations would complicate
the administration of nationwide plans, producing
inefficiencies that employers might offset with decreased
benefits").

Contrary to the Local 1262 Funds' suggestion, there are
very few instances in which the federal common law is
concerned with promoting uniformity within a state. This is
not a situation analogous to those where the Court has
approved adoption of a state's law when the federal statute
incorporates a matter which is one primarily of state
concern. See De Sylva v. Ballentine, 

, 580
(1956)(instructing federal courts to defer to state law for
meaning of terms like "children" and "widower" in the
relevant portions of the federal Copyright Act rather than
formulate a federal law of domestic relations);
Reconstruction Fin. Corp. v. Beaver County, 

,
209-10 (1946) (definition of "real property" which Congress
authorized to be taxed should be defined by settled state
rules, because Congress obviously contemplated various
results among the states).

There is no evidence that state commercial or other
domestic interests would be upset by imposition of uniform
federal order of benefits determination rules. In fact, New
Jersey law regulating "other insurance" provisions is similar
to the NAIC Model Regulation in all major respects except

                               20
that it does not provide the complying plan with the right
to sue the noncomplying plan for subrogation. See N.J.
Admin. Code tit. 11, § 4-28.9. Nevertheless, because of
preemption the possibility that the Local 1262 Funds plan
will face a different rule, and thus disuniformity within the
state, when it conflicts with a non-ERISA insured plan, is
of little concern under ERISA. Cf. 

n. 19 ("While state regulations may affect the cost of doing
business in a state, they may not, consistent with ERISA,
place administrative burdens and costs on ERISA plans
that make it impractical for an employer to provide a
nationwide plan.").

We thus conclude that Congress envisioned
establishment by the federal courts of a uniform set of
federal rules rather than subjecting to diverse state laws
ERISA-regulated plans involving competing benefits
clauses. See PM 

; 

.

B.

Selection of the "Employer First" Rule

As we have stated, the district court exercised its
common law-making authority to select the "employer first"
rule advocated by NAIC as the method for determining
which competing ERISA plan should pay the claimed
benefits. In 1970, in order to deal with the increasing
problem of duplicate coverage, NAIC, an independent group
of state insurance regulatory commissioners, promulgated a
set of rules under the heading of Group Coordination of
Benefits Model Regulation ("Model Regulation"), based in
large part on rules that had been established and followed
by the group insurance industry in the previous decade.
See Helitzer, Coordination of Benefits, at 413-14. The Model
Regulation contains a recommended order of benefits
scheme covering potential conflicts among health benefit
plans or policies. NAIC recommendations do not have the
force of law, but many states have incorporated part or all
of particular recommendations into their insurance
statutes.

                               21
Jack Helitzer, who was the former chairman of the
Industry Advisory Committee to the NAIC Task Force on
Coordination of Benefits, attributes the widespread
acceptance of the recommended regulation to the
participants' need for absolute uniformity in this area. "The
validity of the [coordination of benefits] rules is established
not by law or regulation, but rather by the fact that there
will be chaos without uniform rules to determine the order
of benefit payment." 

The sequential system for determining the order of
payment by benefit plans in the comprehensive Model
Regulation provides, as relevant here, that the"benefits of
the plan which covers the person as an employee, member
or subscriber (that is, other than as a dependent) are
determined before those of the plan which covers the
person as a dependent." Model Regulation § 5B(1) (quoted
in Helitzer, Coordination of Benefits, at 414). As Helitzer
explains, "[t]he plan covering the person as an employee
pays benefits first. The plan covering the same person as a
dependent pays benefits second." Helitzer, Coordination of
Benefits, at 415.

The Model Regulation does not recognize excess or
always secondary plans or incorporate them into the order
of benefits scheme because such clauses "will doom at least
some of their employees to a double-secondary situation, in
which the individual has double coverage and neither plan
has the obligation to pay anything substantial.
Responsibility for the resulting problem lies with the
employer or plan that adopts a unique order of benefits
determination rule, and not with the one who follows
accepted practices." 

If the excess plan refuses to pay for primary coverage,
when it would be obligated to pay as primary under the
Model Regulation, the plan that would be secondary is
instructed to advance to the claimant the amount it would
have paid as primary and execute a right of subrogation
against the noncomplying plan. Model Regulation § 7(B).

The NAIC approach to conflicts involving always excess
coordination of benefits provisions has garnered widespread
acceptance among the states. Twenty-four states have

                               22
adopted the NAIC order of benefits determination rules in
full, providing a right to subrogation against noncomplying
plans. Jack B. Helitzer, State Developments in Employee
Benefits: State Adoption of Coordination of Benefits Rules,4
Benefits L. J. 435, 442-43 (1991). Fifteen states, including
New Jersey, have adopted the NAIC order of benefits
scheme but, unlike the other twenty-four states, they do
not incorporate the subrogation rule as a vehicle whereby
a complying plan can compel payment from a
noncomplying plan.3 

In deciding to adopt the NAIC recommended "employer
first" rule, the district court explained that the NAIC rule
would provide a uniform coordination of benefits scheme
and thereby would best further the statutory objectives of
ERISA. 

. The Local 1262 Funds
urge us to overturn that decision in favor of a pro-rata rule
pursuant to which the two plans would divide coverage on
an equal basis. They contend the pro-rata rule is more
equitable and is the rule applied in the majority of federal
and state courts. They cite our opinion in Northeast, where
we noted that other courts faced with incompatible other
insurance clauses have chosen the pro-rata 

n. 13. In fact, the majority of states have
not adopted the pro-rata rule for health benefit plans, such
as those covered by ERISA. And in Northeast we did not
consider the merits of the pro-rata rule and thus the
statement on which the Local 1262 Funds rely was merely
dictum which is not binding upon our consideration here.

The two courts of appeals that have considered whether
to apply the pro-rata rule, albeit under somewhat different
circumstances than those presented here, have divided on
its merits. In Winstead v. Indiana Ins. Co., 

,
_________________________________________________________________

3. See N.J. Admin. Code tit. 11, § 4-28.9(a)(1)(ii)(1995).

If the complying plan is the secondary plan, it shall attempt to
coordinate in the secondary position with benefits available through
the noncomplying plan. The complying plan shall attempt to secure
the necessary information from the noncomplying plan. If the
noncomplying plan is unwilling to act as primary plan . . .the
complying plan shall assume the primary position and pay its
benefits as the primary plan.

                               23
432 (7th Cir. 1988), cert. denied, 

(1989), the
Seventh Circuit considered a conflict between the
coordination of benefits clauses in a claimant's ERISA-
regulated health and welfare fund and an applicable no-
fault automobile insurance policy regulated by Michigan
law. After finding the plan and the policy to be
irreconcilable, the court affirmed the district court's
decision to hold both insurers liable on a pro-rata basis,
citing our dictum in Northeast. 

More recently, in Auto Owners Ins. Co. v. Thorn Apple
Valley, Inc., 

, 375 (6th Cir. 1994), cert. denied,

(1995), the Sixth Circuit rejected the
application of a pro-rata liability rule between an ERISA
plan and an insurance policy nearly identical to those
considered in Winstead. The court concluded that in light
of ERISA's broad preemption provision, the ERISA-
regulated plan's diversion of liability should be given
priority over the state plan's attempt to do the same. 

The court reasoned that although the pro-rata rule
may be equitable in the context of two non-regulated,
private plans, the equal apportionment formula would not
"comply with a primary goal of ERISA, which is to
safeguard the financial integrity of qualified plans by
shielding them from unanticipated claims." 

Of course, neither case is apposite here because those
courts were not presented with conflicts in "other
insurance" clauses in which both plans are regulated by
ERISA. However, in rejecting the pro-rata rule, the court in
Auto Owners gave dispositive weight to the policy
considerations underlying ERISA, a principal consideration
in the district court's selection here.

In PM 

-48, the Ninth Circuit,
faced with incompatible "other insurance" provisions in two
self-funded ERISA plans, relied in part on NAIC regulations
to create a uniform federal common law solution. In that
case, a husband and wife were each covered primarily by
their respective plans for hospital expenses related to the
premature birth of their daughter. The father's plan
provided that, in all cases, the father's plan would be the
primary insurer (the "gender rule") while the mother's plan
provided that the plan covering the parent whose birthday

                               24
fell earlier in the year -- in this case, the mother's -- was
the primary plan (the "birthday rule"). 

The court recognized that ERISA was silent on the issue
of conflicting "other insurance" provisions and decided that
it must craft a common law rule that would take account
of ERISA's stated goal of uniformity. 

("uniformity
enables employers `to predict the legality of proposed
actions without the necessity of reference to varying state
laws' " (quoting Pilot 

)). The court then
looked for guidance to the NAIC Model Regulation, which
provided an order of benefits rule for such a scenario, and
adopted the "birthday rule" for resolving all such conflicts
in ERISA-regulated plans.4 

court reasoned that adoption of a pro-rata
rule would have the effect of encouraging welfare plans to
adopt excess clauses in order to avoid the disadvantage,
vis-a-vis a plan with excess or always secondary
reimbursement provisions, of having to assume primary
liability if the claimant is an employee of a plan participant,
and 50% liability if the claimant were not an employee.

. By contrast, the excess or
always secondary plans would never have to assume more
than 50% liability. An excess or always secondary plan will
invariably save money by reducing the plan sponsor's cost
of providing health care coverage to their employees.

The district court concluded that this incentive would
produce a "race to the bottom" in the context of
reimbursement provisions. Id.; see also Helitzer,
Coordination of Benefits, at 421 ("If any plan can be free to
set its own rules to determine the order of benefits, every
other similarly situated plan should also be free to do the
same. When other plans are affected by such a cost shift,
they would have to be encouraged to adopt similar, always-
secondary approaches causing large scale chaos"). In a
regime where all plans have always excess provisions but
no governing uniform coordination of benefits rule,
resolution of a particular conflict between two such plans
would depend on an ad hoc judicial determination. This
_________________________________________________________________

4. The competing "gender rule" had been dropped by most states and
NAIC as discriminatory.

                               25
would jeopardize the predictability and certainty for plan
sponsors and beneficiaries that was central to ERISA's
enactment. See Auto 

; 

.

As we acknowledged in Northeast,

even a qualified endorsement of escape clauses might
encourage benefit plans with excess or coordination of
benefits clauses to replace such clauses with those of
the escape variety in order to "fight fire with fire." A
war between plans would cause uncertainty in the
industry and could potentially catch participants and
beneficiaries in the 

n.17. It is also of some interest that health
care insurance contracts subject to New Jersey regulation
are not permitted to include always secondary provisions.
N.J. Admin. Code tit. 11, § 4-28.5(b).

We are concerned that adoption of the pro-rata rule
which the Local 1262 Funds propose would present some
serious difficulties when two self-insured ERISA plans cover
a family member as an employee-participant and dependent
respectively. In the first place, it is unclear how the rule
would operate in practice. Although a pro-rata rule may
technically encompass proportional payment rather than
the 50-50 payment the Local 1262 Funds suggested here,
the Funds were unable to explain precisely how
proportional payment would be fixed. Benefit plans are
unlike casualty insurance, which is the field in which pro-
rata payments primarily operate. There has been no
satisfactory explanation of its feasibility in the medical
benefits field, where different plans have different
deductibles and coverages. Its operation under managed
care programs is also uncertain. Counsel conceded at oral
argument that calculation of the final benefit allocation
pursuant to a pro-rata formula, which counsel presumed
would be based on each plans' proportional primary liability
coverage, is considerably more complicated than under the
more traditional primary versus secondary scale. It may be
that it was these difficulties that led the vast majority of
states to adopt the NAIC recommended "employer-first"
rule.

                               26
The district court also noted that the "employer-first" rule
has been "incorporated into most self-insured employee
benefit plans," 

, and, in fact,
the brief of the amici welfare funds confirms that their
plans include such a provision. See infra note 5.
Significantly, the Local 1262 Funds and the TENJ Fund
themselves have adopted the Model Regulation "employer
first" rule to govern employee/dependent conflicts with
regard to coverage for their full-time employees, and thus
the Local 1262 Funds only resist its applicability to their
part-time employees.

Moreover, the "employer first" rule validates the natural
disposition of an employee to look to his or her own
employer for health care benefits as a reward for his or her
own labor. Most important, the rule also allows employers
to predict with more accuracy the extent of their own
potential liability because it is easier to calculate the
number of a plan's own employee-participants for which it
is responsible than the uncertain but likely greater number
of those employees' dependents who will look to the plan for
their primary coverage.

The final objection by the Local 1262 Funds to the
imposition of an "employer first" order of benefits
determination rule is that the prospect of having to provide
primary coverage to part-time plan participants might force
them to discontinue providing welfare benefits altogether.
They argue that this would undermine ERISA's goal of not
deterring the creation of employee benefit plans. They cite
Hozier v. Midwest Fasteners, Inc., 

, 1160 (3d
Cir. 1990), where we stated that "[h]aving made a
fundamental decision not to require employers to provide
any benefit plans, Congress was forced to balance its desire
to regulate extant plans more extensively against the
danger that increased regulation would deter employers
from creating such plans."

It is true, as we explained in Nazay v. Miller, 

, 1329 (3d Cir. 1991), that "[i]n enacting ERISA,
Congress did not impose a duty on employers to provide
health care and other benefits to their employees. Rather,
the clear emphasis of the statute is to ensure the proper
execution of the plans once established." See also Hlinka v.

                               27
Bethlehem Steel Corp., 

, 283 (3d Cir. 1988).
But it is merely speculation that if the Local 1262 Funds
are obliged to provide primary coverage for part-time
employees they will be unable to afford any coverage
whatsoever. Nor is there a sound reason for giving the
financial interests of the Local 1262 Funds priority over
those of the TENJ Fund, which naturally faces similar
concerns about managing the escalating health care costs
for part-time employees.5 Moreover, these plans have been
established by collective bargaining, and it is in that
process that inclusion, vel non, will be decided.

Thus, in weighing the interests served by ERISA against
the negative effects generated by a rule that favors"always
secondary" plans and thereby induces all plans to structure
their benefits similarly, to the ultimate detriment of
participants, we conclude that the balance is heavily in
favor of the "employer first" rule. Over the long-run, a
uniform "employer first" rule is actually more equitable
since, assuming a generally even distribution of employees
and dependents among various plans, plans such as those
at issue here will tend to be primary half of the time and
secondary half of the time. The "employer first" rule
advances the goals of preserving "the financial integrity of
qualified plans by shielding them from unanticipated
claims," Auto 

, and preventing
participants from being "deprived of compensation that they
reasonably anticipate under the plan's purported coverage,"

.
_________________________________________________________________

5. Indeed, the Amicus parties in this case, the Local 863 I.B.T. Welfare
Fund and Laborers Locals 472/172 of the New Jersey Welfare Fund,
ERISA-regulated plans with "employer first" coordination of benefits
provisions, have come into conflict with the same Local 1262 Funds'
always secondary clause and have had to pay several hundred thousand
dollars in expenses for dependent-beneficiaries of their plans as a result
of the Local 1262 Funds' refusal to accept primary responsibility.

                               28
VI.

CONCLUSION

We thus conclude that in those instances where the
plans have competing provisions with respect to persons
covered by both plans, the "employer first" rule provides the
most appropriate basis for apportioning liability under
federal common law for self-insured benefit plans regulated
by ERISA. We will affirm the district court's grant of
summary judgment.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

                               29