Third Circuit allows RICO claims against insurers.

Policyholders can bring federal racketeering suits against insurers in New Jersey despite the state's lack of provisions for private rights of action, according to a recent Third Circuit ruling. (Weiss v. First Unum Life Ins. Co., 2007 WL 968391 (3d Cir. Apr. 3, 2007).)

The decision overturned a lower court's reverse preemption ruling and held that RICO claims are not barred by the McCarran-Ferguson Act, which prohibits any federal law that would "invalidate, impair, or supersede" state insurance law unless it specifically relates to the business of insurance.

"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," Judge Marjorie Rendell wrote, concluding that RICO augments, rather than impairs, the state's insurance law.

Richard Weiss, a former investment banker, was disabled in 2001 after a heart attack left him with permanent left ventricular dysfunction and extremely low blood pressure. He had short- and long-term disability benefits provided by First Unum through his employer at the time, Tucker Anthony Sutro. The insurer paid Weiss short-term disability benefits and then approved long-term benefits of more than $11,000 a month, but it discontinued payments after three months.

Weiss, who initially sued to recover losses under state law, added the RICO claim when First Unum moved the case to federal court, alleging that the state law claims were preempted by the Employee Retirement Income Security Act. Weiss argued that the insurer violated RICO by discontinuing his disability payments as part of its racketeering scheme to stop paying expensive claims.

The ruling expanded on the U.S. Supreme Court's holding in Humana, Inc. v. Forsyth, in which the justices held that RICO claims would not frustrate the goals of Nevada's insurance law. (525 U.S. 299 (1999).) The defense argued that unlike in Nevada, New Jersey insurance law neither allows a statutory private right of action for nonpayment of benefits nor specifically makes punitive damages available in these cases.

But the Third Circuit found that the remedies established in the state's Insurance Trade Practices Act (ITPA) "are not intended to be exclusive."

"The New Jersey system is best seen as limited, regulating without setting forth private remedies yet not explicitly or implicitly excluding other remedies," Rendell wrote.

First Unum argued that the state legislature's failure to amend ITPA to allow a private right of action indicated that it would not want to allow a RICO suit under these circumstances.

"That's not really all that's involved," said Avrom Gold, the West Orange attorney who represents Weiss. "As long as the common law recognizes certain rights--and there is a substantial body of law that permits action against insurers--you don't need a statutory cause of action to get around the provisions of McCarran-Ferguson."

The court agreed. "We can draw no specific conclusion from New Jersey's silence; if anything, it weighs against First Unum," Rendell wrote.

The Third Circuit also rejected the defendant's argument that New Jersey's Consumer Fraud Act (CFA) did not apply to insurance benefits.

"[W]hile 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, so that treble damages would be available for this claim under the CFA," Rendell wrote.

Gold, who called the ruling precedential, said he is confident the facts will show that First Unum had a scheme in place to discontinue expensive long-term disability payments to policyholders. "It has happened all over the country, and we will be producing evidence," he said.

After Weiss filed the initial lawsuit, First Unum resumed payments of Weiss's long-term disability benefits retroactive to the cutoff date and paid interest as well as some attorney fees. Weiss now seeks to recover other losses, including IRS fees he paid and the lost value of his home and personal belongings that he sold below market value in order to pay for medical care when he wasn't receiving benefits.

First Unum has indicated it plans to seek a rehearing, Gold said.