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Insurance Commissioner Properly Denied Post-Termination Compensation to CareFirst Executive and Commissioner’s Decision Was Not Preempted by ERISA

Maryland Insurance Commissioner v. Kaplan
No. 12 (Maryland Court of Appeals, August 16, 2013)

by Colleen K. O’Brien, Associate
Semmes, Bowen & Semmes (

This case arises from the termination of Leon Kaplan (“Kaplan”), a former executive of Carefirst, Inc. (“CareFirst”). Because CareFirst’s public mission under State law is to ensure affordable and adequate health care for Maryland residents, it enjoys a variety of tax and other benefits under the law, and broad authority is conferred on the Maryland Insurance Commissioner (“Commissioner”) to oversee its operation and its adherence to its mission. In 2003, while substantially reforming the governance and oversight of CareFirst, the Legislature entrusted the Commissioner with ensuring that executive compensation at CareFirst was “fair and reasonable” and “for work actually performed for the benefit of the corporation,” as codified by MD. CODE ANN., INS. § 14-139(c).

Kaplan was hired as an executive vice-president in December 2000 and entered into an employment agreement with CareFirst containing a variety of post-termination compensation benefits. The original employment agreement was entered into prior to substantial reforms in 2003 by the Legislature as to executive compensation of CareFirst and prior to the enactment of MD. CODE ANN., INS. § 14-139(c). Kaplan was terminated on April 30, 2008.

This appeal centered around two (2) aspects of Kaplan’s post-termination compensation: 1) the annual incentive plan (“AIP”) and 2) the supplemental executive retirement plan (“SERP”). Under the terms of his contract, Mr. Kaplan was to receive approximately $6.7 million in post-termination compensation. After consulting with legal counsel concerning the application of MD. CODE ANN., INS. § 14-139(c), CareFirst decided that it would not pay Kaplan $3,853,033 in SERP benefits and would pay him only a prorata amount ($181,089) of AIP benefits, reasoning that otherwise would be compensation for work not actually performed. As a result, Kaplan’s compensation would be $2,695,912 (plus $4,719 in unpaid salary due at the time of termination) instead of the $6.7 million claimed by Kaplan.

The Commissioner upheld CareFirst’s decision and found that if CareFirst paid the compensation claimed by Kaplan, it would be violating MD. CODE ANN., INS. § 14-139(c). Kaplan appealed the administrative decision to Circuit Court for Baltimore County.

That court held that there was substantial evidence to support the Commissioner’s determination that the payment to Mr. Kaplan of the enhanced SERP and full-year AIP benefits would not be for work actually performed and therefore would violate MD. CODE ANN., INS. § 14-139(c), however, the circuit court also held that ERISA preempted the Commissioner’s action with respect to the SERP.

Accordingly, the Circuit Court upheld the Commissioner’s decision as to the full-year AIP payment and reversed it as to the SERP. The Commissioner appealed the Circuit Court’s decision to the Court of Special Appeals, and Kaplan cross-appealed. Prior to a decision by the intermediate appellate court, the Court of Appeals issued a writ of certiorari.

On appeal, the Court of Appeals was asked to decide whether the Commissioner’s determination is preempted in part by the federal Employee Retirement Income Security Act of 1974 (“ERISA”) and, if not, whether the Commissioner mis-applied the Maryland statute. The Court held that the Commissioner’s determination was not preempted by ERISA, that the Commissioner’s construction of the insurance code was legally correct, and that there was substantial evidence to support the Commissioner’s determination in this case. Therefore, the Commissioner’s decision was affirmed, and Kaplan was not entitled to the post-termination compensation he claimed.

The Court of Appeals analyzed ERISA’s bearing on the SERP. It was undisputed that the CareFirst SERP was “regulated” by ERISA. The issue was whether the ERISA preemption provision precluded the application of State law to the proposed SERP payment. Because the final administrative order applying MD. CODE ANN., INS. § 14-139(c) did not affect the SERP directly, purport to invalidate the SERP, alter its eligibility requirements, change the method of computing benefits under the plan, or require an interpretation of the SERP or its eligibility requirements, but rather, only found unlawful a grant of a service credit in Kaplan’s employment agreement (an agreement not itself an ERISA plan), and because the application of MD. CODE ANN., INS. § 14-139(c) was unlikely to result in the sort of impact on administration of ERISA that was precluded by prior case law; overall, ERISA did not “relate to” the issue at hand, and did not preempt the application of MD. CODE ANN., INS. § 14-139(c) to the proposed SERP payment.

Furthermore, the Court held that the Commissioner’s determination upholding CareFirst’s decision to reduce Kaplan’s payment under the AIP and eliminate Kaplan’s SERP payment was legally correct and supported by substantial evidence. In terms of the AIP, Commissioner’s decision was reasonable where Kaplan had worked less than half of the year; where absent a contractual provision to the contrary, CareFirst ordinarily would pay only a prorated share of an AIP to a terminated employee as earned compensation; where only a prorated payment would be the standard practice at most corporations; and, where Kaplan would not have been entitled to any AIP payment had he worked for CareFirst for the entire year based on its earnings.

Likewise, the Commissioner had substantial evidence to decide that Kaplan was not entitled to SERP benefits. While SERP benefits themselves may ordinarily be viewed as a form of deferred compensation for work actually performed by a vested employee, in Kaplan’s situation, the service credits would allow him to receive payments from the SERP without performing that work. As the Commissioner observed, Kaplan did not have to do anything to earn the service credit–other than sign the employment agreement. It was evident that the credit was unrelated to the actual work performed by Mr. Kaplan. Therefore, there was substantial evidence to support the Commissioner’s conclusion that the SERP payment was not for work actually performed for the benefit of CareFirst.

Therefore, the Court affirmed the Commissioner’s determination in all respects.