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Employer Liable for Failing to Furnish Life Insurance Conversion Information

On Behalf of | Apr 27, 2017 |

The United States District Court for the Western District of Pennsylvania recently ruled, in Erwood v. Life Insurance Company of North America and Wellstar Health System, Inc. Group Life Insurance Program, that an employer was liable for more than $750,000 to a deceased employee’s widow as a result of its failure to timely and accurately provide life insurance policy conversion information to the employee.

Background. In Erwood, the plaintiff terminated his employment at the end of his FMLA leave period and died nine months later. While the employee and his wife believed that his life insurance coverage would continue following his termination of employment, the group policy coverage lapsed and was not continued because the employer’s benefits representative neglected to properly explain the post-employment individual policy conversion right to the employee.

Before taking his FMLA leave, the employee met with his employer’s benefits representative to discuss the benefits he would receive during his disability. The employer’s representative assured the employee that all benefit coverages would remain the same. Although the summary plan description for the plan mentioned the availability of a life insurance conversion right, the employer neglected to provide the employee with essential information about the conversion right, including the applicable deadline and the required conversion forms.

Following the employee’s death, his widow filed a lawsuit against the employer claiming it had breached its fiduciary duty as administrator for the life insurance plan by failing to adequately inform the employee about his right to convert his group life coverage to an individual life insurance policy.

District Court. The district court determined that the employer’s failure to provide the employee with specific information about his conversion right amounted to a breach of the fiduciary duty to provide complete and accurate information in the context of the beneficiary’s situation.

The court also found that the employer had breached its fiduciary duties of prudence and loyalty by materially misleading the employee about his life insurance conversion rights. In particular, the court found that: (i) the employer was acting as a plan fiduciary when explaining welfare benefits to the employee; (ii) the employer should have known that its failure to adequately explain his life insurance conversion rights would result in the employee being misled about his right to convert the group life insurance coverage into an individual policy; (iii) the employer’s omission was material because it raised a substantial likelihood that the employee would be misled in making a decision regarding his life insurance benefits; and (iv) the employee and his spouse relied, to their detriment, on the employer’s misrepresentations regarding his right to convert his group life insurance coverage into an individual policy.

Because the employee’s right to convert the insurance policy had long since expired, the court resorted to the equitable remedy provisions of ERISA to award the widow the full amount of the life insurance benefit had the policy been continued from the date on which the employee’s employment ended.

Takeaway from Erwood. Employers that offer life insurance benefits to their employees must be cognizant that the failure to timely and accurately disclose life insurance conversion rights to an employee can result in significant financial liability.

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