The Fourth Circuit Court of Appeals, in Gordon v. CIGNA Corp., has affirmed a lower court’s determination that an insurance company did not breach its fiduciary duty under ERISA when it paid an insured’s widow only half of the amount of life insurance coverage for which the decedent had paid premiums. In particular, the Fourth Circuit held that the insurer had no fiduciary duty to notify the insured that he had not satisfied the evidence of insurability requirement needed for supplemental benefits beyond the guaranteed amount because that task was solely the responsibility of the employer.
Background. An employee paid premiums on life insurance that totaled $300,000 in coverage under a plan sponsored by his employer. When the employee died in 2014, the insurer paid his wife only half of the amount for which premiums were paid. The insurer maintained that the decedent had only been approved for $150,000 in coverage because it had not received evidence of insurability, which was required for coverage in excess of $150,000.
The employer accepted responsibility for the oversight and offered to refund the decedent’s excess premiums payments to the widow. However, the widow instead opted to sue the insurance company and the employer in federal district court for the difference between the two amounts. Specifically, the widow alleged that the insurance company had breached its fiduciary duty by failing to notify her husband that he needed to submit proof of insurability while it continued to collect premiums for unapproved coverage.
District Court. The district court dismissed the widow’s against the insurance company because it concluded that the decedent’s reduced life insurance coverage resulted from mistakes made by the employer in administering the life insurance plan, not the insurer. The widow, in turn, appealed the adverse decision to the Fourth Circuit Court of Appeals.
Fourth Circuit. The Fourth Circuit first addressed the widow’s allegation that the insurer was a fiduciary under ERISA because it exercised “authority and control” over the “management and disposition” of premium payments from the employer, which were “plan assets.” Here, the court concluded that because the plan was a “guaranteed benefit policy” under ERISA, only the policy (and not the premium payments) was a plan asset.
NOTE: ERISA defines a guaranteed benefit policy as an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer.
The Fourth Circuit next reviewed the widow’s claim that the insurer had a fiduciary duty to notify her husband that he had not submitted evidence of insurability that was required for the full amount of supplemental benefits. The court observed that nothing in the controlling plan documents gave the insurer the authority, responsibility, or managerial capacity needed to qualify as a fiduciary under ERISA “with respect to the particular activity at issue,” i.e., notifying employees when they had not completed the evidence of insurability requirements. Alternatively, the court concluded that, under the plan document, this responsibility belonged solely to the employer. The court further noted that, given the particular administrative arrangement for the plan between the insurer and employer, there was no way for the insurer to know that an employee was paying for coverage that had not been approved.
The Fourth Circuit concluded by reviewing the widow’s claim that the insurer was liable for knowingly participating in a breach of trust by a fiduciary. The Fourth Circuit determined that, if such a claim existed, it would fail because there was no evidence to demonstrate that the insurer knew about the employer’s alleged breach of fiduciary duty.
Employer Takeaway. With the insurer off the hook, the employer, which was a plan fiduciary and had taken on the responsibility of “[v]erifying employee eligibility for benefits,” “[p]roviding enrollment materials to employees,” “[m]aking sure employees enroll accurately and on time,” “[h]andling changes to benefit elections,” and “[c]ompleting premium payment procedures.”, was forced to settle with the widow.