The Eighth Circuit Court of Appeals, in Skelton v. Radisson Hotel Bloomington, has upheld a district court’s decision that an insurer acted as a fiduciary in determining eligibility and conducting enrollment for an employer’s supplemental life insurance program, and that it violated ERISA by failing to maintain an effective enrollment system.
Background. In Skelton, the plaintiff’s deceased wife initially enrolled only in her employer’s basic life insurance plan. When the couple assumed custody of the plaintiff’s son (i.e., the decedent’s stepson), the employer mistakenly told the decedent that the change in custody qualified as a life event that allowed her to elect supplemental life insurance, which she did.
The insurer advised the decedent that she needed to submit evidence of insurability (“EOI”) and that she would not be charged premiums until the supplemental coverage was approved. Nevertheless, the employer sent the decedent a benefit verification document and began charging her premiums for the supplemental life insurance coverage. There is no evidence that the decedent ever submitted the requested EOI to the insurer.
The employer sent the insurer the premiums it collected from all employees in one bulk check, but never provided a list of the employees whom it believed were enrolled for what coverage, or from whom the premiums were received. As a result, neither the employer nor insurer ever learned which employees the other party believed were enrolled in the coverages.
Following the decedent’s death, the plaintiff filed a claim that included supplemental life insurance benefits. The insurer denied the claim on the basis that the coverage at issue was pending because it had not received EOI from the decedent. In response, the plaintiff proceeded to sue the employer, insurer and others in federal district court alleging violations of ERISA’s fiduciary duties.
District Court. During the trial, the plaintiff settled a portion of his claim with the employer, and the district court determined that the insurer had breached its fiduciary “duty to ensure its system of administration did not allow it to collect premiums until coverage was actually” effective. The district court subtracted the amount the employer paid for the plaintiff’s claim, and ordered the insurer to pay the remaining damages. The insurer appealed the adverse decision to the Eighth Circuit for review.
Eighth Circuit. Upon reviewing the matter, the Eighth Circuit affirmed the lower court’s decision. First, the appeals court found that the insurer had a fiduciary role in the decedent’s attempt to enroll in its supplemental life insurance coverage. It observed that the insurance policy designated the insurer as the “claims review fiduciary” with “final and binding authority” to determine eligibility for supplemental life insurance. The appeals court noted that the insurer’s ability to determine the decedent’s eligibility for supplemental life insurance coverage made it a fiduciary for the decedent’s application process. As clarification, the appeals court explained that the mere receipt of bulk premium payments did not make the insurer a fiduciary, but that in the instant matter the policy and the insurer’s practices made it a “relevant fiduciary.”
Next, the appeals court concluded that the insurer had breached its fiduciary duties of prudence and loyalty by failing to maintain an effective enrollment system for its coverage. In particular, the appeals court explained that “A reasonably prudent insurer…would use a system that avoids the employer and insurer having different lists of eligible, enrolled participants.”
The appeals court observed that ERISA’s duty of loyalty obligated the insurer to verify that the premiums it received came from only eligible, enrolled employees. The appeals court further noted that ERISA’s duty of loyalty also includes a “duty not to profit at the expense of a beneficiary.” In the instant case, the appeals court found that because the insurer received the decedent’s premiums without giving her corresponding coverage, it had profited at her expense because it avoided any financial risk of having to provide coverage for her.
Moreover, the appeals court observed that the insurer had profited from its broken promise to the decedent that she would not pay premiums until it had approved her coverage application. The appeals court explained that allowing the insurer to escape liability because it had designed a faulty enrollment system would endorse willful blindness.
Accordingly, the Eighth Circuit upheld the district court’s judgment in favor of the plaintiff.