The U.S. Court of Appeals for the First Circuit has ruled, in Shields v. United of Omaha, that an insurer must make a coverage determination for a plan participant within a reasonable period of time after it began accepting premiums.
Law. ERISA assigns to a fiduciary of an employee welfare benefit plan the obligation to “discharge [its] duties with respect to a plan solely in the interest of the [plan’s] participants and beneficiaries.” An ERISA fiduciary, with certain exceptions, includes anyone named as such in the plan document or someone with discretionary authority over plan assets or administration.
Facts. In 2008 a newly hired employee elected supplemental life insurance coverage under his employer’s plan. According to the plan, in order to receive supplemental coverage, the employee had to provide a “statement of physical condition or other evidence of good health” that is acceptable to the insurer. However, the employee was not given an Evidence of Good Health form or any other form to complete to satisfy the good health requirement. Nevertheless, the employee was charged for the additional coverage and the insurer accepted the additional employee contributions. The employee died in 2018 and the insurer refused to pay the supplementary life insurance benefits, citing the lack of proof of good health.
The employee’s spouse, who was the beneficiary of the life insurance coverage sued, claiming, among other things, a breach of fiduciary duties by the insurer for failure to inform her husband that he was not covered.
District court. The lower court ruled in favor of the insurer, stating that it had not violated any fiduciary duties because it was never informed that the employee had elected supplemental coverage and therefore made no insurability determination that could have triggered a fiduciary breach.
Court of Appeals. The First Circuit ruled that while the employer was Named Fiduciary and Plan Administrator, the insurer is a “functional fiduciary” because it had discretionary authority with respect to eligibility determinations. “ERISA recognizes that the terms of an employee welfare benefit plan may impose fiduciary duty on the insurer.”
If a plan confers on an insurer the discretion to choose when to accept premiums from an employee and when to determine if an employee is eligible for coverage, “then the insurer has the kind of discretion in setting the relative timing of those two determinations that would suffice to impose a functional fiduciary duty on the insurer in exercising that discretion with respect to the plan’s employees.” As a result, such an insurer has a fiduciary duty to those employees to make eligibility determinations for each employee from whom the insurer accepts premium payments. According to the First Circuit, this decision must be reasonably proximate to the acceptance of those premiums.
In reaching this conclusion, the First Circuit agreed with the Department of Labor, which had submitted an amicus curiae brief, that the lack of a requirement that insurers make reasonably proximate decisions “would encourage abuse” because insurers would be incentivized to “set up a system in which [the insurer is] completely blind to whether employees paying for…coverage…[are] actually eligible for that coverage.”
It also noted that the U.S. Supreme Court has explained that the “primary function” of fiduciary duty under ERISA “is to constrain the exercise of discretionary powers”, so that “employees will not be left empty-handed by insurers or employers who pull the rug out from underneath them.”
The First Circuit, therefore, found in favor of the employee’s spouse on the question of fiduciary status and with regards to reasonably proximate determinations. It then returned the case to the lower court for further adjudication.