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Insurer May Be Liable Under ERISA for Unauthorized Premium Increases

by | Mar 28, 2024 |

The U.S. Court of Appeals for the First Circuit, in Parameter v. Prudential Insurance and Tufts University, has ruled that an insurer may have breached its fiduciary duty through unauthorized increases in premium rates, but that an employer is not guilty of a co-fiduciary breach for allowing the increases to occur.

Facts.  An employee participated in an ERISA-covered, insured long-term care plan through her employer.  She attended a presentation by the insurer where she was told “that any future premium increases would need to be approved by the Massachusetts Commissioner of Insurance before they could become effective.”  The Long Term Care Coverage insurance contract included the same promise, saying the insurer “may increase the premiums you pay subject to the approval of the Massachusetts Commissioner of Insurance.”  However, the contract also said that the insurer “reserves the right to change premium rates” (without reference to approval by any other body).

In the following years, the insurer raised the premiums by 40% and 19% without securing the approval of the Massachusetts Commissioner of Insurance.  The participant sued, claiming that the insurer breached its fiduciary duty when it raised the premium rate payments without first securing the approval of the Commissioner, as promised, and that her employer has also breached its fiduciary duty by failing to monitor the insurer and by allowing the unapproved premium increases to occur.

The district court concluded the premium increases did not demonstrate a breach of fiduciary duty and dismissed the case.

On appeal, the participant argued that the insurer’s fiduciary status derives from its role managing the long-term care insurance policy and premium rates, as expressed in the terms of the group contract and in the Summary Plan Description.  However, according to the insurer, the act of raising the premium rate is not plan management but, rather, a business decision, which falls outside the scope of its status as a fiduciary.

Court of Appeals.  The Appeals Court began its deliberation by noting that, “[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or (ii) he has any discretionary authority or discretionary responsibility in the administration of such plan[.]”

The Court then stated that the insurer’s authority to exercise its discretion and increase premiums is part of the overall management of the welfare benefit plan.  In the plan documents, the insurer had held itself out to the plan participants as owing them a fiduciary duty of prudence.  Pursuant to ERISA, the insurer owed a fiduciary duty of prudence to manage the plan in accordance with the documents and applicable federal and state laws governing the plan, including those relating to premium increases.  However, because the Court could not resolve the meaning of the contradictory plan clauses and the application of state insurance law, it reversed the judgment in favor of the insurer and remanded the case to the district court for further proceedings.

With regards to co-fiduciary liability for the employer, the Court noted that, “Co-fiduciary liability is a shorthand rubric under which one ERISA fiduciary may be liable for the failings of another fiduciary.  Co-fiduciary liability inheres if a fiduciary knowingly participates in or conceals another fiduciary’s breach, enables such other to commit a breach, or learns about such a breach and fails to make reasonable efforts to remedy it.”

The Court then ruled that the allegations with respect to the employer did not fall into one of the categories of co-fiduciary liability set forth in ERISA because there are no allegations that the employer knowingly participated in, concealed, enabled, or failed to intercede in any way to influence the insurer’s decision to increase the premium rates.  “Based on the text of [ERISA], it seemingly contemplates active steps in furtherance of a co-fiduciary breach whereas [the [employee] alleges [the employer] stood by and did nothing.”  Therefore, the Court affirmed the district court’s judgment dismissing the complaint against the employer.