Court Rules that Employer Liable for Death Benefit
A U.S. District Court has determined, in Van Loo v. Cajun Operating Company, that an employer that self-administered a life insurance plan breached its fiduciary duty under ERISA when it inadvertently misrepresented an employee's level of life insurance coverage. As a result the employer, and not the insurer, was responsible for paying the misrepresented amounts.
Background. Under the employer's life insurance plan, employees were automatically enrolled for a base amount of group term life insurance coverage and had the option to buy supplemental coverage. The insurer for the plan routinely required evidence of insurability ("EOI") for the supplemental coverage. The employer's open enrollment materials explained that an EOI "may be required" and that the employer would provide the EOI forms to employees when necessary.
The decedent employee had elected and paid for the plan's supplemental coverage option for a number of years. However, the employer never provided any EOI forms to her. When the employee died, her parents made a claim for the base benefit and supplemental coverage. The insurance company responded by paying only the base benefit and explained that it could not honor the supplemental coverage claim (despite the fact that the employee had paid premiums for such coverage for more than five years) because it never received a completed EOI form for the employee. The insurer said it had previously sent the employee an EOI form, on behalf of the employer.
In response, the beneficiaries sued the employer on the basis that it breached its fiduciary duty as plan sponsor by misrepresenting the total amount of life insurance that was effective for the employee.
Applicable Legal Standard. In order to prevail on a breach of fiduciary claim based on a material misrepresentation by a plan sponsor, a plaintiffs must demonstrate that: (i) the plan sponsor was acting in a fiduciary capacity when it made the challenged representation; (ii) that the representations constituted material misrepresentations; and (iii) that the plaintiff relied on the representations to his or her detriment.
District Court Decision. The court first determined that the employer's actions (i.e., representations about the employee's effective level of life insurance coverage) constituted management or administration of the plan which were fiduciary in nature. Accordingly, the court ruled that the employer was acting as a fiduciary when it made the challenged representations.
The court next explained that misleading communications to plan participants regarding plan administration will support a claim for a breach of fiduciary duty. In reviewing the record, the court determined that the employer's communications with the employee throughout her employment constituted material misrepresentations regarding the level of effective life insurance coverage. The court noted that: (i) nothing in the employer's open enrollment materials clearly explained when an EOI was required; and (ii) that the record was devoid of any evidence establishing that the employer had actually sent an EOI to the employee.
Finally, in determining whether the employee had detrimentally relied on the employer's misrepresentation, the court found that the employee's decision to continually increase the levels of supplemental coverage on a yearly basis and to pay the premiums for such coverage confirmed her belief that the supplemental coverage was in effect. On this basis, the court ruled that the employee had, in fact, relied on the employer's representations. The court also found that the employee's detrimental reliance was reasonable because she had no way to know that an EOI form was absolutely necessary for the supplemental coverage.
The court ultimately ruled in favor of the plaintiffs, finding that the employer had breached its fiduciary duty by administering the plan in a way that allowed the employee to believe incorrectly that a certain level of life insurance coverage was in place. As a result, the court ordered the employer, and not the insurer, to pay $314,000, the amount of the supplemental coverage.
Takeaway for Employers. In the wake of Van Loo, employers that self-administer welfare benefit plans must be careful to follow and enforce all insurance policy terms and limits that they are administering.