Employer May Be Held Liable for Service Provider’s Error

The Second Circuit Court of Appeals, in Sullivan-Mestecky v. Verizon Communications, Inc., has held that a plaintiff properly pled her breach of fiduciary duty claim for equitable relief against an employer in connection with a third party administrator’s (“TPA’s”) clerical error in calculating life insurance benefits payable to her under the employer’s ERISA welfare plan.

 Background. The plaintiff’s mother was employed by the employer from 1970 to 1978  during which her annual income was $16,800. In 2011, the employer informed the employee she was eligible for $679,000 in coverage under the employer’s life insurance plan. She enrolled in the coverage and listed her daughter as the beneficiary. The employer subsequently sent various communications to the plaintiff’s mother confirming the existence and amount of the coverage under the plan. 

As a result of a calculation error made by the TPA, the former employee’s annual income of $16,800 had been erroneously coded as her weekly income. However, this mistake was not detected until after the employee died. In the interim, believing herself to be the beneficiary of a generous life insurance policy, the plaintiff allowed her mother to live with her rent-free, covered her living expenses, paid off her debts and took an extended unpaid leave of absence from her own job to care for her mother.

Following her mother’s death, the plaintiff submitted a claim to the insurer, but was paid only $16,800, which the insurer represented to be the true value of the coverage. The plaintiff appealed, and was told that the plan had miscalculated the coverage amount and had provided incorrect information to the decedent about her life insurance coverage. The plaintiff then sued the employer and TPA, seeking equitable relief for their alleged breaches of fiduciary duty in connection with the miscalculation. At trial, the district court dismissed the plaintiff’s breach of fiduciary duty claims against both the employer and the TPA, and the plaintiff appealed to the Second Circuit.

Second Circuit. In reviewing the matter, the Second Circuit determined that the plaintiff reasonably pled that the employer breached its fiduciary duties by failing to provide complete and accurate information regarding the plan. As part of this conclusion, the Second Circuit noted that as the plan’s administrator, the employer was responsible for assessing the decedent’s eligibility and enrollment in her life insurance coverage. The court observed that when the employer arranged for the TPA to communicate with the decedent about her life insurance benefits, the employer was acting as a fiduciary and bound by ERISA’s fiduciary requirements to properly administer the plan. In particular, the Second Circuit explained that the TPA’s negligence is imputed to the employer and that “[the employer] cannot hide behind the [TPA’s] actions to evade liability for the fiduciary breach that occurred here.”

Employer Takeaway. The Second Circuit’s decision in this case is a reminder to employers of ERISA’s fiduciary duties, and that employers continue to retain these fiduciary obligations even after engaging a service provider. Accordingly, employers must be sure to regularly review and monitor service providers’ work to ensure that it is accurate.