Insurer Not Bound By Employer’s Errors

The Fifth Circuit Court of Appeals has ruled, in Talasek v. National Oilwell Varco, L.P., that an insurer was not required to pay a supplemental life insurance claim merely because of misrepresentations by the employer that sponsored and administered a group life insurance plan.

Facts. An employee applied for supplemental group life insurance and received a statement from the insurer reflecting his new elections. However, the statement: (i) noted that “[a]ny coverage listed as suspended requires approval”; and (ii) indicated that his supplemental benefit elections were suspended until he completed an approved Evidence of Insurability form. When the employee completed the form, the insurer said it was not able to approve the additional coverage because of the employee’s health issues.

Nevertheless, the employee subsequently received statements from the employer, as plan administrator, showing his election of supplemental benefits and indicating that the employer was deducting contributions from his paycheck for the coverage. Four years later, the employee died and his spouse’s claim for supplemental life insurance benefits was denied. Among other things, she sued the employer and the insurer based on the legal concept of “estoppel.” 

Court. The Fifth Circuit stated that to pursue an estoppel claim, the spouse needed to show that the plan had made a material misrepresentation on which she “reasonably and detrimentally” relied.

The spouse contended that the plan misrepresented the status of her husband’s supplemental life insurance coverage with its statements and by continuing to deduct premiums from his paycheck.

The Court stated that “(i)t is difficult to imagine a misrepresentation more likely to mislead a recipient.  Every year for four years, [the employee] received statements... purporting to identify the benefits elected and indicating the amount of the deduction for each element of coverage” including supplemental life insurance.

However, the employee and spouse must also have relied “reasonably” on the plan’s material misrepresentation. The Court ruled that their reliance was not reasonable.

The provision of the group life insurance policy requiring the employee to complete an approved Evidence of Insurability form before coverage could begin was unambiguous.  The Court then said the insurer’s Summary of Benefits, provided by the insurer to the employee, is the governing document.  It states, “in no uncertain terms”, that “[e]vidence of insurability is required for any amount of life insurance.” Therefore, the employee was on notice that “coverage was contingent on the insurer’s approval of the Evidence of Insurability form for supplemental life insurance.”

Furthermore, the Summary of Benefits also made it clear that the plan’s (and therefore the employer’s) representations were not those of the insurer and delineated when and by whom changes to life insurance coverage could be made.

Therefore, the Court ruled that the spouse cannot establish “reasonable” reliance and dismissed her estoppel claim.