Insurer’s payment of reduced benefits not a fiduciary breach

An insurer did not breach any fiduciary duty it may have had under ERISA when it paid an insured’s widow $150,000 in life insurance benefits instead of the full $300,000 in coverage for which the insured had paid premiums, the U.S. Court of Appeals for the Fourth Circuit held. The reduced benefits were the result of an error by the insured’s employer (the plan’s administrator), not the insurer. Contrary to the widow’s assertion, the insurer had no fiduciary duty to notify the insured that he had not satisfied the evidence of insurability requirement needed for supplemental benefits beyond the guaranteed amount. According to the plan documents, that task was solely the responsibility of the employer.
The plan documents provided that the employer would calculate and collect employee premiums via payroll deduction. At the end of each month, the employer would send a bulk premium to the insurer reflecting the total monthly premiums for both basic and supplemental coverage. The premium did not identify the names of individual employees for whom payment was being made, and the employer did not list the amount being paid for any specific employee.
In this case, the insured had elected $250,000 in supplemental coverage, and the employer deducted the applicable monthly premium from his paychecks. When he died, his widow submitted a claim for $300,000 (the supplemental coverage amount plus $50,000 in basic group life insurance provided by the employer). However, the insurer-Life Insurance Company of North America (LINA)-approved only $150,000 ($100,000 in supplemental coverage plus $50,000 in basic) because it had not received evidence of insurability from the insured, which was required for supplemental coverage in excess of the “guaranteed issue amount” of $100,000. The employer accepted the blame for the discrepancy and offered to refund the excess premiums, but the widow opted instead to file suit. In her complaint, she alleged that LINA and the employer breached their fiduciary duties by: (1) failing to notify her husband that he needed to submit evidence of insurability, while (2) simultaneously collecting premiums for unapproved coverage. In the current case, LINA moved for summary judgment, asserting that it owed no fiduciary duty with respect to soliciting and receiving supporting materials for coverage beyond the guaranteed issue amount.

Breach of fiduciary duty claim.

The widow first argued that LINA was a fiduciary under ERISA because the bulk premium payments it received from the employer were “assets” of the plan and because LINA exercised “authority or control” over the “management or disposition” of those assets. According to the court, however, the plan at issue here was a “guaranteed benefit policy” under ERISA such that only the policy itself-not the premiums paid-was a plan asset. ERISA defines a “guaranteed benefit policy” as “an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer.” Under the structure of the plan, the employer paid LINA a set amount of money in premiums on behalf of its employees. If any of those employees subsequently submitted a claim, LINA agreed to provide a benefit that was determined solely on the basis of the level of coverage selected by the employee. That amount was guaranteed, regardless of market performance or other variables plans could take into account. Moreover, LINA comingled the premiums with other assets, and if a covered employee died, it paid a set benefit, regardless of the amount of premiums collected. This structure allocated investment risk to the insurer, the hallmark of a guaranteed benefit plan. Thus, the funds paid to LINA were not plan assets.
Contrary to the widow’s next assertion, LINA did not have a fiduciary duty to notify her husband that he had not completed the evidence of insurability requirement needed for the full amount of supplemental benefits. The plan documents showed that the circumstances in this case resulted not from any fault of LINA but, rather, from the employer’s errors in failing to fulfill its fiduciary duties. The documents designated the employer as the plan administrator, which involved tasks such as “screening and submitting applications over guaranteed issue.” Based on its authority as plan administrator, the employer appointed LINA as the “claim fiduciary,” which was limited to adjudicating claims for benefits and deciding any appeals of adverse claim determinations. Nothing in the plan documents gave LINA the authority, responsibility, or managerial capacity needed to qualify as a fiduciary under ERISA with respect to soliciting supporting materials for coverage beyond the guaranteed issue amount or notifying new employees that they had not completed the evidence of insurability requirement. Under the plan documents, that responsibility belonged solely to the employer.
In addition, everything in the record showed that the employer was responsible not just formally, but functionally, for the specific roles at issue here-i.e., requesting the information required to enroll new employees and notifying plan participants if they lacked documentation required for supplemental coverage. Most tellingly, each month the employer merely provided LINA with the number of employees covered and the total amount of premiums due; it did not provide individual information about specific employees. Given that arrangement, it was not clear how LINA could have known that a particular employee was paying for coverage that had not been approved.

Participation in fiduciary breach.

The court also rejected the widow’s claim that LINA was liable for knowingly participating in a breach of trust by a fiduciary. Assuming without deciding that such a cause of action existed, the court concluded that the claims would still fail because there was no evidence that LINA knew about the employer’s alleged breach of fiduciary duty until after it had occurred.

SOURCE: Gordon v. CIGNA Corp., (CA-4), No. 17-1188, May 15, 2018.
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