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Benefits

Business Insurance Policies Do Not Cover Benefit Payments Resulting From Flawed Plan Administration

EBIA  

EBIA  

 

Erickson-Hall Construction Co. v. Scottsdale Ins. Co., 2019 WL 719204 (S.D. Cal. 2019)

A company controller tasked with various duties relating to his employer’s benefit plans—including receiving and processing insurance premium invoices—failed to make premium payments for life and disability coverage. When the coverage lapsed due to nonpayment, he did not notify the company or plan participants. Three employees suffered injuries or death that would have been covered under the plans, and the employees (or their beneficiaries) submitted letters demanding the benefits they would have received if the coverage had been in effect. The company settled the demands (totaling over $200,000) and filed claims for reimbursement under two business insurance policies. Both insurers denied the claims, and the employer sued. The insurers asserted that the case should be dismissed because failure to pay premiums is not a covered event under the policies, and the court agreed.

Both policies covered losses arising from negligent acts or omissions or fiduciary breach associated with administration of the employer’s benefit plans. The employer argued that the controller’s mishandling of records, premium payments, and renewal notices, and his communication failures, constituted negligent acts or fiduciary breaches associated with plan administration and thus fell within the policies’ coverage terms. The court acknowledged sufficient ambiguity in what it means to “administer” plans under the policies so that the conduct in question could potentially be covered. However, it examined key policy definitions, including “employee benefits injury” and “wrongful act,” and concluded that the employer’s claim did not fall within these terms. Instead, the employer’s obligation to pay the relevant benefits arose from contractual promises it had made to employees through the plans, and this underlying obligation could not be passed on to the insurer by failing to pay insurance premiums, even if the failure was negligent or a breach of fiduciary duty. The court explained that “it would not be reasonable for an insured to expect that an insurance policy providing coverage for negligence or breaches of fiduciary duties would cover a claim that the insured ‘forgot to pay its bills.’” The court dismissed the case, but granted the employer leave to amend its complaint to present additional arguments.

EBIA Comment: The employer, which has already filed an appeal, likely thought this sort of situation was exactly why it purchased business insurance. The court, on the other hand, was concerned with the incentives that would be created by transferring benefit plan liabilities to the business insurers. Whatever the outcome, this case demonstrates the importance of thoroughly training and monitoring internal employees charged with administering benefits. For more information, see EBIA’s ERISA Compliance manual at Section XXIX.G (“Limiting Plan Administrator’s Liability”).

Contributing Editors: EBIA Staff.

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