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Court Awards Benefits Based on Flawed Eligibility Procedures for Dependent Life/AD&D Insurance



Frye v. Metropolitan Life Ins. Co., 2018 WL 1569485 (E.D. Ark. 2018)

A court has held that an employee is entitled to the proceeds of dependent life and accidental death and dismemberment (AD&D) insurance policies after her son died in a car crash, even though the son was over the age limit for dependent eligibility at the time of his death. The employee provided the son’s birthdate and other information when she enrolled him in her employer’s medical plan in late 2012. She also elected dependent life and AD&D coverage at that time, but she was not required to provide any information about her son for that coverage. The son’s coverage began in 2013 and automatically renewed in 2014 and 2015. Although the son lost eligibility for the dependent life and AD&D coverage when he turned 23 in 2014, the employee did not notify her employer or the insurer. Neither the employer nor the insurer notified the employee that her son was no longer eligible for the coverage, and they continued to collect premiums from the employee’s wages. After the son’s death in 2015, the insurer denied the employee’s claim for benefits due to his age and refunded the premiums.

The employee sued under ERISA, citing § 502(a) without specifying the grounds on which she sought recovery. The court ruled that the insurer had correctly denied benefits under ERISA § 502(a)(1)(B), since the insurance policy unambiguously terminated dependent eligibility at age 23. On its own initiative, the court then considered whether the employee was entitled to appropriate equitable relief under ERISA § 502(a)(3). The court decided that the benefits committee (acting as plan administrator) and the insurer had breached their fiduciary duties by using flawed administrative procedures that failed to confirm eligibility at enrollment, thereby allowing employees to enroll dependents who either were ineligible or became ineligible. While conceding that not screening for eligibility upfront might simplify administration and reduce costs, the court viewed the procedure as focusing too much on saving expenses while overlooking how simple screening for age would be. For example, the employer could have provided the life insurer with birthdates collected during medical plan enrollment. The court concluded that even though the plan documents required employees to notify the insurer of changes in dependents’ status, the employee’s failure to notify did not relieve the administrator and insurer of their fiduciary duties—especially given the length of the plan documents. The court held that the appropriate remedy was a surcharge against the employer and insurer equal to the amount the employee would have received if coverage had been in force when her son died.

EBIA Comment: Surcharges have been gaining judicial acceptance ever since the U.S. Supreme Court’s Amara decision (see our Checkpoint article). In electing to address fiduciary duties, the court clearly was troubled by an administrative procedure that gave the insurer windfall profits from employees who paid premiums for ineligible dependents and never filed claims. Employers should note that the court placed some of the blame with the plan sponsor, and that judgment will be entered against both the employer and the insurer. For more information, see EBIA’s ERISA Compliance manual at Section XXVIII.I.5 (“Fiduciaries May Sometimes Be Liable for Harm Caused to Individual Participants”). You may also be interested in our recorded webinar “Learning the Ropes: An Introduction to ERISA Compliance for Group Health Plans” (recorded on 2/21/18).

Contributing Editors: EBIA Staff.

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