Denial of Life Insurance Benefit Supported by Clear Plan Provisions Despite Years-Long Collection of Premiums

An employee attempting to enroll in his employer’s ERISA-covered supplemental life insurance plan was informed that his elected coverage was “suspended” pending approval of required evidence of insurability. After some back-and-forth between the employee and the insurer, during which the employee corrected errors in his evidence-of-insurability form and provided additional materials, the insurance company informed him that it was unable to approve the coverage. However, for the next four years—until the employee’s death—premium payments for the elected coverage were taken from his paycheck, and the coverage was reflected on his benefit statements. After he died, his wife’s claim for benefits was denied. Following an unsuccessful internal appeal and unfavorable ruling by a trial court, she appealed to the Fifth Circuit, claiming estoppel. That is, she sought to prevent enforcement of the plan’s terms because the employer misrepresented the husband’s coverage by deducting premiums and listing the coverage on his benefit statements.

The court explained that, in the Fifth Circuit, a successful estoppel claim requires a showing that there was a material misrepresentation on which the claimant reasonably and detrimentally relied, under extraordinary circumstances. With respect to the erroneous benefit statements and payroll deductions, the court acknowledged that it was “difficult to imagine a misrepresentation more likely to mislead a recipient.” But the court concluded that reliance on the erroneous statements and deductions was not reasonable because the plan clearly and unambiguously set forth the evidence-of-insurability requirement and explained that insurance company approval was required before the coverage would become effective. In addition, the plan clearly stated that representations made by the employer were not the insurer’s representations. (Because the reasonable reliance element was not met, the court did not need to decide whether there were extraordinary circumstances.) Recognizing how frustrating the employer’s misrepresentations must have been, the court nevertheless upheld the denial of benefits.

EBIA Comment: This case clearly demonstrates the advantage to the plan of good drafting and unambiguous plan provisions, but it can also be seen as a cautionary tale on the importance of careful plan administration. Although the plan documents were clear, the erroneous payroll deductions and benefit statements led the employee (and his wife) to believe the elected coverage was in effect even though it was not. While it appears that the premiums paid were refunded to the wife, these amounts were undoubtedly significantly less than the expected insurance benefits. For more information, see EBIA’s ERISA Compliance manual at Section XXXVI.F.4 (“Benefits Based on Representations Outside of Plan Terms: Estoppel Claims”).

Contributing Editors: EBIA Staff.