Denial of Supplemental Life Benefit Overturned Due to Poor Claims Administration

This lawsuit was brought by a deceased participant’s wife after denial of her claim for supplemental life insurance benefits under her husband’s employer-provided plan. The insurer’s denial stated that, at enrollment, the participant answered “no” to several health questions to which he should have answered “yes” to indicate that he had certain health conditions. It explained that “yes” answers would have necessitated a full “statement of health,” and since no such statement was received the supplemental coverage never took effect. It also asserted that it would not have issued the coverage due to health conditions indicated by the participant’s earlier medical records. The wife contended that the participant underwent physical examinations for purposes of the life insurance. (The exams were apparently through the employer’s wellness program, not expressly for life insurance, but the court found that the insurer did indeed obtain the results.) Also, the employer withheld premiums for the supplemental coverage from the participant’s pay and the insurer accepted the payments for nearly 18 months before the employee’s death.

Applying the deferential arbitrary and capricious standard of review, the court concluded that the denial was not a reasonable interpretation of the plan’s terms. After reviewing various communications among the employer, insurer, and TPA, the court cited widespread confusion regarding the requirements for obtaining supplemental coverage. There was apparently no paper or electronic record of the participant’s application, and there were conflicting accounts of what health questions were asked, what the answers were, and who provided the answers. Noting that the insurer’s lack of clarity was demonstrated by the inconsistent reasons given for the denial, the court determined that the evidence did not establish that the participant was untruthful in his application. Also, applicable plan provisions were vague and inconsistent and did not adequately explain the requirements for approval of supplemental coverage, and the insurer did not show that it would have denied coverage had a statement of health been submitted. Accordingly, the insurer was liable for the supplemental benefit. Moreover, even if the insurer had not abused its discretion, the court noted that both the employer and insurer breached their fiduciary duty and should be prevented (equitably estopped) from denying coverage because the premium withholding, two annual re-enrollments, and the physical exams under the wellness program justified both the couple’s reasonable belief that the coverage was effective and their decision not to seek coverage elsewhere.

EBIA Comment: This is a case study in how not to administer benefits—a vague SPD, inconsistent explanations, cryptic claim records filled with acronyms and jargon, and poor coordination among the plan sponsor, TPA, and insurer resulted not only in an award of benefits but potential liability for the wife’s attorney fees. Also, the maximum ERISA penalty was awarded for the employer’s failure to timely provide certain documents the wife had requested. There are many lessons here for those with responsibility for benefit claims. For more information, see EBIA’s ERISA Compliance manual at Sections XXVIII.I (“Fiduciary Liability and Litigation”) and XXXIV.N (“How to Protect Claim Denials From Being Reversed in Court”). You may also be interested in our upcoming webinar, “Claims & Appeals Rules for Group Health and Disability Plans“ (live on 04/18/2018).

Contributing Editors: EBIA Staff.