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Benefits

Employer May Face Equitable Remedies for Fiduciary Breach Due to Service Provider’s Error

EBIA  

EBIA  

A participant in an employer-sponsored group life insurance plan was informed, in numerous written communications and several telephone conversations, that her death benefit under the plan’s “1 X pay” coverage option amounted to nearly $700,000. But when she died, the plan, based on her annual earnings of $18,600, paid only her funeral expenses and an additional $20. Apparently, when the participant enrolled, her annual earnings were mistakenly entered as weekly earnings. And despite the participant expressing surprise at the coverage amount during conversations with plan representatives—and some internal questioning by a service provider—the error was not discovered until after her death. The beneficiary (her daughter) sued for the remainder of the promised benefits and for fiduciary breach under ERISA. The trial court ruled against the daughter, and she appealed. The Second Circuit upheld the trial court’s ruling on the claim for benefits. It also upheld rulings in favor of a later claims administrator that did not make the data entry and communication errors. But it set aside the ruling that the fiduciary breach claim against the employer sought an impermissible remedy in the form of money damages.

The Second Circuit’s opinion acknowledges that the “equitable” relief allowed by ERISA for fiduciary breaches does not include money damages. However, citing the Supreme Court’s Amara ruling (see our Checkpoint article), the court explained that some types of equitable relief—estoppel, surcharge, and reformation—can provide a monetary remedy. According to the court, the facts presented could support claims for estoppel (which requires reliance on a promise, injury, and extraordinary circumstances) or the other forms of equitable relief. The employer contended that it did not commit a fiduciary breach because a service provider, not the employer itself, furnished the erroneous information. But the court explained that the employer, as the ERISA plan administrator, was ultimately responsible for determining the participant’s benefits eligibility and enrolling her in the plan. Moreover, selecting the service provider was a fiduciary act, and a fiduciary may be responsible for a service provider’s gross negligence in performing ministerial acts. Lastly, the court said the employer could not “hide behind” the accuracy of the plan documents because the participant was never directed to specific plan terms that could have alerted her to the error. The case now returns to the trial court.

EBIA Comment: Two key ERISA issues are highlighted here: the possibility of monetary relief for fiduciary breach, and the importance of monitoring service providers. (While an employer held liable for a service provider’s gross negligence might seek recovery from the service provider, contract terms could limit the service provider’s exposure.) This case also illustrates the importance of fully investigating possible errors as they arise. For more information, see EBIA’s ERISA manual at Sections XXVIII.I (“Fiduciary Liability and Litigation”) and XXX.F (“Duty to Monitor the TPA”). See also EBIA’s Fringe Benefits manual at Section XIV (“Group-Term Life Insurance”) and EBIA’s 401(k) Plans manual at Section XXXVII.H (“Claims for Breach of Fiduciary Duty”).

Contributing Editors: EBIA Staff.

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