Loo v. Cajun Operating Company d/b/a Church’s Chicken, 2016 WL 3137822 (E.D. Mich. 2016)
After receiving a smaller-than-expected payout on a life insurance claim, the beneficiaries sued their deceased daughter’s former employer for breach of fiduciary duty, asserting that, as plan administrator, it misrepresented the amount of life insurance coverage in effect. Although the employee had elected and paid for $614,000 worth of coverage, the insurer paid only $300,000—the guaranteed issue threshold—because it had never received an evidence of insurability form (EIF). (In a previous decision, the court dismissed claims against the insurer because the employer and insurer had agreed that obtaining EIFs was the employer’s responsibility.) In support of their claim, the beneficiaries pointed out that not only did the employer fail to send an EIF when the employee first elected coverage above the guaranteed-issue threshold, it also indicated (via its enrollment system) that her enrollment was complete and accepted premiums for the elected coverage for five years—despite the lack of an EIF. The premium amount for the elected coverage was also specified in a letter the plan administrator sent when the employee stopped working due to illness. According to the beneficiaries, these actions amounted to a representation that the elected coverage was in effect.
To prevail on their fiduciary breach claim, the beneficiaries had to show that the employer was acting as a fiduciary when it made material misrepresentations detrimentally relied on by the employee. The court explained that the employer acted as a fiduciary when conducting enrollment, processing premium payments, and communicating the level of benefits. The misrepresentations were material because they implied that the employee had completed enrollment for a coverage level that never became effective, affecting her ability to make informed decisions about her coverage. Rejecting the argument that the employee should have been aware of the threshold because it was set forth in the policy, the court determined that there was no indication that the policy was ever made available to participants. Rather, a reasonable person would interpret the employer’s communications (which indicated only that an EIF “may” be required for higher coverage) to mean that an EIF would be provided if needed. Lastly, the fact that the elected coverage likely would not have been approved given the employee’s preexisting health conditions demonstrated her detrimental reliance—had coverage been denied, she may have sought coverage elsewhere. The court concluded that the employer breached its fiduciary duty and was liable for the $314,000 difference between the actual coverage and the represented coverage amount.
EBIA Comment: Employers that assume responsibility for aspects of plan administration take on additional risks; this employer, rather than the insurer, ended up having to pay a substantial part of the life insurance benefit. The employer might have been in a better position if its communications clearly explained when EIFs were needed, but accepting higher premiums also influenced the employee’s expectations about the level of coverage. Employers should build safeguards into their administrative processes to avoid disconnects like this one. For more information, see EBIA’s ERISA Compliance manual at Sections XXVIII.F (“ERISA Fiduciary Duties and Participant Disclosure”) and XXVIII.I.5 (“Fiduciaries May Sometimes Be Liable for Harm Caused to Individual Participants”).
Contributing Editors: EBIA Staff.