Sixth Circuit upholds ERISA breach of fiduciary duty award

The Employee Retirement Income Security Act of 1974 is better known as ERISA.  It was enacted by Congress to protect retirement and welfare benefit plans, such as employer provided life insurance. 

Unfortunately, the courts have interpreted ERISA in ways that typically favor insurance companies and employers over the rights of employees.  A common problem I see is employees who believe they are covered for a particular life insurance plan.  That belief is often well founded, because their employer tells them they are covered and deducts premium payments!

At times, the insurance company will audit a claim and decide that the employee should never have received the coverage at issue. ERISA plans are governed by detailed plan provisions.  Possibly, the employee did not meet qualifications of work status, maybe they did not work enough, maybe they did not sign the right paperwork, etc.

These denials can be frustrating and extremely unfair, because the employer may have assured the employee of the coverage and also made premium deductions from the employees paychecks.  Unfortunately, courts are often not sympathetic to the fundamental unfairness of denying coverage ever existed, despite the employee's payment of premiums and good faith belief they had the coverage.  As a consequence, courts have provided minimal checks on the power of insurers to deny claims, particularly as ERISA does not provide an employee/beneficiary with a right to a jury trial. 

A ray of light comes from the Eastern District of Michigan, as affirmed by the Sixth Circuit court of appeals. Loo v. Church's Chicken involved a claim by a life insurance beneficiary to supplemental life insurance benefits.  As is common with many employers, Church's offered employees "basic" coverage at one times annually salary as a base benefit, paid for by the company. The employee in this case also elected to get employee-paid elective supplemental life insurance, ultimately four times her annual salary.

Church's self-administered the ERISA life insurance plan, even though Reliance Standard Life Insurance Company ultimately paid claims.  Thus, Church's was “responsible for ensuring that coverage elections (including any required proof of good health) are processed in accordance with the terms and conditions of the applicable policy and that premium remittances are accurate and timely."

The plan required that an employee submit an evidence of insurability form. But Church's processed her request anyway, and deducted the premiums for the elective supplemental coverage.  Thus, the employee believed she had coverage.

After the employee got sick and died, Reliance denied the claim for the supplemental benefits, because the employee did not submit the evidence of insurability. I have seen numerous such cases over the years and the courts typically allow the ERISA insurer to not pay if the coverage conditions are not met.  In this case, the court did dismiss the claims against Reliance.

But the court here noted that Church's was responsible for administering the life insurance plan. It then found that Church's breached its ERISA fiduciary duty to administer the group life-insurance policy in the sole interest of the insured employees and their beneficiaries. The misrepresentation was that the employee was covered for the supplemental benefits, as evidenced by the deductions from her pay check. The court found:

"Fiduciaries are liable when their misrepresentations cause an employee to be inadequately informed in her decision whether to pursue benefits. . . Because Church’s misrepresented her coverage level, [she] lost the opportunity to obtain the coverage she wanted through another channel, such as on the individual market for life insurance."

This Sixth Circuit decision should be referenced when an administrator leads an employee to believe they have a certain life insurance coverage.