Equitable surcharge and agency and waiver, oh my!
ERISA: Breach of fiduciary duty or breach of contract when employers make mistakes administering their employees’ benefits
“People make mistakes. Even administrators of ERISA plans.” These are the opening lines from Chief Justice John Roberts’ majority opinion in Conkright v. Frommert, (2010) 599 U.S. 506. The U.S. Supreme Court went on to explain it “should come as no surprise” that mistakes will be made in administering plans under the Employee Retirement Income Security Act of 1974 (“ERISA”) because the statute is “enormously complex and detailed” and the plans that administrators must construe can be “lengthy and complicated.” (Id. at p. 509.) The result in Conkright – a holding that a single honest mistake in plan interpretation does not justify stripping an administrator vested with discretionary authority of deference in exercising that discretion. Even unpacking that holding is complex.
Considering how many employers provide ERISA-regulated benefits, the potential complexity in doing so, and the seeming understanding from the Supreme Court about how to deal with that complexity, does it really matter if a single honest mistake is made in administering those plans? You bet it does. So, employers big and small need to understand who is liable for mistakes, when, and why. Because mistakes will happen.
The focus of this article is on two paths to liability when a plan administrator makes a mistake in the administrative or “functional” phase of ERISA plans. This is when employers or insurance companies are answering questions about the plan or performing the “day-to-day” work that benefits require – like collecting premiums, monitoring enrollment, or asking for items that need to be provided before coverage becomes effective.
The first path, breach of fiduciary duty, finds relief under 29 U.S.C. § 1132(a)(3) which allows a plan participant, beneficiary, or fiduciary “to obtain other appropriate equitable relief” to redress violations of ERISA or the terms of the plan. This will be referred to as (a)(3). The second path, which resembles breach of contract, finds relief under 29 U.S.C. § 1132(a)(1)(B) which grants a plan participant or beneficiary the right to bring a civil action to recover benefits due under the terms of his plan. This will be referred to as (a)(1)(B). For the second path, this article explores how an employer’s “mistake” may bind an otherwise uninvolved insurance company to liability under the contract via (a)(1)(B) and the one-two punch of agency and waiver.
What is ERISA again?
Let us pause here for a quick refresher: ERISA is the law that regulates and protects employees’ rights under their employer-provided pension and other welfare benefit plans – such as medical insurance, disability insurance, or life insurance. The largest exception to this rule is benefit plans provided by governmental entities and religious organizations. ERISA does not apply there. (29 U.S.C. § 1003(b).) Virtually all other employers must comply with ERISA if they offer employee benefits.
The employee benefits themselves are provided through a plan – a written document that defines the rights, terms, and obligations for funding and receiving the benefit. When disputes arise over plan benefits, ERISA preempts state laws and ERISA’s statutory terms and the regulations promulgated by the Department of Labor apply. When there are gaps in the statute or regulations, Congress empowered courts to develop a common law of ERISA to fill in those gaps. (Firestone Tire & Rubber Co. v. Bruch, (1989) 489 U.S. 101, 110.) While ERISA contains one of the broadest preemption clauses ever enacted by Congress, it also contains a “savings clause” such that state laws that regulate insurance are saved from ERISA preemption. (See 29 U.S.C. § 1144(a); 29 U.S.C. § 1144(b)(2)(A).)
Breach of Fiduciary Duty
ERISA defines a fiduciary with respect to a plan to include an entity that exercises any control over the management of the plan or is responsible for the administration of such plan. (29 U.S.C. § 1002(21)(A).) Plan insurers are not fiduciaries, unless they determine claims made against the plan. (King v. Blue Cross and Blue Shield of Illinois, (9th Cir. 2017) 871 F.3d 730, 745.) Since employers establish the plan and set its terms, they are fiduciaries, and are almost always named as a fiduciary in the plan documents. Despite some employers arguing to the contrary when mistakes happen, if it is a named plan administrator, it can be sued for breach of fiduciary duty when handling administrative or functional aspects of the plan. (Dawson-Murdock v. National Counseling Group, Inc., (4th Cir. 2019) 931 F.3d 269, 277-78.)
The duties of an ERISA fiduciary are the highest known to the law. (Howard v. Shay, (9th Cir. 1996) 100 F.3d 1484, 1488.) This includes the duty of loyalty, a duty to disclose, and requires a fiduciary to “discharge his duties with respect to the plan solely in the interest of the participants and beneficiaries.” (29 U.S.C. § 1104(a)(1); King, 871 F.3d at 745-46.) This includes the obligation to convey complete and accurate information material to the participant’s circumstances, even when the participant has not specifically asked for the information. (King, 871 F.3d 744.) A fiduciary has an affirmative duty to inform when it knows silence might be harmful. (Bixler v. Central Pa. Teamsters Health & Welfare Fund, (3rd Cir. 1993) 12 F.3d 1292, 1300.)
The focus in breach of fiduciary duty cases is on the “big picture” presented by the case, without parsing technical language of the plan. (See Krohn v. Huron Memorial Hosp. (1999) 173 F.3d 542, 548.) When it comes to plans involving insurance (health, life, disability, etc.), a fiduciary may not administer the plan in such a way that it creates a situation where essentially risk-free profits can be obtained from premiums paid on non-existent benefits. The mere refund of premiums may be insufficient to right such a breach of fiduciary duty as the fiduciary must always be guided by the purpose of making coverage a reality. (McCravy v. Metropolitan Life Ins. Co., (4th Cir. 2012) 690 F.3d 176, 182-83; Frye v. Metropolitan Life Ins. Co., (E.D. Ark. Mar. 30, 2018) 2018 WL 15694885 at *4.)
A fiduciary is also liable when its breach caused an employee to be inadequately informed in her decision whether to pursue benefits. (Van Loo v. Cajun Operating Co., (6th Cir. 2017) 703 F. App’x 388, 394.) A showing of detrimental reliance on the fiduciary’s breach is not required for equitable recovery – all that needs to be established is the violation injured him or her. (Gabriel v. Alaska Elec. Pension Fund, (9th Cir. 2014) 773 F.3d 945, 958.)
Finally, a fiduciary may be liable for a co-fiduciary’s actions where it has enabled such other fiduciary to commit a breach or it has knowledge of a breach by the co-fiduciary. In such a circumstance, both fiduciaries are liable, unless one of them made reasonable efforts to remedy the breach. (Echague v. Metro. Life Ins. Co., (N.D. Cal. 2014) 43 F. Supp. 3d 994, 1022.)
Because we are talking about ERISA, if an employee needs to go to court to prove breach of fiduciary duty, they may be entitled to an award of attorney’s fees in addition to any other relief obtained. (29 U.S.C. § 1132(g)(1).)
Now we know what constitutes a breach of fiduciary duty, but (a)(3) claims are limited to equitable relief. Many lawyers recall learning a maxim from law school that money damages are not available in equity. Equity provides things like specific performance or injunctions. Legal remedies allow recovery of monetary damages. It turns out, that is not completely accurate.
The U.S. Supreme Court’s decision in CIGNA Corp. v. Amara, (2011) 563 U.S. 421, marked a sea change for the understanding of the equitable relief provided by ERISA under (a)(3). Several prior U.S. Supreme Court decisions made it appear that ERISA’s equitable remedies did not allow for monetary relief. If money payment was the remedy sought, it was widely believed it was only available through (a)(1)(B) – essentially to redress breach of contract.
In Amara, the U.S. Supreme Court entered the way-back machine to the time before the merger of law and equity. Citing to cases as far back as 1817 and hornbooks from 1823, it explained (a)(3) provided any remedy available to the courts of equity. Those remedies were indeed broad, as a maxim of equity states that “[e]quity suffers not a right to be without a remedy.” (Amara, 563 U.S. at 440.) The Court then reviewed three traditional equitable remedies: reformation of the contract, estoppel, and surcharge.
Each of these remedies is potentially powerful. Reformation can change the terms of a contract (as contrasted with the power to enforce contracts as written) in order to remedy a false or misleading statement provided by a fiduciary. Estoppel essentially puts the employee into the same position she would have been in had the fiduciary’s false statements been true. But surcharge has proven to be the most influential of the three – perhaps because surcharge can take the form of a money payment. (Id. at 440-42).
Equitable surcharge is a form of injunction that can require a fiduciary to pay monetary “compensation” for a loss resulting from its breach of duty or to prevent unjust enrichment. Another benefit of surcharge is that it does not require detrimental reliance – a prerequisite for estoppel. (Id. at 443). Through surcharge an employee or beneficiary is simply ordered to be made whole following a breach – an extremely flexible remedy in which the court can “mold the relief to protect the rights of the beneficiary according to the situation involved.” (Id. at 444.) A fiduciary can be surcharged under (a)(3) upon a showing by a preponderance of the evidence of actual harm caused by its breach of fiduciary duty. Harm can be as broad as the loss of a right protected under ERISA – such as the right to apply for a particular benefit.
Mistakes resulting in monetary surcharge against employers
With the legal and remedial framework in place, how has this played out in the real world? Lots of ways.
Don’t forget to answer every question
In presenting the rules, this article focuses on first-party entities – employers and insurance companies. But the rules apply to any entity that develops ERISA fiduciary responsibilities, including third-party vendors. Many employers outsource the administration of benefits. When this happens, the vendor may find itself financially responsible for mistakes made in the administration of the benefits.
In Echague v. Metropolitan Life Ins. Co., (N.D. Cal. 2014) 43 F. Supp. 3d 994, we saw liability attach to a vendor for breach of fiduciary duty and surcharge. Carol Echague had $440,000 in life insurance benefits through an ERISA plan offered by her employer. The employer outsourced administration of the life insurance benefits, and multiple other benefits, to TriNet Group, Inc. Ms. Echague stopped working and took a leave of absence after she was diagnosed with cancer.
TriNet sent Ms. Echague several letters that explained to her that it was important for her to understand her rights and responsibilities while on leave. The letters directed her to several written materials, directed her to an online portal, and offered her an 800 number if she had questions regarding her benefits, but never specifically addressed her life insurance. Thereafter, Ms. Echague emailed TriNet, informing it that she did not want any insurance to lapse and inquiring where to send premium payments for continued insurance. In response, TriNet simply re-sent Ms. Echague copies of its prior letters. It did not provide her with any information directly responsive to her inquiry. Because her employer had always paid the premiums, Ms. Echague did not start paying the premiums on her life insurance. (Id. at 1001.)
After Ms. Echague died, MetLife denied her husband’s life insurance claim because the policy had lapsed for failure to pay premiums. Mr. Echague appealed, arguing that neither he nor his wife had been informed that the life insurance was at risk of terminating and that neither he nor his wife received notice from anyone that premiums were not being paid. A lawsuit followed. (Id. at 1002.)
The court found that TriNet could be held liable as a plan fiduciary because it administered the plan despite the delegation of claims determinations to MetLife. For example, TriNet sent COBRA and FMLA notices, transmitted premium payments to MetLife, and kept track of which employees were in the plan. (Id. at 1014.) However, the court did not find TriNet’s breach was in providing Ms. Echague with non-specific information when she went out on leave of absence. Rather, it was TriNet’s response to the email that breached its fiduciary duties because the response failed to provide complete and accurate information to Ms. Echague regarding her situation. (Id. at 1017). The court determined TriNet had a duty to specifically answer Ms. Echague’s question – which it failed to do – and provide more than generic and duplicative information. (Id. at 1019-20.)
TriNet’s mistake: It failed to provide a specific answer to a specific question. The result: a judgment against it for $440,000 through the doctrine of equitable surcharge. (Id. at 1024.)
Don’t forget to address every option
Dr. Scott Erwood worked for WellStar Health System, Inc. and had $1,000,000 in life insurance coverage through its ERISA plan. After suffering a seizure, Dr. Erwood was diagnosed with a brain tumor. He stopped working fulltime at WellStar, transitioning to part-time employment, before leaving work completely.
Around the time Dr. Erwood stopped working in full, Dr. Erwood and his wife met with WellStar’s benefits representatives to discuss benefits after his employment terminated. At the meeting the Erwoods repeatedly asked if all their coverage was going to remain the same. It was repeatedly confirmed that it would. The life insurance benefit was discussed, but not one specific aspect – conversion. (Erwood v. Life Ins. Co. of North America, (W.D. Penn. April 13, 2017)2017 WL 1383922 at *2-3.)
Under the life plan, after Dr. Erwood ended his FMLA leave (during which he paid premiums to maintain his medical, dental, vision, and life coverage), converting the life insurance benefit from an ERISA benefit to an individual benefit was the only way to continue his life insurance. WellStar did not send Dr. Erwood any information regarding conversion and continuation of the life insurance benefit after FMLA leave ended. This remained true even though WellStar knew Dr. Erwood was dying and that he had been approved for $250,000 of early life insurance benefits under the plan’s Terminal Illness Benefit. (Id. at *4-5.)
After Dr. Erwood died, his wife made a claim to LINA for the remaining $750,000 in life insurance benefits. LINA denied the claim because Dr. Erwood was no longer an active employee at WellStar nor had he elected to continue his policy via conversion to an individual policy. (Id. at *5.) Thereafter, Ms. Erwood sued WellStar for breach of fiduciary duty.
The court found that WellStar breached its fiduciary duty owed to Dr. Erwood when it remained silent on the single non-addressed benefits issue during the meeting called for the express purpose of informing the Erwoods about maintaining all of their benefits. WellStar had successfully informed the Erwoods about how to keep all of Dr. Erwood’s benefits in force during the FMLA leave. WellStar had even been successful in informing the Erwoods about how to keep all of Dr. Erwood’s benefits in force after the FMLA leave – with the only exception being his life insurance benefits. (Id. at *10.)
WellStar’s mistake: It failed to address every single plan requirement to continue plan benefits during a meeting called for the general purpose of providing information about continuing plan benefits. The result: a judgment against WellStar for $750,000 through the doctrine of equitable surcharge.
Don’t forget to keep track of how old people are
Tammy Frye worked for American Greetings, which provided a suite of benefits through MetLife. The responsibility for administration of those benefits was delegated to MetLife. One perk of the plan was the ability to elect certain coverage for dependents – including life and AD&D insurance coverage. However, eligibility for dependent coverage ended when the dependent turned twenty-three.
Ms. Frye elected to obtain various benefit coverages on her son, including life and AD&D insurance. During the process of enrolling her son in coverage, which was done entirely through the website www.americangreetingsbenefits.com, Ms. Frye provided his date of birth. The coverage went into force and premiums continued to be paid through payroll deductions. (Frye v. Metropolitan Life Ins. Co., (E.D. Ark. Mar. 30, 2018) 2018 WL 1569485 at *1.)
When Ms. Frye’s son turned twenty-three, she did not alert American Greetings or MetLife of this fact. And neither of them alerted Ms. Frye that her son had aged out of coverage. Ms. Frye’s son died in a car crash at the age of twenty-four-and-one-half. She made a claim for benefits, which MetLife denied on the basis that her son was ineligible for coverage at the time of his death. Frye appealed, arguing that she thought she had insurance; she had never been told about the age cut-off; American Greetings and MetLife knew about her son’s age because it was provided during his enrollment for medical insurance (not the life or AD&D insurance); and neither MetLife nor American Greetings had sent her any information about conversion when her son aged out. The appeal was denied, and a lawsuit followed. (Id.)
The court ruled that American Greetings and MetLife breached their fiduciary duties owed to Ms. Frye by implementing a flawed administrative process. With specificity, the court determined it was a breach to allow employees like Frye to pay for coverage for dependents who either are ineligible or become ineligible. (Id. at *3.) The court was clearly vexed by the potential that allowing this to happen might lead to MetLife receiving “essentially risk-free windfall profits from employees who paid premiums on non-existent benefits but who never filed a claim for those benefits.” (Id. at *4.) It also faulted only American Greetings and MetLife for the failure of communication, as they “are the fiduciaries on the scene.” (Id.).
American Greetings and MetLife’s mistake: not tracking the age of insureds to ensure they are notified when coverage ends. The result: judgment against both American Greetings and MetLife for the full life and AD&D coverage amounts via surcharge.
Don’t pay premiums for ineligible employees
Referral, a small company with fifteen employees, employed Teresa McGee. It offered employees a life insurance plan that included basic benefits and the opportunity to purchase additional coverage under a voluntary life policy. Between the two, Ms. McGee was insured for $143,550 in life insurance.
Unfortunately, Ms. McGee was diagnosed with breast cancer and had to stop working. Thereafter, Referral’s managing director told Ms. McGee that he would continue to pay premiums to make sure she continued to maintain her life insurance. He did so because he knew her condition was terminal. Referral was true to its word and paid life insurance premiums for Ms. McGee for over a year after she stopped working. It did not convert Ms. McGee’s insurance or notify her of her conversion rights. Unfortunately, the plan stated that it only covered employees who were in active employment. (McBean v. United of Omaha Life Ins. Co., (S.D. Cal., April 5, 2019) 2019 WL 1508456 at *1-2.)
The court determined Referral breached its fiduciary duty when it made a misrepresentation to Ms. McGee by informing her that it would continue to maintain her life insurance coverage. This was true even if Referral did not know whether it could continue her coverage via premium payments. The misrepresentation was material simply because it prevented Ms. McGee from making an informed decision regarding her coverage and other options. (Id. at *9.)
Referral’s mistake: not checking whether the continued payment of premiums would, in fact, continue coverage. The result: judgment against Referral for $143,550 via equitable surcharge – an amount Referral was unable to pay and did not have insurance to cover and may lead to bankruptcy. (See Referral Only, Inc. v. Travelers Property Cas. Co. of Am., (S.D. Cal., April 10, 2019) 2019 WL 1559145.)
Don’t forget to provide employees with a summary plan description
Michelle Snitselaar worked for Mount Mercy University. Under the terms of Mount Mercy’s life insurance plan, a lawful spouse was eligible for dependent coverage. However, the spouse’s coverage ends on “the date of divorce or annulment.” (Snitselaar v. Unum Life Ins. Co. of Am., (N.D. Iowa Jan. 22, 2019) 2019 WL 279995 at *2.) At that point the dependent may convert the coverage to an individual policy. However, Ms. Snitselaar and her husband were never provided with a summary plan description regarding this coverage, a violation of ERISA. (29 U.S.C. § 1024(b)(1).)
In 2010, Ms. Snitselaar enrolled for life insurance coverage under the plan for herself and her husband. In February 2015, Ms. Snitselaar’s divorce was finalized. Less than three months later, her then ex-husband died. Ms. Snitselaar made a claim for the $60,000 in life insurance she believed was in force. Unum denied the claim because the divorce ended the coverage and the benefit had not been converted. (Snitselaar, 2019 WL 279995 at *3.) Ms. Snitselaar argued that she was never informed in writing or verbally of the right to convert or that divorce could affect the policy. A lawsuit followed.
The court determined that Mount Mercy “clearly” breached its fiduciary duty by failing to timely deliver a certificate of coverage or summary of benefits to Ms. Snitselaar. But was there harm and causation? Yes. Simply by failing to provide the summary plan description or notice of the conversion rights, Mount Mercy had both harmed Ms. Snitselaar and caused that harm by keeping her uninformed.
Mount Mercy’s mistake: not providing a summary plan description and not keeping track of an employee’s divorce. The result: judgment against Mount Mercy for $60,000 under the equitable “make-whole, monetary relief” of surcharge. (Id. at *10.)
Agency and waiver – employer mistakes binding an insurance company
Several of the cases discussed to this point expressly denied the existence of coverage under the terms of the plan. This is the case because many jurisdictions require examining whether there is relief under (a)(1)(B) before deciding whether there is relief under (a)(3). Even then, the (a)(3) claim cannot be a “repackaging” of the (a)(1)(B) claim.
But even if the employer makes a mistake and there is a breach of fiduciary duty, the employer may not end up being liable to the employee if coverage is found under (a)(1)(B). The Ninth Circuit illustrated this in deciding Salyers v. Metropolitan Life Ins. Co., (9th Cir. 2017) 871 F.3d 943.
Susan Salyers participated in the life insurance plan established by her employer Providence Health & Services and insured by MetLife. The plan allowed her to elect dependent life benefits for her husband up to $50,000 without providing evidence of insurability. For coverage above $50,000, evidence of insurability was required.
Ms. Salyers elected only $20,000 in coverage for her husband. Providence mistakenly entered $500,000 in its system and deducted premiums from Ms. Salyers’s paycheck based on $500,000 in coverage. She was not asked to provide evidence of insurability.
During the next open enrollment period, Ms. Salyers elected $250,000 in life insurance coverage for her husband. A warning on the enrollment guide stated that any coverage elected requiring a statement of health will not take effect until approved by MetLife. Despite this, premium payments were now deducted to reflect the election of $250,000 in coverage. Again, neither Providence nor MetLife asked for evidence of insurability. Ms. Salyers received enrollment confirmation showing $250,000.
Ms. Salyers’s husband died shortly thereafter and she made a claim for benefits. Upon receiving the claim, Provident and MetLife discovered Provident’s mistake and the fact that evidence of insurability had never been provided. As a result, MetLife paid Ms. Salyers $30,000 – the amount of coverage her husband was eligible for under the Plan based on the initial election of $20,000 – and Provident refunded the premiums that were deducted from her paychecks for the higher amount of coverage.
Ms. Salyers appealed and MetLife responded that additional benefits were not payable because MetLife had not received and approved evidence of insurability for Ms. Salyers’s husband as required by the ERISA plan. (Id. at 936-37.)
Ms. Salyers sued MetLife, claiming it waived the evidence of insurability requirement because it did not ask Ms. Salyers for a statement of health, even as it accepted her premiums. However, because it was Provident that handled the administration of the plan, MetLife did not know that premiums had been deducted from Ms. Salyers’s paycheck or that she had elected coverage in an amount that required evidence of insurability under the plan.
This posed a problem for Ms. Salyers as waiver occurs when a party intentionally relinquishes a right or acts so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished. Courts have long applied the waiver doctrine in ERISA cases when an insurer accepted premium payments with knowledge that the insured did not meet certain requirements of the insurance policy. (Id. at 938.)
But what if the insurer lacked actual knowledge of the facts? After all, Providence and MetLife had created a system in which Providence was responsible for interacting with plan participants and MetLife remained largely ignorant of individual plan participants’ coverage elections. Don’t the above cases tell us that MetLife should be off the hook and Providence should face liability for breach of fiduciary duty? Enter the common law of ERISA and the adoption of agency law principles.
The Ninth Circuit was concerned that allowing ERISA to preempt state agency laws without replacing them gives insurers little incentive to monitor ongoing administration or to make sure that new information reaches the beneficiaries. Thus, it adopted the federal common law of agency regarding direct interactions with the insured to incentivize diligent oversight and to prevent an insurer from relying on a compartmentalized system to escape responsibility. (Id. at 940.)
Under agency law, the legal consequences of an agent’s actions may be attributed to a principal when the agent has actual authority (express or implied) or apparent authority. The latter, apparent authority, results when the principal permits the agent to do something which reasonably leads another to believe that the agent had the authority he purported to have. (Ibid.)
The court had “no trouble concluding that Providence had apparent authority…to enforce the evidence of insurability requirement on MetLife’s behalf.” (Ibid.) This was because a plan participant would have reasonably believed Providence’s direct interaction with plan participants, coupled with MetLife’s failure to engage with Ms. Salyers about evidence of insurability, suggested that Providence had apparent authority on the collection of evidence of insurability. The result: Providence was MetLife’s agent for purposes of enforcing the evidence of insurability requirement. (Id. at 941.)
Providence was acting as MetLife’s agent for purposes of collecting, tracking, and identifying inconsistencies with the evidence of insurability requirement, Providence’s knowledge and conduct regarding those matters were attributed to MetLife. Because Providence’s actions were so inconsistent with an intent to enforce the evidence of insurability requirement as to induce a reasonable belief it had been relinquished, MetLife waived the requirement and was unable to contest coverage on that basis. (Id. at 941.)
Because of Providence’s mistake, and the compartmentalized system of plan administration, MetLife was ordered to pay the remaining portion on the $250,000 policy amount. (Id. at 942.)
Yes, administering ERISA plans might be complex. Given the relative paucity of case law regarding ERISA surcharge, waiver, and agency, mistakes may not be as common as the Supreme Court believed. Yet given the ease with which courts will ensure plan participants get the ERISA benefits they reasonably believed they held, it is important for plan administrators and insurers to be extra diligent in the process.
Brent Dorian Brehm
Brent Dorian Brehm litigates ERISA and bad-faith insurance cases at Kantor & Kantor, LLP. When not suing insurance companies, he enjoys cycling and cartography.
2023 by the author.
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