Many employers offer group term life insurance, including supplemental life. Often an employee who wants to buy coverage above a particular level after an initial open enrollment period must show evidence of insurability. This requirement is present to protect the plan from adverse selection so that employees do not wait until they develop a medical condition before purchasing a policy. A recent Eighth Circuit Court of Appeals decision highlights the dangers to employers and insurers that fail to monitor these enrollment requirements.
In that case, an employee waited several years before applying to purchase supplemental life insurance benefits through his employer’s plan. The enrollment was done on line and the employee requested coverage equal to five times his salary, a total of $429,000. He made this election during the annual open enrollment period and the policy appeared on his benefit election package on the employer’s intranet. The employer then began withholding the applicable premium for the coverage.
At the time that the employee was first eligible to enroll for coverage, he signed a statement stating that if he declined coverage, but later decided to enroll he would be required to provide evidence of good health satisfactory to the insurance company. Although the employer said that there should have been a text box alerting the employee to the evidence of insurability requirement during the enrollment process, there was no evidence that the box in fact appeared nor did the employer introduce the language of the text box or the insurability form that would need to be completed. Six months after enrollment the employee died although there was also no evidence that he was ill at the time that he enrolled for the additional coverage.
The beneficiary sought the life insurance benefits and was told that the coverage did not go into effect because no evidence of insurability form had been filed and approved. During the course of the lawsuit, the beneficiary learned that approximately 200 employees had never filed evidence of insurability but had premium payments for coverage withheld from their paychecks. The insurer allowed those employees to submit that evidence of insurability in order to allow the continued coverage. The beneficiary who sued was not permitted to make the same showing for the deceased employee.
The trial court had found in favor of the insurance company and the employer. The Court of Appeals reversed and remanded the case to the District Court to reconsider. The Court of Appeals reached some conclusions that may cause employers to look more closely at their enrollment provisions:
The court found that the 100 page policy was not a sufficient summary plan description because it was technical and complicated and did not explain the plan in simple terms. (This conclusion could call into question medical plan summary plan descriptions which also tend to be long, technical and complicated.)
The court suggested that employers should explain better in the summary plan description what evidence of insurability is and how it is shown.
It can be a breach of fiduciary duty for an employer to accept the premium payments without making sure that there is in fact coverage under the plan. In other words, the employer and the insurance company should be monitoring late enrollments for proof that evidence of insurability has been filed and accepted. Failure to do so, particularly while accepting premium payments, may result in a finding of liability for the requested coverage.
Employers may wish to review both their summary plan descriptions and their processes for enrollment with respect to late enrollments under the term life insurance policies. Failure to monitor and enforce an insurability requirement may result in an employee being treated as having coverage despite having never shown evidence of good health.