Be Careful With Your Life Insurance Enrollments

by Stinson Leonard Street - Employee Benefits & Compensation

Over the years there have been a number of cases that have involved employers improperly enrolling employees in group life or disability insurance benefits. If the employee who should not have been enrolled dies or becomes disabled, the insurance carrier will deny coverage on the grounds that the employee should never have been enrolled. These enrollment problems often arise when an employee is not at work at the time that a new insurance policy is supposed to become effective since typically employees must be actively at work to become covered under the new policies. If the policy is life insurance and the employee dies, the beneficiaries are understandably upset when the carrier denies coverage. The employee has been paying premiums on the policy and in many cases the family has relied on the coverage in the event of the employee’s death. However, in many situations, courts have held that ERISA’s requirement that claims for relief be equitable in nature prevent the family from recovering money damages (the unpaid coverage amount) for the enrollment error.

The Supreme Court’s 2011 decision in CIGNA Corp. v. Amara has changed the landscape in that regard. In that case, the Supreme Court suggested that equitable remedies might include some that result in the payment of money to the claimants. Courts are now more likely to find remedies for these enrollment errors. A recent decision from the federal District Court in Virginia, may become an example of such a decision. In that case, the court held that an employer breached its fiduciary duty when it allowed an employee to enroll in the company’s life insurance plan, encouraging him to believe he was eligible for benefits, when the employer knew or should have known that he was not eligible to enroll in the plan. The situation involved an employee with a brain tumor who was working part time and receiving disability payments covering the hours that the employee was unable to work. When the employer changed life insurance carriers, the employee and his wife asked the employer questions about the employee’s eligibility for the coverage. The employer directed the questions to the carrier who responded to the employer that the employee would not be eligible unless the employee was working full time. The carrier suggested that the employee investigate continuing coverage with the carrier that was being replaced since the employee’s disability was incurred while the employee was covered under that policy. The employer did not pass this information along to the employee so the employee did not make those inquiries. The employer never told the employee that there was any problem with the coverage and in fact told the employee that the coverage was in place. When the employee then died, the carrier denied the claim for insurance benefits.

Despite the fact that the policy gave the insurance carrier the right to determine eligibility for coverage for benefits under the plan, the court noted that the carrier never made such eligibility determinations. The court concluded that the carrier had no fiduciary duty with respect to enrollment. Rather, the employer made enrollment decisions and was responsible for the enrollment error. The court concluded that the employer had breached its fiduciary duty to the employee by misleading the employee about coverage.

The court did not decide damages for the employee’s family. There are likely still to be arguments about the types of damages available in such an ERISA case. However, since the carrier was determined to be not responsible for the error, the employer is now potentially liable for the amount of the insurance that the employee thought he had in place. The decision does not say how much is at stake. However, coverage was available to the employee for up to five times his salary.

In light of the Supreme Court decision expanding remedies in ERISA cases, employers will want to be careful when enrolling employees in disability and life insurance plans, particularly in situations in which employees have not been working full time. Employers may find themselves required to pay the benefits if insurance carriers deny coverage to employees whom the employer improperly enrolled in a plan.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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