In Life Insurance Dispute, Fourth Circuit Allows Beneficiary to Pursue Fiduciary Breach Claims Against Employer | Practical Law

In Life Insurance Dispute, Fourth Circuit Allows Beneficiary to Pursue Fiduciary Breach Claims Against Employer | Practical Law

In a dispute over life insurance benefits, the US Court of Appeals for the Fourth Circuit vacated a district court opinion dismissing a beneficiary's fiduciary breach claims under the Employee Retirement Income Security Act of 1974 (ERISA) against the ERISA plan administrator and named fiduciary. The Fourth Circuit concluded that the beneficiary sufficiently alleged that the plan administrator was an ERISA fiduciary.

In Life Insurance Dispute, Fourth Circuit Allows Beneficiary to Pursue Fiduciary Breach Claims Against Employer

by Practical Law Employee Benefits & Executive Compensation
Published on 29 Jul 2019 • USA (National/Federal)
In a dispute over life insurance benefits, the US Court of Appeals for the Fourth Circuit vacated a district court opinion dismissing a beneficiary's fiduciary breach claims under the Employee Retirement Income Security Act of 1974 (ERISA) against the ERISA plan administrator and named fiduciary. The Fourth Circuit concluded that the beneficiary sufficiently alleged that the plan administrator was an ERISA fiduciary.
In a dispute involving life insurance benefits, the Fourth Circuit vacated a district court opinion that dismissed the beneficiary's fiduciary breach claims under ERISA against the plan administrator (Dawson-Murdock v. Nat'l Counseling Grp., Inc., (4th Cir. July 24, 2019)). The Fourth Circuit concluded that the beneficiary sufficiently alleged that the plan administrator was an ERISA fiduciary.

Life Insurance Participant Switched from Full-Time to Part-Time

The participant in this case obtained life insurance coverage through an employer-sponsored ERISA group life insurance plan. The governing plan documents, which included a summary plan description, identified the employer as the ERISA plan administrator and named fiduciary, and provided that the insurer would administer benefits. The employer was responsible for:
  • Collecting premium payments and sending them to the insurer.
  • Providing the insurer information about who was eligible for coverage.
  • Informing the insurer when an individual's coverage ended.
In March 2016, the participant transitioned from full-time to part-time employment, at which point he was no longer eligible to participate in the plan. However, the employer failed to inform the participant that he:
  • Was now ineligible to participate in the plan.
  • Could have converted or ported his coverage upon moving to part-time status.
(See Article, ERISA Litigation: Life Insurance Conversions and ERISA Fiduciary Breach Claims.)
The participant continued paying premiums for the coverage. After the participant died in August 2016, his spouse, as designated beneficiary, sought payment of plan benefits. The insurer denied the claim because the participant had failed to convert his coverage after becoming ineligible. Over a four-month period, the beneficiary was in contact with the employer's vice president of human resources, who told her that the claim would be paid through a method that did not involve the insurer, and that she did not need to appeal the insurer's benefits denial. Reversing course in February 2017, the vice president informed the beneficiary that the employer would not pay benefits on her claim. By that point, however, the window during which the beneficiary could have appealed the insurer's denial had closed.
The beneficiary sued the employer for breach of fiduciary duty under ERISA (see ERISA Litigation Toolkit and Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502: Claims for Breach of Fiduciary Duty). The district court dismissed the beneficiary's claims, concluding that the complaint failed to sufficiently allege the employer was a fiduciary under ERISA. The beneficiary appealed.

Fourth Circuit Analyzes Employer's Named and Functional Fiduciary Status

On appeal, the Fourth Circuit vacated the district court's opinion and remanded. The beneficiary asserted that the employer breached its ERISA fiduciary duties in two ways. First, she alleged that the employer breached ERISA's fiduciary duties to the participant by not informing him of:
  • His continued plan eligibility (or by providing misinformation in this regard).
  • The option to convert or port his life insurance coverage.
The beneficiary alleged that the employer also violated ERISA's fiduciary duties by advising her, through the employer's vice president, that she did not need to appeal the insurer's denial.
The beneficiary argued that the employer's conduct was necessarily fiduciary in nature because the employer was both the ERISA plan administrator and named fiduciary. But even if those roles did not establish the employer's fiduciary status, the beneficiary argued that the employer was a functional fiduciary under ERISA because of the vice president's conduct (see Practice Note, ERISA Fiduciary Duties: Overview: Functional or Inadvertent Fiduciary).

Named Fiduciary Analysis

The Fourth Circuit rejected the employer's argument that, even though it was both the ERISA plan administrator and named fiduciary, its conduct was not fiduciary in nature under ERISA (see Practice Note, ERISA Fiduciary Duties: Overview: Named Fiduciary). In the employer's view, the vice president's conduct was taken in an administrative (that is, non-fiduciary) capacity. Citing logic and Supreme Court precedent, however, the Fourth Circuit rejected the employer's argument and instead reasoned that a named fiduciary is an ERISA fiduciary. (In doing so, the court acknowledged that there may be greater fluidity in determining whether a party has functional fiduciary status under ERISA; see Practice Note, ERISA Fiduciary Duties: Overview: Functional or Inadvertent Fiduciary.)
The Fourth Circuit concluded that a plaintiff need not allege that an ERISA plan administrator and named fiduciary also satisfies the functional fiduciary test to state a plausible ERISA fiduciary breach claim. The Fourth Circuit faulted the district court for overlooking the employer's roles as joint plan administrator and named fiduciary, and instead focusing on cases involving functional ERISA fiduciary status.

Functional Fiduciary Analysis

Moreover, the Fourth Circuit was satisfied that the beneficiary's complaint adequately alleged that the employer – owing to its conduct related to the beneficiary's claims – was an ERISA fiduciary under the functional test. Relying in part on a 1975 DOL Interpretive Bulletin (29 C.F.R. § 2509.75-8), the court concluded that the beneficiary sufficiently alleged that the employer acted as a functional fiduciary. In reaching this conclusion, the court focused on the employer's status as ERISA plan administrator and the vice president's individualized advice to the beneficiary regarding her appeal. The court also cited its prior decisions in noting that a plan administrator acts in a fiduciary capacity when it verifies employee eligibility for plan participation.

Practical Impact

Although this case is early on procedurally (at issue is whether the beneficiary's complaint stated viable claims), it illustrates fiduciary issues that commonly arise in the ERISA life insurance context. Situations like this – where an employee who has elected life insurance coverage experiences a change in employment status (often due to a serious illness) that impacts the employee's eligibility – can all too easily result in ERISA fiduciary litigation for employers that are involved with administering the life insurance policy. As in this case, for example, an employer may fail to inform an employee whose classification has changed of the possibility of converting group life coverage to an individual policy. Or the employer, in attempting to help an employee, could provide misinformation concerning the benefits implications of the employee's change in employment classification. This employer, attempting to fix a bad outcome, apparently overpromised on what it could do in response. Employers and benefit administrators should be extra vigilant in these situations involving life insurance coverage, particularly regarding written and oral communications to employees and beneficiaries. (For more information, see Article, ERISA Litigation: Life Insurance Conversions and ERISA Fiduciary Breach Claims.)