Five years ago, Chief Justice Roberts observed: “People make mistakes. Even administrators of ERISA plans.” Conkright v. Frommert, 559 U.S. 506, 509 (2010). Four years ago, searching for a mechanism to provide monetary relief for such mistakes under ERISA, the Supreme Court reached into the desiccated maw of early 19th century trust law and pulled out the make-whole remedy of surcharge. CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011). While the contours of the surcharge remedy are still being worked out in the lower courts, it currently appears to have only two elements – (1) a breach of fiduciary duty (2) that results in actual harm.
Since this important change in ERISA jurisprudence, we have noticed a significant increase in ERISA breach of fiduciary duty claims against employers alleging errors in the administration of life insurance plans in particular. Many such cases seem to involve conversion, porting, and/or continuation of coverage provisions. (Hereafter, “conversion” provisions.) Plaintiffs are blaming denied life claims on their employers – for instance, in failing to provide accurate or timely information about conversion issues that allegedly caused the rejection of an application for conversion. As even the Chief Justice recognizes, plan administration mistakes – sooner or later – are inevitable. Given this inevitability, employers – especially small to medium-sized employers – may have cause to reconsider whether the liability risks outweigh the value of providing life insurance benefit plans to their employees.
While there are fiduciary liability risks associated with the administration of any kind of plan, surcharge claims under life insurance plans seem to provide a particularly tempting variety of low-hanging fruit for the ERISA plaintiffs’ bar. First, there is often a substantial – and relatively undisputed – amount of money at issue. Benefits under such plans commonly reach six figures. Claims of a quarter to a half million dollars are not at all uncommon. Second, life insurance policies are often complex documents, particularly when it comes to conversion provisions. Far too often, small to medium-size employers simply are not attuned to the specialized language of insurance. Indeed, in our experience, such employers are often surprised to learn that the full weight of fiduciary responsibility may rest upon their shoulders – and not upon the insurance companies – to ensure employees are properly informed about when and how to exercise conversion rights. See Brenner v. Metropolitan Life Ins. Co., 2015 U.S. Dist. LEXIS 36044 at * 21 (D. Mass. Mar. 3, 2015) (insurer, “in general … would not be considered liable for failing to send an individual notice of conversion or to otherwise advise the [insureds] of their rights”). We suspect the combination of high damages and fertile ground for mistakes creates a tempting target for the ERISA plaintiffs’ bar.
In recent months, more than one client – after facing expensive litigation over alleged conversion administration issues – has expressed to us a concern that group life insurance plans may no longer be worth the risk of litigation. In our view, it is a legitimate question. Sooner or later, mistakes will be made. If any mistake, in the eyes of ancient trust law, is a breach of fiduciary duty (see, e.g., Stiso v. Int’l Steel Grp., 604 Fed. Appx. 494 (6th Cir. 2015) (misleading statements were a breach of fiduciary duty, whether “made intentionally or negligently”)), it seems to follow that a large court award – if not inevitable – is at least a highly probable risk. Perhaps judge-made exceptions will ameliorate the risk over the years to come. But that possibility will be of little comfort to employers watching their litigation budgets in the meantime.
Almost twenty years ago, the Supreme Court noted the “competing congressional purposes” of ERISA, “such as Congress’ desire to offer employees enhanced protection for their benefits, on the one hand, and, on the other, its desire not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place.” Varity Corp. v. Howe, 516 U.S. 489, 497 (1996) (emphasis added). One wonders, will the newly minted ERISA surcharge remedy – while providing significant monetary relief for a few plaintiffs – ultimately result in the complete loss of some kinds of benefit plans – such as life insurance plans – for employees generally? Your comments are welcomed.