The U.S. Court of Appeals for the Eleventh Circuit ruled on June 28 that a beneficiary of the Employee Retirement Income Security Act plan may bring a claim against a plan administrator or its agents under the Act to recover life insurance benefits incurred as a result of a violation of the loyalty has been lost.
The case, Gimeno vs. NCHMD Inc., solved an ERISA question on first impressions.
in the Gimeno, an employee who chose supplemental life insurance coverage during open enrollment. In order to qualify for the supplemental insurance, proof of insurability had to be presented to Human Resources. However, the HR department failed to send the employee the correct one Fill out forms or tell him that they are missing or necessary. Nonetheless, the employer deducted three years of supplemental insurance premiums and informed the employee that she had a total of $500,000 in life insurance coverage.
After the employee died, his spouse filed a claim with the plan’s insurance company. The insurance company denied the claim because the proper forms had never been filled out. As a result, the spouse filed suit against the employer and the plan administrator under ERISA Section 502(a)(1)(B).
The employer and plan administrator moved that the complaint be dismissed, and the spouse acknowledged that a claim for Section 502(a)(1)(B) benefits was improper and moved that the complaint be amended to include a claim for Breach of a trustee’s duty under ERISA Section 502(a)(3) for “reasonable equitable relief,” which the district court denied and was the subject of an appeal in the Eleventh Circuit Court.
ERISA Section 502(a)(3) “Equitable Charge”
The spouse argued that Section 502(a)(3), consistent with the US Supreme Court decision in CIGNA Corp. against Amarah (2011) who concluded that financial relief in the form of a “fair premium” against fiduciary breaches is possible.
The spouse satisfied the Eleventh Circuit that the employer’s failure to provide his spouse with the forms was a breach of fiduciary duty and that he should be able to make a Section 502(a)(3) claim to reclaim the $350,000 in additional life insurance coverage.
The Eleventh Circuit agreed with precedents established in the Second, Fourth, Seventh, Eight, and Ninth Circuits. before amarahowever, such cases have regularly been dismissed by the courts.
Action points for employers Post-Gimeno
To GimenoEleventh Circuit employers and plan administrators can take immediate action to avoid facing similar claims based on alleged inaction or misrepresentation by plan trustees. Although the apparent damage in Gimeno occurred during the registration process, its justification could be applied to any statement, action or omission occurring at any point during the plan administration process.
Employers should immediately take the following actions.
To try to avoid a Gimeno-type lawsuit, employers should promptly conduct an audit to confirm that all employees who have elected supplemental life insurance and are paying premiums have completed the required documentation, including proof of insurability documentation.
This assessment should include all current employees and may require confirmation that these documents have been received and accepted by the insurer. To the extent that an employee has not submitted the required documentation, the employer should send the employee a monthly notice stating that this information is required before coverage becomes effective. If an employee fails to provide the required information, the employer should consult their legal counsel and insurer to decide whether to cancel the supplemental insurance and return the premiums to the employee.
Regarding other potential life insurance issues, employers and plan administrators should consider providing complete and accurate information to employees. This could include information about an employee’s ability to convert a policy, whether the premium amounts withheld match the coverage chosen by the employee, whether the enrollment website allows employees to enroll for amounts of coverage that exceed their eligibility under the plan, and/or whether Coverage continues during certain holiday periods.
Other Performance Tests
Because future plaintiffs could try to apply the reasoning Gimeno to other benefit programs, employers and plan administrators should also consider other benefit plan reviews to ensure they have been and continue to be properly administered. This should include review of plan documents, amendments, plan summary descriptions, agreements with service providers (including trustees, custodians and record holders), registration records, withholding and waiver of contributions, loan and distribution processes.
Employers and plan administrators should also check that they have adequate annual training for human resources and other personnel assisting with plan administration. Training should include sections related to how best to manage communications with employees and avoid disseminating inaccurate or misleading information.
The law in the Eleventh Circuit will evolve according to this new theory, and plaintiffs like Gimeno may be awarded a reasonable surcharge of relief when no other remedy is available under Section 502(a)(1)(B).
This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Todd Wozniak is a partner at Holland & Knight LLP and leads the firm’s ERISA litigation team. He defends corporations, fiduciaries and public entities across the United States in ERISA, employee stock ownership plans and other business disputes.
Kory Thomas is Senior Counsel at Holland & Knight LLP. He focuses his practice on defense in employment matters, employee benefits, executive compensation and ERISA litigation.