Benefits professionals are often on the front lines of employee tragedy. For example, when employees become disabled, they not only rely on disability benefits, but may also need information on other benefits. In particular, employees who may be facing a terminal condition (or a family member) will likely ask for more information regarding the employer’s group life insurance policies.

Life insurance conversion notices inform employees how to convert their group life insurance benefits to an individual policy. Conversion usually occurs after the end of a leave of absence or on upon termination of employment. The availability of conversion rights and the related process is generally dictated by the policy.

While ERISA does not require that employers automatically distribute life insurance conversion notices, the employee’s conversion rights should be included in the summary plan description (“SPD”). Additionally, if employees (or often, their family members) ask about maintaining coverage, then the employer should be prepared to give information regarding the portability and/or continuation of all of the employer’s plans, including converting the life insurance benefits into individual policies. Timely and accurate communication can avoid misunderstandings and potential lawsuits.

A Tale of Two Cases

Two cases illustrate how important these conversion notices can be. A 2017 case from the Western District of Pennsylvania involved an employee who was terminally ill. The employee’s spouse met with the employer’s benefits department (both live and on the phone) and corresponded with them on multiple occasions. The employee’s spouse consistently expressed their desire and need to maintain each of the employee’s benefits. However, other than a general statement about the possibility of conversion in the employee’s FMLA information packet, the employer never provided the couple with information regarding their right to convert the supplemental group life insurance policy into an individual policy.

In this case, the contract with the insurer specifically required the employer to distribute the conversion rights notice to its employees (the insurer did not provide these notices). In fact, the insurer even detailed this requirement in the administrative manual that it provided to the employer. However, the employer was unaware of its obligation. As a result, the employee did not receive notice and did not convert his life insurance policy to an individual policy. At the time of his death, the insurance carrier paid only the basic life insurance death benefit. The employee’s wife sued both the employer and the insurance carrier and the court found in her favor. The court said the employer breached its fiduciary duty to the employee because it failed to provide complete information regarding the employee’s ability to continue all of his benefits, including the conversion of the group life insurance. Consequently, the employer had to pay $750,000 in life insurance benefits (plus interest and attorneys’ fees).

On the other hand, a recent case from the Court of Appeals for the Sixth Circuit (which covers Michigan, Ohio, Kentucky, and Tennessee) held that the employer did not have an obligation to notify the employee of about life insurance conversion. More specifically, in this case the employer similarly did not provide notice to the employee and spouse regarding the right to convert the optional life insurance to an individual policy. The court reasoned that it was not a breach of fiduciary duty to omit the conversion notice because it was not specifically required under ERISA. In fact, the court specially stated that “[i]t would be strange indeed if ERISA’s fiduciary standards could be used to imply a duty to disclose information that ERISA’s detailed disclosure provisions do not require to be disclosed.” Based on the discussion in this case, it does not appear that family members specifically requested benefits continuation information.

Be Careful

Trying to reconcile these two cases may seem impossible. However, there are some important lessons to be learned from these cases. First, the outcome of each case is very fact-specific and can vary by jurisdiction.

Second, employers have a fiduciary duty to act in the best interests of the participant. Therefore, it becomes very important that employers provide complete information to employees - even when an employee doesn’t specify precisely what they may need. Employees (and their family members/beneficiaries) may not have the knowledge or expertise to know the specific questions to ask or information to request, but the employer should be more familiar with their benefits and the options that may apply.

For example, if the employer provides information about continuing life insurance while on leave, but not about life insurance conversion after employment ends, that could be seen as an incomplete disclosure and a breach of fiduciary duty.

Tips for Employers

Regardless of legal risk, most employers want to do right by their employees. With that in mind, consider the following:

  1. Review (or ask your broker to review) the contract with your life insurer (and possibly other carriers).
    1. What is the deadline for an employee to convert the insurance?
    2. How long does coverage continue when an employee is on leave?
    3. Do you or the insurer have responsibility for sending conversion notices?
    4. Do you have an appropriate notice? (HUB can provide a sample to its clients upon request)
    5. If you are supposed to send the notices, do you have a process for making sure they are sent?
  2. Review the packet of information you give to employees on leave (FMLA or otherwise) and at the time of termination of employment.
    1. Does it mention conversion notices at all? Should it, based on your insurance contracts?
    2. Does it say who to contact for more information or the deadline to elect convert a policy to an individual policy? While you may not need to include all the details, you need to include enough so that employees know what to do, who to contact, and the deadline.
    3. Have you changed insurers since the last time you reviewed your employee communications? Conversion rules can vary among policies – be sure your communications are up to date.
  3. Create a checklist for employees who take a leave of absence and/or terminate employment. Complete the checklist and keep a copy to use later to verify that you provided all of the important and necessary information. Using a checklist will also ensures you give consistent communication to each employee and remember all the important details. Make sure you update your checklist when you change carriers.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.