By: HUB’s EB Compliance Team

A recently reported life insurance case offers a valuable cautionary tale for employers and their service providers about clerical errors.

Background

Kathleen Sullivan worked for the New York Telephone Company and was eligible for life insurance though her employer’s group plan. Due to a coding error, her annual pay was entered as her weekly pay. This resulted in her receiving statements showing a life insurance benefit 52 times the size to which she was entitled. Additionally, her Forms W-2 reflected imputed income on this higher amount. Ms. Sullivan designated her daughter as the beneficiary.

While employed, Ms. Sullivan received numerous benefit statements affirming her higher life insurance amount. Moreover, Sullivan had conversations with the employer’s benefit service center (run by a third party) where the increased amount was separately confirmed multiple times. When Sullivan expressed surprise at the higher amount, benefit service center employees emailed internally with each other to verify the life insurance amount’s accuracy. However, it appears from the case that none of the service center employees investigated deeply enough to discover the coding error.

In Ms. Sullivan’s waning years, her daughter cared for her and spent significant money on her behalf, all in the apparent expectation that the life insurance payment would be the higher specified amount.

Ultimately, Ms. Sullivan passed away. Not surprisingly, the life insurance carrier paid the “correct” (lower) amount based on Ms. Sullivan’s actual annual salary, or a little less than 2% of what Sullivan’s family thought they would receive.

The Case

This case ultimately centered on two claims made by Ms. Sullivan’s daughter. 

  1. Sullivan’s daughter was entitled to benefits under the terms of the group life plan.
  2. Even if the plan terms specified otherwise, Sullivan’s daughter should be made whole for what she thought she would receive.

Both claims were dismissed at the trial court level. This most recent case was her appeal.

On the first claim, the Court said the core plan documents were clear and were unchanged by the benefit service provider’s mistakes. Consequently, under the terms of the plan, Ms. Sullivan’s daughter was only entitled to the lower amount. Therefore, that claim was properly dismissed.

However, on the second claim, the Court held that her claim can proceed against the employer (not the insurer). In other words, while the Court did not say she was entitled to the money, it did agree that she had the right to make the claim. In fact, the Court specifically noted that there were “extraordinary circumstances” in this case that led the Sullivan family to reasonably rely on misstated promises about the actual life insurance amount. This means the case will go back to the trial court or, potentially, be settled.

The Takeaways

Although this litigation is not yet over, even at this stage, the case offers some important lessons for employers:

  1. You cannot avoid responsibility just because you outsource functions to a third party. Here, it was the third party that made the repeated verbal representations that the benefits were larger. Although the employer may in the future initiate separate legal action against the third-party vendor, in the end, the court held the employer, as plan administrator in the context of its benefit program, responsible in this matter. Employers should remember that they are responsible for keeping an eye on their vendors.
  2. Check your payroll records. It is a best practice to check them periodically for accuracy. Here, it is unclear from this case whether the coding error occurred on the employer’s side or the third-party’s side.  Regardless, however, a check of payroll records may have avoided this issue.
  3. Investigate. If something seems fishy or incorrect, it is worth some time to dig through the facts. Here, if a further investigation had been done earlier, the case might have turned out differently (or never been brought at all).

If you have any questions, please contact your HUB Advisor. You can also 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.