By: HUB’s EB Compliance Team

The 10th Circuit Federal Court of Appeals recently revived a breach of fiduciary duty claim for failure to send a life insurance conversion notice. If the beneficiary is successful, this could lead to the employer having to pay over $600,000. The case underscores the importance of sending conversion notices in a timely manner.

What Happened?

The facts follow a somewhat familiar pattern in these cases. An employee took early retirement as part of a voluntary separation plan with the company. The now former employee was allowed to stay on benefits for a transition period and received pay like an active employee. Once the transition period ended, the employee was taken off benefits. While he was informed of his rights to continue other benefits, the former employee did not receive the conversion notice that would allow him to convert the company life insurance policy to an individual policy.

Sadly, the former employee died shortly thereafter. When his wife then made a claim for life insurance benefits, it was denied due to the former employee’s failure to pay the premiums required after the transition period. She then sued his former employer.

What’s the Claim?

She did not argue that the life insurer owed her a payment. Since no premiums were paid after the transition period, she could not claim the insurer owed her money.

Instead, she claimed that the employer breached its fiduciary duty under ERISA by failing to notify her husband regarding his conversion rights under the life insurance policy.

What Did the Court Decide?

The district court originally denied her claim, arguing that she was not entitled to make a claim due to the former employee’s failure to pay required premiums. 

However, the 10th Circuit reversed the district court’s decision. This is a little technical, but basically there are two separate parts of ERISA that beneficiaries can sue under. They can either 1) sue making a “claim for benefits” under the terms of the plan or 2) sue by alleging the fiduciaries committed a “breach of fiduciary duty.” (There are others, but those are the two most relevant for purposes of this case.) The 10th Circuit determined that the district court made a mistake when they treated the wife’s claim as a claim for benefits without considering the merits of the breach of fiduciary duty claim. Accordingly, the 10th Circuit sent the case back for reconsideration.

What Does This Mean?

In short, the employer is not out of the woods. If the surviving wife is successful in her breach of fiduciary duty claim, the employer could be on the hook for paying the entire life insurance benefit totaling $663,000 (despite the fact that premiums were not paid after the transition period). Her claim is simple: the employer did not communicate this important conversion right to her husband as required by the life insurance policy.

What Do I Do Now?

While much of the focus lately has been on health plan fiduciary litigation, this is a reminder that ERISA’s fiduciary rules apply to all ERISA-governed welfare plans. Additionally, employers may be unaware that they are obligated, under the terms of their life insurance contracts, to provide the conversion notices. 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? While not at issue in this specific case, this is a good callout.
    3. Do you or the insurer have responsibility for sending conversion notices?
    4. If you are required to send the notices,
      1. Do you have an appropriate conversion notice?
      2. Do you have a process in place to ensure that the notice is timely 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

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.