A federal district court recently awarded $750,000 in damages to the wife of a deceased former employee of WellStar Health System because her husband’s life insurance lapsed while he was out on disability, and the employer failed to notify him of his conversion rights. The case is Erwood v. Life Insurance Company of North America and WellStar Health System, Inc. (W.D. Pennsylvania 4/13/17). Dr. Erwood, a neurosurgeon, was an employee of WellStar and he was a participant in WellStar’s basic and supplemental life insurance programs. He was diagnosed with a malignant brain tumor and went out on FMLA leave (Interestingly, WellStar offered 36 weeks of FMLA leave to employees for a serious medical condition). He ultimately became eligible for WellStar’s Long Term Disability Plan. There was evidence that Dr. and Mrs. Erwood attended a meeting with a WellStar benefits representative to discuss questions about Dr. Erwood’s employee benefits. During this meeting, Dr. and Mrs. Erwood “repeatedly” asked is "all our coverage going to remain the same.” While the benefits representative and the Erwoods discussed life insurance during the meeting, conversion was not mentioned. Mrs. Erwood testified that when she left the meeting, she was confident that “everything was okay” and that the benefits would remain the same.

Insufficient Notice of Conversion Process. Ultimately, HR sent Dr. Erwood an FMLA leave packet that said that life insurance benefits may be continued up to 36 weeks and that a continuation/conversion policy may be available for employees requesting to continue life insurance coverage beyond 36 weeks. However, the court noted that the FMLA packet did not include (1) the materials necessary to convert life insurance coverage, (2) information about where to access such materials or (3) the date that such materials were due. There was also evidence that WellStar did not have a process for notifying employees of their conversion rights, and that it was WellStar’s practice to provide conversion forms only upon request by an employee. 

Dr. Erwood ultimately died. Mrs. Erwood – who had 6 children who were financially dependent on her – completed the death benefit claim form and submitted it to WellStar who completed the employer portion. However, the insurance company denied the claim for benefits on the ground that at the time of his passing, Dr. Erwood’s life insurance was no longer inforce because he was no longer an active employee at WellStar and he had not converted his policy. 

ERISA's Surcharge Remedy. The court noted that under ERISA even when a plaintiff is not entitled to relief under the terms of the plan as written, section 502(a)(3) permits a surcharge remedy for a breach of trust committed by a fiduciary encompassing any violation of duty imposed upon that fiduciary. The court reasoned that once an ERISA beneficiary has requested information from an ERISA fiduciary, the fiduciary has an obligation to convey complete and accurate information materials to the beneficiary’s circumstance, even if that information comprises elements about which the beneficiary has not specifically inquired. The court concluded that WellStar, as the Plan Administrator, was a fiduciary and that it had breached its fiduciary duties by not adequately advising Dr. and Mrs. Erwood about the life insurance conversion process. WellStar argued that the FMLA packet and the Summary Plan Description (SPD) provided sufficient notice. However, the court commented that merely making an SPD available on the employer’s Benefits portal did not satisfy the disclosure obligations especially in light of the fact that once Dr. Erwood’s FMLA leave expired, his access to the portal was terminated. The court awarded the full loss of the insurance benefit -- $750,000 – as an equitable surcharge to Mrs. Erwood.

Lessons for employers? Employers should make sure that they have an iron-clad process for notifying employees of important changes to their benefits and requirements when they are out on leave, including applicable conversion rights and responsibilities. Employers should not rely exclusively upon an SPD or a generalized communication, especially where, as here, the employee lost access to the employer’s benefits portal website while on leave.  This case has broader implications in that regard. It is not unusual for employers to rely upon written policies that are posted on their internal HR and Benefits portals. When taking personnel action against an employee on leave, employers to be mindful that access to this portal may have been discontinued.