A recent decision by the United States District Court for the Western District of Pennsylvania serves as a reminder that an employer may incur significant financial liability for failing to timely provide life insurance policy conversion information to a disabled employee.
Erwood v. Life Insurance Company of North America and Wellstar Health System, Inc. Group Life Insurance Program, decided April 13, 2017, involves a disabled physician who arranged to meet with his employer’s benefit representative to discuss the benefits the physician employee would be able to continue during his disability due to an illness that was expected to result in his death in the near future. During the meeting with the employer’s benefit representative, the disabled physician and his spouse clearly expressed their desire to continue all welfare benefit coverages as then in place for as long as possible. The benefit representative provided the physician and his spouse with information regarding how all coverages would be continued while the disabled physician was on FMLA leave and how, following the expiration of the FMLA leave, medical, dental and vision coverage could be continued via COBRA. No mention was made by the benefit representative of how the physician could continue his $750,000 life insurance coverage by converting his group life insurance coverage under his employer’s welfare plan to an individual life insurance policy.
Following the physician’s death, the physician’s widow brought suit against the life insurance plan, arguing that the employer, in its capacity as the administrator of its life insurance plan, is liable under ERISA for the $750,000 in life insurance benefits because the employer failed to inform the physician employee of his right to convert his group life coverage under the employer’s welfare plan to an individual life insurance policy. Citing cases previously decided by the United States Court of Appeals for the Third Circuit (which includes Pennsylvania), the district court held that the facts of the case demonstrate that all of the elements necessary for the physician’s widow to pursue her fiduciary breach claim are satisfied: (i) the employer, in its capacity as plan administrator, was acting as a plan fiduciary when explaining welfare plan benefits to the employee physician and his spouse, (ii) the plan administrator should have known that its inadequate disclosure to the physician of his life insurance conversion rights would result in a substantial likelihood that the physician employee would be misled regarding his right to convert his life insurance coverage to an individual policy, (iii) such misleading omission by the fiduciary was material because it raised a substantial likelihood that the physician employee would be misled in making a decision regarding his life insurance benefits, and (iv) the physician employee and his spouse relied to their detriment on the plan administrator’s misrepresentation regarding his right to convert his group life insurance plan coverage to an individual life insurance policy. Notwithstanding that the right to convert to an individual insurance policy had long since expired, the court crafted a remedy under ERISA that imposed a surcharge on the employer equal to the $750,000 in life insurance that the physician employee would have elected to convert to an individual policy but for the plan administrator’s breach of its fiduciary duty; the court also awarded the physician’s spouse interest, legal fees and costs associated with bringing the lawsuit. Because the ability to convert to an individual policy was no longer available, the employer, and not the insurance company, is obligated to make all of these payments.
Life insurance plans typically are not the subject of extensive attention during or following an employee’s period of employment. As this case demonstrates, the failure by the employer/plan administrator to timely and accurately disclose to an employee the right to convert group life insurance coverage to an individual life insurance policy can result in substantial liability for the employer.