Many employers self-administer welfare benefit plans such as life insurance or disability insurance plans. This self administration requires the employer to determine eligibility for coverage, remit proper premiums and notify the insurance carrier about changes in coverage. The insurance carrier often does not even know the names of the covered individuals and the coverage amounts. However, if the employer makes a mistake, the employer can be left holding the bag.
Consider the case of Van Loo v. Cajun Operating Company, a recent U.S. District Court decision. That case involved group term life insurance coverage. Employees were eligible for a base amount of coverage and could buy supplemental coverage. In some cases, evidence of insurability (EOI) was required for the additional coverage. The plan was administered by the employer, and the open enrollment materials where an employee could elect the additional coverage simply told the employee that evidence of insurability “may be required” and that the employee would be sent the necessary forms if it was required.
The employee in question increased supplemental coverage over the years beyond the level at which coverage was available without evidence of insurability. However, the employee was never sent the EOI form and the EOI form was never completed. When the employee died of an aggressive form of cancer, her parents, the beneficiaries, made a claim for the benefit, but the insurance company paid only the amount allowed without EOI despite the fact that the employee had been paying premiums on the increased amount for at least five years without knowing that coverage was not in force.
The employer made a number of arguments about why the coverage should be limited to the guaranteed issue amounts, but the court rejected them all. The court found that the employer breached its fiduciary duty by administering the plan in a way that allowed the employee to believe incorrectly that coverage was in place, particularly when the employee had paid premiums for the coverage for a number of years. The court reached this result even though the insurance company reported that given the employee’s health history, the carrier would not have approved the additional coverage in any case.
The insurance company is not responsible for more than guaranteed issue amount. The employer will have to pay the excess amount, in this case, $314,000. It is also likely that the employer will have to pay for the attorney’s fees of the employee’s parents, as well as interest on the unpaid amount.
The lesson for employers: If you self-administer your group term life insurance policy, make sure you follow and enforce all policy limits that you are administering – and follow up on evidence of insurability requirements when employees elect to increase their coverage amounts.