A recent court case, Erwood vs Life Insurance Company of North America, is a reminder that plan sponsors must understand the terms of their welfare and retirement benefit plans, and ensure that their staff follows the provisions of any plan administrative manual. Failure to provide employees with accurate information is a breach of ERISA fiduciary duty and may result in liability for the plan sponsor.
In the Erwood case, WellStar contracted with the Life Insurance Company of North America to provide group life insurance for its employees, including Dr. Erwood. Like many group life insurance plans, the contracts gave employees a short window period after termination to convert the group insurance coverage into an individual policy. The administrative manual supplied to WellStar by the insurance company included a form that WellStar was to provide to a terminated employee advising the employee of his right to convert the policy. The manual required that the plan sponsor send the form to a terminated employee within 15 days after the employee’s termination date.
When Dr. Erwood became terminally ill, he and his spouse had numerous discussions with a WellStar representative about his benefits, including how to continue benefits while on FMLA leave and thereafter. The representative even completed the employer portion of a form that allowed Dr. Erwood to receive a terminal illness benefit from one of the group life insurance plans. Unfortunately, the WellStar representative never provided to Dr. Erwood the specific forms that he needed to exercise his conversion rights, and the group coverage lapsed prior to Dr. Erwood’s death.
The Court found that WellStar’s fiduciary responsibilities to administer the group life plans were set forth in the administrative manual supplied by the insurance company. Further, once Dr. Erwood had requested information from WellStar, the company had a fiduciary obligation to convey complete and accurate information to Dr. Erwood, even if that information comprises elements about which he had not specifically inquired. The Court determined that Dr. Erwood relied on the information provided by WellStar, that WellStar breached its fiduciary duty by not providing Dr. Erwood with sufficient information so that he could exercise his conversion rights under the plans and therefore WellStar was liable for the full amount of the proceeds that would have been paid under the policies, $750,000.
In addition to being a reminder that plan sponsors should check their processes for advising terminated employees of any group life insurance conversion rights, this case is a cautionary tale about administrative documents and service agreements in general. Plan sponsors rely heavily on their third-party recordkeepers and insurance companies to “administer” plans for them. But prudent plan sponsors understand that recordkeeping agreements and insurance contracts often contain specific language proscribing how the administration should be handled, in addition to provisions confirming that the plan sponsor is responsible for the administration of the plan.