Breach of Fiduciary Duty under ERISA: Making the Insurer or Plan Administrator Responsible for their actions towards a Plan’s Participants and Beneficiaries

In a previous blog, we addressed the doctrines of equitable estoppel and waiver when the Employee Retirement Income Security Act of 1974 (“ERISA”) governs their insurance or pension plan.  As we explained, both doctrines provide an insured with methods of forcing an insurance company to honor its word and previous conduct.  However, insureds often have difficulty invoking the doctrines.  ERISA governs a wide variety of plans that provide life insurance, disability insurance, accidental death and dismemberment insurance and pension benefits.  Given the challenges of invoking equitable estoppel and waiver in the ERISA context, do plan participants and their beneficiaries have other ERISA specific tools to force insurers to honor their word and previous conduct?  Luckily, they do.  A lawsuit for breach of fiduciary duty can sometimes achieve nearly identical results as waiver and equitable estoppel, but with less difficulty.

ERISA provides for various equitable remedies, including surcharge.  See CIGNA Corp. v. Amara, 563 U.S. 421, 441 (2011).  Section 502(a)(3) of ERISA authorizes plan participants and beneficiaries to seek equitable relief for ERISA violations.  The Supreme Court examined this provision in Amara, supra.  The Amara court’s interpretation of Section 502(a)(3) provides courts with broad powers to help insureds with problematic plan and claims administrators (normally employers and insurers).

In Amara, several CIGNA employees sued CIGNA for altering the CIGNA Pension Plan.  Before the alteration, the pension plan had provided employees with a calculated annuity based on preretirement salary and length of service.  The new pension plan provided a lump sum cash balance based on a defined annual contribution from CIGNA.  The employees claimed that the new plan provided them with less generous benefits.  They also asserted that CIGNA had not given them proper notice of the changes.

CIGNA first notified the employees of the change to the pension plan in a November 1997 newsletter.  In the newsletter, CIGNA explained that the new plan would be an account balance system.  The newsletter stated that CIGNA would explain the new plan at some undetermined date in 1998, but that the new plan would take effect on January 1, 1998.  To employees who were already entitled to pension benefits, the new plan gave the employees a lump sum value for their years of service, discounted to its present value.

The employees sued CIGNA.  The district court determined that the initial descriptions of the new plan misled CIGNA’s employees and was incomplete.  The November 1997 statement claimed that the new plan would “significantly enhance” the retirement benefits program and would improve retirement benefits.  The plan was to provide the “same benefit security” but with “steadier benefit growth.”  Id. at 428.  CIGNA also claimed that it would not benefit from any savings by implementing the new plan.  The district court found all of these statements to be false and violations of provisions of ERISA that require a plan administrator to provide accurate and comprehensive statements such that the average plan participant understands their rights under a plan.

The district court held that ERISA Section 502(a)(1)(B) provided it with the legal authority to reform the plan for the benefit of the employees.  Section 502(a)(1)(B) provides that a plan participant can bring an action to recover benefits due under an ERISA plan.  The district court modified various portions of CIGNA’s new pension plan to provide the employees with the benefits to which it held they were entitled.

The court considered relying upon ERISA Section 502(a)(3) for its authority to modify the pension plan, but concluded that, under then Supreme Court precedent, Section 502(a)(3) did not provide the necessary authority.  Section 502(a)(3) explains that a claim may be brought:

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.

CIGNA appealed the district court’s ruling.  The Second Circuit affirmed the ruling in a summary opinion.  CIGNA petitioned the Supreme Court, and the Supreme Court agreed to hear the petition.

The Supreme Court first analyzed Section 502(a)(1)(B).  It determined that, in fact, Section 502(a)(1)(B) did not provide a district court with the authority to alter a plan.  However, the Supreme Court determined that section 502(a)(3) provided the necessary authority.  The Supreme Court explained that, “appropriate equitable relief” means the traditional equitable powers of a court.  Courts’ traditional equitable powers included special remedies against trust fiduciaries who fail to properly administer a trust.  ERISA plans are treated as trusts.  As such, the current matter before the Supreme Court was one that traditionally involved an equitable suit against a trust’s administrator.  A court’s equitable powers include such remedies as injunctions, reformation of contracts, equitable estoppel and equitable surcharge.  Surcharge is the “power to provide relief in the form of monetary ‘compensation’ for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment.”  Id. at 441.  The Supreme Court concluded that section 502(a)(3) provided the necessary authority for the district court’s actions.  See id. at 441-42.

The Supreme Court then addressed what standard would apply to a district court’s invocation of its equitable powers.  ERISA does not provide a standard.  The Supreme Court noted that only certain remedies traditionally required detrimental reliance, the reliance on a party’s assertions to the suing party’s detriment.  For example, detrimental reliance is an element of equitable estoppel, but not the reformation of a contract or surcharge.

The Supreme Court determined that to establish surcharge, a party need establish, by a preponderance of the evidence, that the plan beneficiary suffered actual harm due to a fiduciary’s breach of their duties.  The Supreme Court remanded the matter for further proceedings.

As we previously noted, insureds have difficulty invoking the doctrines of equitable estoppel and waiver.  However, that does not mean that insureds lack recourse against an insurer’s misconduct.  An insurer’s actions may constitute a breach of fiduciary duty.  If so, the insured may have a much simpler time establishing the insurer’s impropriety in court via a breach of fiduciary duty claim.

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