McBean v. United of Omaha Life: Judge Anello Finds Employer Liable for Breach of Fiduciary Duty, Orders Payment of Life Insurance Policies’ Face Value under Equitable Surcharge Theory

Application of the doctrine of “equitable surcharge” in ERISA has become a very significant theory of recovery for ERISA plan participants in obtaining their life insurance and medical insurance benefits.  In a recent decision by the U.S. District Court for the Southern District of California, McBean v. United of Omaha Life Insurance Company, 2019 WL 1508456, the ERISA surcharge theory was used to overturn the denial of a life insurance claim, thus salvaging substantial life insurance benefits that would otherwise have been lost through breach of fiduciary duty and misrepresentation.

In McBean, the Plaintiff won a significant victory in a case involving a claim for life insurance benefits under an ERISA-governed plan.  The Plaintiff’s mother (“Decedent”) was covered by United of Omaha’s (“United”) Basic Life Insurance Policy and Voluntary Life Insurance Policy (“Policies”).  United was the Claims Administrator, and the Plan Administrator/fiduciary was the employer By Referral Only, Inc. (“Referral”).  The benefits at issue under the Policies were $43,550.00 and $100,000.00.  At the age of 67, the Decedent was diagnosed with breast cancer, and left work on June 9, 2015 to have surgery.  She returned to work part-time thereafter, but by August 10, 2016, she had to stop working, and died on August 5, 2017.  United accepted the premium payments for the Policies made by Referral up to the date of the Decedent’s death.

According to the Policies, coverage ends “the last day of the month in which … [y]ou are no longer Actively Employed….”  To be “Actively Employed” according to the Policies means to work 40 hours or more per week regularly, and to receive “compensation from the Policyholder for work performed for the Policyholder.”  Among other provisions involving eligibility and enrollment updates, the Policies required Referral to inform United when an employee’s eligibility status changes, and they contained a conversion provision that allowed the covered employee to apply for an individual policy without providing health information.  On February 6, 2017, the Decedent was granted long-term-disability benefits retroactive to September 6, 2015.  On August 21, 2017, the Plaintiff (as trustee of his mother’s trust) submitted a claim to United for benefits under the Policies.  United denied the claim, responding that the Policies were “not in force at the time of [Decedent’s] death on August 5, 2017” because she was no longer working.  The Plaintiff appealed, explaining that Referral’s managing director told the Decedent and her family that the company would ensure payment of the premiums.  On December 12, 2017, United affirmed its earlier claim decision that the Decedent was no longer covered when she died, and then it refunded the premiums Referral had paid for the Decedent during her period of ineligibility.

The Plaintiff filed an ERISA lawsuit setting forth a claim for breach of fiduciary duty against United and Referral.  The Plaintiff’s first argued that United had waived the “active employment” eligibility requirements (which, on their own, would mean that the Decedent’s coverage had ended in June 2015 for the Voluntary Life Policy and June 2016 for the Basic Life Policy) because it continued to accept premiums even though it knew that the Decedent was not actively employed.  The Plaintiff also claimed that United had waived the “written notice” requirements for extension of coverage.  However, the court found that such an argument would create coverage where it did not exist in the Policies, and found as well that the Plaintiff had not shown sufficient evidence of “an intentional and voluntary relinquishment of United’s right to require a written request for continued coverage . . . .”

With regard to the Plaintiff’s claim for equitable surcharge under 29 U.S.C. Section 1132(a)(3) against United for breach of fiduciary duty—a remedy that would provide “compensatory damages for actual harm caused by . . . breach of duty”—Plaintiff argued that United had a duty to develop a system to confirm eligibility before it accepted premiums, rather than waiting until a mistake occurred to implement a system.  Citing Fink v. Union Cent. Life Ins. Co., 94 F.3d 489, 492 (8th Cir. 1996), the court rejected that argument, finding that “United had no duty to train or supervise Referral because United did not have the authority to select or remove the plan administrator.”  In addition, Referral was responsible for determining eligibility and updating United on which employees should be covered under the Policies.

Referral was also found to be a fiduciary under the policy because it is the plan sponsor and plan administrator, and breach of duty, the court ruled, was indicated by Referral’s misrepresentation to the Decedent that she would continue to have life insurance coverage.  That promise was false and material and led to “detrimental reliance by the plaintiff.”  In re Computer Scis. Corp. ERISA Litig., 635 F.Supp.2d 1128, 1140 (C.D. Cal. 2009).  The standard for material misrepresentation involves “a substantial likelihood that it [the misrepresentation] would materially mislead a reasonable employee in making an adequately informed . . . decision.”  (Id. At 1141.)  With respect to detrimental reliance, that standard was met because the Decedent, trusting in what Referral told her, “lost the opportunity to convert or port her coverage, or obtain coverage she wanted through another channel, such as on the individual market for life insurance.”

It is noteworthy that the court rejected Plaintiff’s claim of derivative liability on the part of United based on Referral being its agent, and granted summary judgment in favor of the Plaintiff onhis claim against Referral in the amount of the Policies’ combined face value, $143,550.00; it also allowed Plaintiff to file a motion for reasonable attorneys’ fees and costs.  It appears that Plaintiff’s counsel did not cite important and relevant Ninth Circuit authority that clearly would have made the insurer liable for the acts of the employer (this is why it’s important to hire the best ERISA lawyers in California, the McKennon Law Group PC).  Even though the court awarded summary judgment against the employer on all claims but one, that one claim for the value of the life insurance policies under the doctrine of equitable surcharge proved invaluable for the family of the deceased employee.