In the April 21, 2021 issue of the Los Angeles Daily Journal, the Daily Journal published an article entitled “Ruling Clarifies who Qualifies as an ERISA Fiduciary” written by the McKennon Law Group PC’s Managing Shareholder, Robert J. McKennon. The article addresses a recent case by the Ninth Circuit Court of Appeals, Bafford v. Northrop Grumman Corp., which addressed the available legal remedies for ERISA plan members who are harmed as the result of repeated gross misstatements of pension benefits. The court held that the ministerial conduct of a third-party delegee who made incorrect pension calculations pursuant to a formula provided to it and transmitted the calculations to the plaintiffs did not constitute fiduciary actions. It also held that pension plan participants could bring state-law professional negligence and negligent misrepresentation claims against non-fiduciaries who make representations regarding plan benefits because such claims are not preempted by ERISA. The ruling provides an important avenue for relief for plan members who are harmed as the result of such repeated gross misrepresentations of plan benefits.
Ruling Clarifies who Qualifies as an ERISA Fiduciary
By Robert McKennon
In its landmark 2011 decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), the U.S. Supreme Court signaled a broad expansion of the availability of equitable remedies to plan participants and their beneficiaries under the Employee Retirement Income Security Act of 1974. The claims are typically brought through actions for breach of fiduciary duty against plan fiduciaries. Courts continue to grapple with issues such as: Who are ERISA fiduciaries and when do they engage in fiduciary acts?
ERISA has been interpreted to limit legal recourse to conduct of plan fiduciaries that is “fiduciary” in nature, as opposed to “ministerial.” Thus, an ERISA breach of fiduciary duty claim will depend on whether the actions at issue involve a fiduciary function.
But what happens when a pension plan’s third-party delegee grossly miscalculates the level of plan benefits and the plan administrator communicates this misinformation to plan members who rely on them? Can the plan sponsor, the plan administrator, or the third-party delegee be liable for breach of fiduciary duty? If the third-party delegee is not liable for breach of fiduciary duty, can it be sued for state law claims because such claims are not preempted by ERISA?
The 9th U.S. Circuit Court of Appeals recently answered these questions in Bafford v. Northrop Grumman Corp., 2021 DJDAR 3501 (April 15. 2021).
Northrop Grumman sponsored an employee pension plan governed by ERISA. Northrop delegated administration of the plan to an administrative committee, which in turn contracted with Hewitt, a company that provided outside administrative services for the plan. One of Hewitt’s responsibilities was to generate statements showing plan participants what their monthly pension benefit would be when they retired. Plaintiffs Stephen Bafford and Evelyn Wilson both requested these statements using an online platform Hewitt provided.
The statements mailed to the plaintiffs in response to their online platform requests grossly overestimated the benefits to which each plaintiff would be entitled. After the plaintiffs retired and began collecting benefits in the amount the statements predicted they would, Northrop sent them notices that the statements generated by the online platform had been incorrect. Instead of the approximately $2,000 and $1,600 per month benefit Hewitt previously estimated, Bafford and Wilson were only entitled to receive $807 and $823 per month, respectively.
The plaintiffs sued. They alleged that Hewitt, the committee, and Northrop had breached their fiduciary duties, and that the committee failed to provide ERISA-required benefit information. In an alternative to their ERISA claims, the plaintiffs asserted state-law professional negligence and negligent misrepresentation claims against Hewitt. The district court granted the defendants’ motion to dismiss, and the plaintiffs appealed.
The Bafford court affirmed in part and reversed in part. The court found that because the calculation of benefits was a “ministerial” task requiring no fiduciary skill or judgment, there was no legal liability under ERISA of the employer, its administrative committee, or of the entity that “ran the numbers” and communicated the grossly inaccurate information to plan members. The court found the Department of Labor regulatory guidance as persuasive evidence regarding whether a task is fiduciary or ministerial. The DOL’s interpretive bulletin identifies a variety of tasks as “ministerial” if they are done by persons who “have no power to make any decisions as to plan policy, interpretations, practices or procedures” and who merely implementing the “policies, interpretations, rules, practices and procedures” in a framework created by other persons, including: “preparation of employee communication material” and “calculation of benefits.” See 29 C.F.R. Section 2509.75-8 (Cmt. D-2). Because, in its view, the error was merely a miscalculation of benefits by a non-fiduciary who was provided a formula to follow — a ministerial duty — the Bafford court found no ERISA legal liability for any of the companies responsible for the error. And it was a big error — Bafford’s benefit amount was overstated by nearly 60%.
The 9th Circuit panel did, however, reverse the district court’s dismissal of the state law claims, holding that the company that miscalculated the benefit amount could be potentially liable for its negligence in the performance of its duties under its contract with Northrop, noting that plaintiffs were intended beneficiaries of that contract. The court concluded that ERISA did not preempt state common law professional negligence and negligent misrepresentation claims for relief. Following Paulsen v. CNF, Inc., 559 F.3d 1061, 1082 (9th Cir. 2009), it held that “the state-law professional negligence claim does not have a ‘connection with’ an ERISA plan … , and ERISA does not preempt the cause of action.”
The Bafford court also recognized that sometimes plan administrators perform fiduciary functions through ministerial agents and that those actions will be imputed to the named and functional fiduciaries. The court cited approvingly the recent 2d Circuit opinion in Sullivan-Mestecky v. Verizon Communications Inc., 961 F.3d 91, 104 (2d Cir. 2020), where the court permitted a suit for breach of fiduciary duty against an employer based on the imputed gross negligence of a third-party ministerial benefits administrator.
Sullivan-Mestecky involved clerical errors by a life insurer that created a higher coverage amount than believed covered by the insurer. Due to a calculation error, Aon Hewitt had coded Sullivan’s annual $18,600 income as her weekly income and represented that her life insurance policy had a death benefit of $582,600. But this mistake was not caught until after she died. Sullivan did not obtain an additional life insurance policy due to the generous value of her employer policy. Based on her mother’s age at the time of her death, the plaintiff believed her mother’s life insurance policy was worth $582,600. After her mother’s death, the plaintiff submitted a claim to Prudential, but Prudential paid only $11,400, which amount it stated was the policy’s correct death benefit. The plaintiff filed suit. The court held that the plaintiff could proceed against Verizon under the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty because of Verizon’s continuing negligent misrepresentations regarding the amount of coverage, actions that were undoubtedly fiduciary in nature.
The 9th Circuit distinguished Sullivan-Mestecky because that case involved gross misrepresentations by a plan fiduciary to a plan beneficiary regarding plan benefits: “In other words, if a fiduciary delegates a fiduciary function to an entity that normally performs a ministerial function, that entity’s performance of a fiduciary function can still constitute a breach of fiduciary duty, imputed to the delegating fiduciary.” In Bafford, Northrop’s ministerial delegee Hewitt did nothing more than calculate plan benefits pursuant to a formula provided to it and send estimates of plan benefits based on additional information provided by plan members. The court found the activity to be ministerial “because Plaintiffs [did] not allege that Hewitt was ‘issuing written plan materials like summary plan descriptions,’ or providing ‘individualized consultations with benefits counselors,’” both activities that are clearly fiduciary in nature.
In addition to miscommunication of benefits, the negligence in handling other fiduciary functions that have been held to support claims against ERISA fiduciaries include:
Cases where the benefit calculation under the plan is based on ambiguous plan language. See Kenseth v. Dean Health Plan, Inc., 722 F.3d 869, 883 (7th Cir. 2013); Daniels v. Thomas & Betts Corp., 263 F.3d 66, 74-75.
Cases where the plan accepts premiums and misrepresents coverage based on a misstatement to the plan member of eligibility for the benefit. See McBean v. United of Omaha Life Ins. Co., 2019 WL 1508456 (S.D. Cal. Apr. 5, 2019); Curcio v. John Hancock Mut. Life Ins. Co., 33 F.3d 226 (3d Cir. 1993); Smith v. Hartford Ins. Group, 6 F.3d 131 (3d Cir. 1993).
- Cases where the plan approves benefits and then, based on the same information, denies coverage. See Cohorst v. Anthem Health Plans of Kentucky, Inc., 2017 WL 6343592, at *2 (C.D. Cal. Dec. 12, 2017).
In these cases, very often key elements are material misrepresentations to a plan member, which misrepresentations can be imputed to the employer or to the insurers administering the plans. Such circumstances can and do provide aggrieved plan members and their beneficiaries important equitable relief, including surcharge, reformation, estoppel, and waiver.
The Bafford ruling will have limited impact on ERISA claims against plan administrators based on the broad scope of fiduciary functions and the availability of equitable remedies under ERISA. The main significance is its holding is that state-law professional negligence and negligent misrepresentation claims against plan delegees who perform “ministerial “ duties are not preempted by ERISA, thereby providing a potential remedy to plaintiffs for the harm caused by the negligence of the entities performing the ministerial tasks. This is a just and fair result for employees and their beneficiaries, who would potentially be significantly harmed by losing their expected benefits if such a remedy were unavailable.
Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith and ERISA litigation. He can be reached at (949) 387-9595 or firstname.lastname@example.org. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.