A recent trend of lawsuits has involved Insurers who seek to avoid paying out life insurance or disability insurance benefits even though they have collected premiums on the policy, because they and the plan participant’s employers never obtained Evidence of Insurability (“EOI”).  These insurers deny claims for life insurance and disability insurance benefits on the ground that a claimant was never covered by the policy.  The Eighth Circuit Court of Appeals, in Corey Skelton v. Reliance Standard Life Ins. Co., 33 F.4th 968 (8th Cir. 2022), recently provided some clarity as to when an insurer and employer have a fiduciary duty to the insured with respect to life insurance and disability insurance coverage and when those fiduciary duties are breached.  In Skelton, Plaintiff worked for Davidson Hotels LLC (“Davidson”) and obtained supplemental life insurance coverage for his wife.  The life insurance policy was issued by Reliance Standard (“Reliance”).  The policy generally required EOI, including proof of good health, for a member to obtain coverage.  However, if an applicant for supplemental life insurance was changing coverage amounts within 31 days of “a life event change (such as marriage, birth, or specific changes in employment status),” then the applicant was not required to submit an EOI and receive Reliance’s approval.

Mrs. Skelton had life insurance coverage for $100,000 and wanted to increase the coverage to $238,000.  Her husband regained custody of his son, Mrs. Skelton’s step-son, and she asked Davidson whether this qualified as a life event that would allow her to elect supplemental life insurance.  Davidson told her that this did qualify as a life event.  Skelton applied for the supplemental coverage and in Davidson’s response she received a notice informing her that she was required to submit EOI.  Mrs. Skelton subsequently received a “Benefit Verification / Deduction Authorization” document indicating that she had “Supplemental Term Life” insurance, with the reason for completing the form being listed as “Regaining custody of dependent child.”  She then paid premiums for a few months, but stopped, and one year later she qualified for a waiver of her premiums retroactive to when her coverage began.  She then passed away and her husband made a claim for death benefits under her policy, which Reliance denied for lack of coverage, stating that Mrs. Skelton was never covered because she did not provide EOI.

Reliance argued that because Davidson’s practice was to collect the premiums and then forward the premiums to it, Reliance did not have a fiduciary duty to Mrs. Skelton.  However, the district court held that Reliance had a fiduciary duty to ensure that its system of administration did not allow it to collect premiums until coverage was actually effective.  The court held that

“Fiduciary status . . . is not an all or nothing concept.  A court must ask whether an entity is a fiduciary with respect to the particular activity in question.”  Maniace v. Com. Bank of Kansas City, 40 F.3d 264, 267 (8th Cir. 1994), quoting Kerns v. Benefit Tr. Life Ins. Co., 992 F.2d 214, 217 (8th Cir. 1993).  “[A]n insurer who is not the plan administrator has no ERISA fiduciary duty” for a particular activity “unless the policy documents or the insurer’s past practices have created [such] an obligation.”  Id.

The court held that the “ability to determine Mrs. Skelton’s eligibility for supplemental life insurance made Reliance a fiduciary for Skelton’s application process.”  Reliance argued that while it had fiduciary duties related to eligibility and making claims decisions, those duties did not extend to enrollment.  But because the policy language provided that enrollment occurred automatically as a result of Reliance’s eligibility decision, Reliance was therefore Mrs. Skelton’s fiduciary, as it essentially determined enrollment.  The “plan documents and the insurer’s acts determine whether it is a fiduciary for the relevant function.”  See Kerns, 992 F.2d at 217.  Thus, as the entity that determined eligibility and conducted enrollment, Reliance was Skelton’s fiduciary.

The court further held that Reliance breached its fiduciary duty by failing to maintain an effective enrollment system.  The court held that a reasonably prudent insurer would use a system that avoids the employer and the insurer having different lists of eligible, enrolled participants, and that Reliance used an insufficient, haphazard system.  Reliance sent Davidson monthly status reports listing pending applications, but the reports did not include employees who had not submitted EOI, which resulted in a “ships passing in the night” situation between Reliance and Davidson as to who was eligible for coverage.

With respect to Reliance Standard’s argument that it did not communicate with the employer about enrollment in the ERISA plan, the court rejected it, explaining:

Reliance cannot insulate itself by failing to communicate with Davidson about enrollment—which Reliance controlled—while having Davidson remit ill-gotten premiums.  ERISA seeks “to protect … the interests of participants in employee benefit plans and their beneficiaries” and to “increase the likelihood that [they] receive their full benefits.”  29 U.S.C. §§ 1001(b), 1001b(c)(3).  This Circuit has emphasized that allowing plaintiffs to seek full recovery for breach of fiduciary duty “is so important” because this eliminates the “‘perverse incentive[ ]’” for fiduciaries to “‘enjoy essentially risk-free windfall profits from employees who paid premiums on non-existent benefits but who never filed a claim for those benefits.’”  Silva, 762 F.3d at 725, (quoting McCravy v. Metro. Life Ins. Co., 690 F.3d 176, 183 (4th Cir. 2012)).  Allowing an insurer to use “a compartmentalized system to escape responsibility” would undermine ERISA’s purposes.  See Salyers v. Metro. Life Ins. Co., 871 F.3d 934, 940 (9th Cir. 2017) (quotations omitted).

Indeed, allowing a fiduciary to escape liability because it designed an enrollment system that ensured it would not know it was collecting “premiums on non-existent benefits” would endorse willful blindness—and the exact “perverse incentive” this Circuit has decried.  See generally Patterson v. Reliance Standard Life Ins. Co., 986 F. Supp. 2d 1140, 1150 (C.D. Cal. 2013) (“Reliance Standard did not conduct any such investigation and only investigated the eligibility of Ms. Dietrich for *979 supplemental life insurance coverage after her death.”); Cho v. First Reliance Standard Life Ins. Co., 852 Fed. Appx. 304, 305 (9th Cir. 2021) (holding Reliance liable where employer erroneously collected premiums from ineligible person for over a year despite unsubmitted EOI); cf. Chao v. Merino, 452 F.3d 174, 182 (2d Cir. 2006) (stating, in ERISA breach-of-fiduciary-duty case, that under the duty of prudence, “If a fiduciary was aware of a risk to the fund, he may be held liable for failing to investigate fully the means of protecting the fund from that risk”).

Indeed, allowing a fiduciary to escape liability because it designed an enrollment system that ensured it would not know it was collecting “premiums on non-existent benefits” would endorse willful blindness—and the exact “perverse incentive” this Circuit has decried.  See generally Patterson v. Reliance Standard Life Ins. Co., 986 F. Supp. 2d 1140, 1150 (C.D. Cal. 2013) (“Reliance Standard did not conduct any such investigation and only investigated the eligibility of Ms. Dietrich for *979 supplemental life insurance coverage after her death.”); Cho v. First Reliance Standard Life Ins. Co., 852 Fed. Appx. 304, 305 (9th Cir. 2021) (holding Reliance liable where employer erroneously collected premiums from ineligible person for over a year despite unsubmitted EOI); cf. Chao v. Merino, 452 F.3d 174, 182 (2d Cir. 2006) (stating, in ERISA breach-of-fiduciary-duty case, that under the duty of prudence, “If a fiduciary was aware of a risk to the fund, he may be held liable for failing to investigate fully the means of protecting the fund from that risk”).

Skelton, 33 F.4th at 978–79.  The court additionally held that Reliance breached its fiduciary duty by accepting Skelton’s premiums without providing coverage.  “ERISA fiduciaries must comply with the common law duty of loyalty, which includes the obligation to deal fairly and honestly with all plan members.”  Shea v. Esensten, 107 F.3d 625, 628 (8th Cir. 1997).  This includes the duty to not profit at the beneficiary’s expense.

Reliance argued that because it received all of the premiums from Davidson, it had no way of knowing whether Mrs. Skelton’s payments were made, but it presented no evidence that it did not receive payment for Mrs. Skelton’s life insurance policy from Davidson.  The court thus held that Reliance breached its fiduciary duty to Mrs. Skelton by receiving her premiums without giving her a corresponding benefit of coverage, while serving as a fiduciary for her eligibility and enrollment, and thus profited at her expense by avoiding any financial risk of having to pay benefits for her.

Notably, the court did not hold that Reliance became a fiduciary merely by receiving premiums from an ineligible employee.  The court found that Reliance told Mrs. Skelton that she would not pay premiums until it approved her application, then it took her premiums without approving her application, thus profiting on its broken promise.  This act of misleading Mrs. Skelton (by causing her to believe that if she was paying premiums, she was covered for the supplemental coverage), then profiting off of her premiums without approving her application, was Reliance’s breach of its fiduciary duty.

The Skelton court’s decision demonstrates that an insurer can be held liable for a breach of fiduciary duty even where it does not have actual knowledge that a participant is paying premiums.  Because a reasonably prudent insurer would have facilitated a system that reliably informed Davidson as to which participants’ premiums were being paid and which participants were required to provide EOI, Reliance breached its duty.  The Skelton court’s holding provides a blueprint of recourse for participants whose insurers have breached such fiduciary duties.

If you or someone you know has experienced the same or similar treatment from an insurer or employer, you may be able to hold them accountable.  McKennon Law Group PC is highly experienced in handling denied ERISA claims, including those involving the insurer’s breach of fiduciary duty.  Contact McKennon Law Group today for a free consultation.