ERISA - Conversion Issues Archives

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

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.

Ten Things to Consider and Look For in Your ERISA Life and/or Accidental Death and Dismemberment (AD&D) Insurance Plans When You Select Benefits or File a Claim

1. Obtain a full copy of your plan. The full plan will not typically be a benefit summary or a print-out from a website. It will be fairly long and many definitions and it will recite your ERISA plan terms, policies and procedures for filing a life insurance or AD&D claim and handling the claim, claim denials, appeals of claim denials, etc. The claims administrator will likely not have a copy of the full plan. You can request a copy of the full plan from your Employer’s Human Resources department or often from the claims administrator (the insurer or third-party administrator).

2. Read the plan. Your plan document controls the rights and obligations of the parties, including all plan participants and beneficiaries. Thus, if you have an ERISA claim for life insurance benefits or AD&D benefits, you should read the plan carefully. A human resources representative, a customer service representative for the insurance company that administers your life and/or AD&D benefits, or your claims administrator may tell you what your benefits are over the telephone or in an e-mail. You cannot necessarily rely on what a representative tells you over the phone. The plan document controls the benefits available, not what someone tells you over the telephone or via e-mail. If there is any confusion, ask the representative to tell you what specific plan provision they are referencing and ask them to send you a letter documenting what they are telling you.

3. Read the definitions, provisions, and exclusions. Be aware that life and AD&D insurance policies may exclude certain types of losses, such as suicide within the first two years of life insurance coverage. Pre-existing conditions or sicknesses may exclude an insured’s death or dismemberment from coverage under an AD&D policy as well. “Dismemberment” is often defined by an AD&D policy provision. Terms like “pre-existing condition,” “sickness,” “intoxication,” and other words may have special definitions under your policy. Under an AD&D policy, you will have to prove that the claimed loss resulted from an accident or accidental bodily injury. This can be complicated, especially where the accidental bodily injury may have been caused in part by a preexisting medical condition. If this is the case, you will need to consult an attorney immediately as there are complex and technical rules that are only found in applicable case law. McKennon Law Group PC is highly experienced in this area. Make sure you know what is required under your plan’s specific definitions in order to successfully claim life and/or AD&D benefits.

4. Select the appropriate coverage amount. Some employers will provide you with a base amount of life or accidental death and dismemberment (AD&D) insurance coverage, and some may not. Be sure to select the level of coverage that you want, and make sure you fill out any forms, like a Statement of Health, to ensure that you receive the coverage you select. You may also be able to select a level of life or AD&D insurance coverage for your spouse as well. Read the plan and policy documents carefully; your policy may state that, if selected, your spouse coverage will only be a percentage of your coverage, but your policy may also provide for spouse coverage in an amount independent of your coverage.

5. Confirm your coverage. Get a confirmation of coverage in writing, either a print-out of the premiums that you are paying for each insurance coverage you have chosen through your employer or a certificate that states the exact coverage you receive. Make sure you always have a current document showing your benefits coverage, which will usually be once a year after coverage selection or two to four months after you begin new employment. Review your premiums statements to ensure that you are paying the correct amounts for the coverages that you selected. Put all communications with your employer or insurer in writing and insist on the same in return.

6. Understand the conversion period to individual coverage. Many insurance companies permit you to continue your life and AD&D insurance coverage with them if you leave your employer. Usually, you need to contact the insurance company for your life and AD&D benefits within 30 days of your last day of work to convert your policy. Read through your plan documents and policy to understand the time period you must convert your group policy to an individual one and to know who you need to call or write to in order to continue your insurance coverage through an individual policy. If you decide to convert your policy, keep detailed records on when you called or wrote to the insurance company, what number you called, and who you spoke to regarding conversion of your policy or policies. You may be limited to a 30- or 31-day period, so make sure you follow up every couple of days until you receive confirmation that your policy has been converted. However, by law, if the insurance company does not convert your policy in a timely manner despite your requests to do so, you may be able to extend the time period in which you may convert your policy. You should contact an attorney for advice if you encounter this problem.

7. Time to appeal a claims decision. Read the appeals or grievance section to determine your appeal rights and deadlines. The first appeal must be submitted within 60 days of the date you receive the initial denial, pursuant to ERISA’s regulations. However, there may be a second appeal, which may be mandatory or voluntary. Whether there is a second appeal and whether it is mandatory or voluntary is critical to pursuing your life and/or AD&D benefits claim in court if it is denied. Additionally, although ERISA requires that you have 60 days to file your first appeal, the insurance company may dictate that a second appeal be filed in shorter amount of time. Be aware that you can and should contact an attorney as soon as you receive any notice, oral or written, from your insurance company that your claim will be or has been denied. An attorney can help you with your first and second appeals of the denial of your life and/or AD&D benefits, which will also help if you need to go to court to force the insurance company to pay you your benefits because the attorney will ensure that your life and/or AD&D claim record during the administrative appeals is complete and will help a judge understand that the insured’s death or dismemberment qualifies for payment of benefits.

8. Obtain a full copy of the claim file or administrative record. If your claim for benefits has been denied once, make sure you obtain a full copy of the claim file and/or Administrative Record so you can see what the insurance company considered in denying your claim. You can request a copy of the administrative record from the claims administrator, which is often an insurance company such as MetLife, Unum, and Liberty Mutual. If your claim for benefits has been denied after one (or two) appeals, make sure you obtain another copy of the claim file, which is also called the “administrative record” in insurance litigation, because it will contain updated records of what the insurance company considered in denying your appeal(s).

9. Find the statute of limitations and contractual limitations period as stated in your plan. The statute of limitations and contractual limitations period will be the period of time by which you must file a lawsuit to obtain disputed benefits. To file a lawsuit for benefits pursuant to an ERISA plan, you must first submit appeals (at least one, but no more than two). The contractual limitations period may appear in a section titled, “Legal Action.”

10. Find out who the plan administrator is and seek necessary information from it. Look for a name and address of the plan administrator in the plan. If your claim has been denied, send a written request to the plan administrator for all plan documents. The plan administrator is required to provide the plan documents to you within 30 days. 29 U.S.C. § 1024. Federal regulations allow you to file a lawsuit to seek penalties from the plan administrator in the amount of $110 per day for each day the plan documents are not provided beyond the 30-day period. 20 U.S.C. § 1132(c)(3); 29 C.F.R. § 2575.502c-1.

If your ERISA claim has been denied, knowing when to sue may be integral to the success of your claim. It is important to have experienced and highly qualified disability, health, life and accidental death or dismemberment insurance attorneys, like those at the McKennon Law Group PC. Fill out our free consultation form today to set a time to discuss your claim with one of our attorneys, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.

Plaintiff Recovers $750,000 Based on Plan Administrator’s Breach of Fiduciary Duty

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.

In some instances, ERISA plan participants may be able to “continue” or “convert” their employer-sponsored long-term disability, life, medical or other insurance policy even after they no longer work for their employer. This ability to convert to an individual policy arises from the language in some policies, which may allow ERISA plan participants to either continue or convert a group policy even after their employment has been terminated. For example, in Alexander v. Provident Life & Acc. Ins. Co., 663 F.Supp.2d 627 (E.D. Tenn. 2009), the ERISA-governed long-term disability policy provided for continued coverage for a certain period of time, regardless of employment. In this case, the plaintiff elected to continue coverage and so, even though he was no longer considered an employee, he was still covered by the employer-sponsored disability policy. In other cases, the employer-sponsored plan does not continue, but “converts,” at which point ERISA plan participants may still be eligible for coverage, but will be individually responsible for the premiums (thus “converting” the policy from a group policy to an individual policy). For our recent blog on when ERISA applies to such continued or converted policies, see https://mslawllp.com/when-does-erisa-apply-to-a-continued-or-converted-group-insurance-policy/.

In this article, we address a plan administrator’s fiduciary duty to adequately inform the employee of the ability to convert a long-term disability, life or other insurance policy. In a recent opinion from the United States District Court for the Western District of Pennsylvania, Erwood v. Life Ins. Co. of N. Am., Civ. 2017 WL 1383922 (W.D. Pa. 2017), Plaintiff Patricia Erwood sought to recover losses and damages related to two group life insurance policies purchased by her late husband, Dr. Scott Erwood. Mrs. Erwood brought suit against Defendant WellStar Health System, Inc. and Group Life Insurance Program (collectively, “WellStar”) alleging that they breached a fiduciary duty to her when they failed to adequately inform her of the need to convert two group life insurance policies as part of an ERISA benefit plan. Ultimately, Magistrate Judge Maureen P. Kelly ruled in Mrs. Erwood’s favor and required WellStar provide $750,000 to Mrs. Erwood for the lost coverage.

Prior to his death, Dr. Erwood worked as a neurosurgeon at WellStar. As a WellStar employee, he participated in the employer-offered benefit plans, which included basic and supplemental life insurance. Under his employer-sponsored policies, Dr. Erwood had a total of $1,000,000 in life insurance coverage.

Tragedy struck Dr. Erwood in late 2011, when he suffered a seizure, later determined to be the result of a malignant brain tumor. At this point, Dr. Erwood went on leave from work and remained on leave until September 4, 2012. After exhausting his leave, WellStar informed him that unless he returned to work, he would be considered separated from employment. WellStar mailed Dr. Erwood a Family Medical Leave Act (“FMLA”) leave packet, which gave him limited information regarding the continuation or conversion of his life insurance policy. WellStar did not provide notice or otherwise inform the Erwoods of the need to convert the policies. WellStar also did not provide the forms necessary to convert the policies, despite express instruction to do so in the manual on plan administration. As a result, the life insurance policies lapsed shortly before Dr. Erwood succumbed to his illness. Mrs. Erwood learned of this lapse upon her application for death benefits, which WellStar rejected.

In a strong opinion for ERISA plan participants outlining the importance of the fiduciary’s role in administering an ERISA-governed plan, the court found WellStar’s failure to communicate the information necessary to actually convert Dr. Erwood’s life insurance policies to be a misrepresentation and failure to adequately inform in violation of its fiduciary duty to act “solely in the interest of the participants and beneficiaries and— (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries….” under ERISA § 404, 29 U.S.C. Section 1104(a)(1). The court found that by “executing the Application for Group Insurance and the Appointment of Fiduciary form, WellStar expressly undertook the fiduciary duty to administer the Plan and to provide notice to employees of their right to convert the group life insurance.” The court continued, finding WellStar acted in a fiduciary capacity in the administration of the relevant life insurance policies for the Erwoods and, in particular, in the explanation of those benefits. In sum, the court found that WellStar’s conduct violated ERISA and ruled in favor of Mrs. Erwood for what would have been the remaining amount owed on the life insurance policies, awarding her the sum of $750,000. In doing so, the Court acknowledged the important fiduciary role that employers play as plan administrators in ERISA-governed plans, including providing adequate information regarding an employee’s ability to convert a policy after termination of employment.

ERISA Will Not Pre-Empt State Law Claims Under an Individual Conversion Policy

In an important victory for claimants, a United States District Court recently determined that a plaintiff who obtained an individual disability insurance policy through a conversion provision in an ERISA plan can pursue remedies in a state court under the newly issued individual policy. This ruling is important because the range of damages available through a lawsuit containing state law claims is much broader than the range of damages available through ERISA, and includes emotional distress damages and punitive damages.

In Marshburn v. Unum Life Ins. Co. of America, the insurance company, Unum, argued that the plaintiff, Julie Marshburn, could not pursue state law remedies to recover long-term disability insurance benefits because her plan was subject to ERISA. However, even though her initial group coverage, offered through her employer at the time, Cedars-Sinai Medical Center, was governed by ERISA, she was eventually given the opportunity to obtain a Conversion Policy for an individual plan. In this case, the court rejected Unum’s argument that Ms. Marshburn’s state law claims under the Conversion Policy were preempted by ERISA because the Plaintiff validly converted her group policy to a conversion policy.

Ms. Marshburn was admitted to a medicine residency program at Cedars-Sinai Medical Center in Los Angeles. During her residency, which consisted of a series of clinical rotations, she injured her shoulder while lifting a patient. Initially, Ms. Marshburn continued to work, but after the injury did not heal on its own as she had previously been advised, she was placed on certain work restrictions. .

Nearly three years after her shoulder injury, Ms. Marshburn underwent surgery to repair the labrum tear in her right shoulder. During this surgery, she suffered another injury, this time a torn ligament in her right thumb. The Plaintiff was then placed on additional work restrictions “prohibiting her from pushing, pulling, or lifting with her right upper extremity.” Under these restrictions, Ms. Marshburn would potentially be prevented from completing her internal residency program. Following her injuries, Ms. Marshburn continued to work as a resident at Cedars-Sinai and received her full salary. Her work at Cedars Sinai was terminated in June 2006.

After her termination in June 2006, the Plaintiff was given the opportunity to convert her group long-term disability coverage to an individual policy. Despite initially being denied conversion coverage due to a dispute as to the date the Plaintiff received the option, Ms. Marshburn was eventually issued LTD benefits under the Conversion Policy as of her termination date. She submitted a claim for LTD benefits in January 2011 under the Conversion Policy. Ms. Marshburn also suffered other injuries including insomnia, depression, chronic headaches and was unable to perform basic tasks.

The Plaintiff sued for breach of contract and breach of the implied duty of good faith and fair dealing. Unum moved for summary judgment, claiming that the Plaintiff was ineligible to convert her ERISA plan to and individual policy, which would be governed by state law.

The court first determined that while ERISA governs the right to convert, it does not overn the actual conversion policy:

In the Ninth Circuit, ERISA governs the right to convert an ERISA-governed policy to an individual conversion policy, but not conversion policies themselves. See Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 877 (9th Cir. 2001). By contrast, “state-law claims arising under a converted policy—even though the policy has been converted from an ERISA plan—are not preempted by ERISA.” Id. Accordingly, the Court looks to ERISA to determine whether plaintiff validly converted her group policy to a conversion policy. See White v. Provident Life & Accident Ins. Co., 114 F.3d 26, 28 (4th Cir. 1997).

Using the principle, the court first made clear that the insurance company seeking ERISA preemption bears the burden of proof to show that the insured was “disabled” under the relevant terms of the Group Plan (i.e., pre-conversion). Importantly, the court found that the Plaintiff was not disabled under the terms of her ERISA plan before her ERISA plan was converted because she received her full salary until the end of her employment. So while her injury occurred when her coverage was governed by ERISA, her entitlement to benefits did not arise until after her plan had been converted. Thus, her claims under the Conversion Policy were not pre-empted by ERISA, allowing her to pursue state law claims under that policy.

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