Legal Articles Archives - McKennon Law Group

How a Previous Divorce Can Impact Your Life Insurance Claim

Understanding Divorce’s Impact on Potential Life Insurance Benefits

Typically, when policyholders purchase insurance such as life insurance or accidental death and dismemberment insurance, they name one or more beneficiaries to receive benefits under the Policy. A beneficiary is the person who receives the policy benefit payout upon a qualifying event. In the case of life insurance, a benefit is paid if the covered insured passes away in a manner that is covered under the policy.

Many married persons make their spouse the sole beneficiary of these types of policies. That can be true even if the couple has children, as the expectation is that a surviving spouse would use the benefit payout to care for the children too.

However, what happens in this situation if the marriage is over through a divorce and the life insurance policy or the accidental death and dismemberment policy names the divorced spouse as the beneficiary at the time of the insured’s death?

No Automatic Beneficiary Change

It is critical to understand that California law and the law in most states do not automatically effect a change upon divorce. That means that a divorce decree does not automatically remove an ex-spouse as a beneficiary on these policies even if the insured would have wanted removal of the ex-spouse but did not change the beneficiary designation before he passed away.

Typically, if an insured wants a divorce decree to remove his or her spouse as a designated beneficiary, that must be spelled out clearly in the language of the divorce decree/agreement. Couples who are going through a divorce may want to discuss these types of details with their divorce attorneys and with a knowledgeable insurance lawyer. If you have previously gone through a divorce and this type of detail was not included in the decree, you may want to talk to your insurance agent about options for changing beneficiary designations.

Life Insurance Can Be Considered Community Property

Another critical factor that can impact how life insurance policies and payouts work after a divorce is the fact that these types of policies might be considered community property. If you or your spouse purchased the policy during your marriage—and particularly if you paid the premiums for the policy with communal assets—the policy is likely to be considered community property during a divorce.

This can be an important consideration, as it can drastically change the total value you get from the policy. Consider a hypothetical example where a husband purchases a policy on his own life and names his wife as beneficiary. The policy is for $1 million in benefits, and when the couple gets divorced, the cash value in the policy is $100,000.

One potential outcome in the case is that the court decides the policy is community property. It may award ownership of the policy to the husband but require him to give up $50,000 in cash assets to ensure equitable distribution of the current cash value. At that time, the husband could change the beneficiary on the policy, and the ex-wife is potentially out a million dollars later in life.

The Requirement for One Spouse to Maintain a Life Insurance Policy With the Other Spouse as Beneficiary

In some cases, courts may order or the parties may agree that one spouse to carry life insurance in the future for a specific time, for a specific amount and that other divorcing spouse is named as a sole or partial beneficiary. This might occur when one spouse makes a lot more money and has been the de facto breadwinner in the family. A life insurance policy can help ensure that child support and other dependent needs are covered if the insured spouse passes away.

Updating Your Life Insurance Policies

Divorced spouses likely will want to make changes to your life insurance policy. They should talk with their insurance agent and their divorce attorneys involved before they move ahead with those changes. They will want to ensure that they are making legal, intelligent changes so there is less likelihood that the changes might be called into question later. That is true even if you are only updating your beneficiary designations.

What to Do if You Run Into Problems With a Life Insurance Claim Post Divorce

Many people think of life insurance as a fairly straightforward purchase. You buy the coverage, and if you pass away while the coverage is still in force, your beneficiary receives a cash benefit. Unfortunately, it does not always work as simply as you might think it should.

There are many reasons that an insurance company might balk at processing a payout. After all, the insurance company has a bottom line to protect, and paying out every claim that is filed is not the way to do that. If an insurance company can find a legal reason to deny a claim, you can count on the fact that it will do so.

Any time there are extra mitigating factors, such as potential questions about who a beneficiary might be or whether a beneficiary change was legal, it can hold up a payout or even put a claim in jeopardy.

If you believe you are the rightful beneficiary for a life insurance policy and the insurance company is not acting in good faith or is otherwise failing to pay the claim, you may need additional help. Experienced life insurance and accidental death insurance lawyers who understand the these issues can fight to protect your rights and increase the chance that you get the benefits you deserve.

For more information about how we can help you, call us today. The McKennon Law Group PC has fought many life insurance companies and we have been highly successful.

Defined Benefit Plans Versus Defined Contribution Plans: What is the Difference?

Defined Benefit Plans vs. Defined Contribution Plans: What You Need to Know

Saving for retirement is a common goal for many. One means of achieving this is for employees to take advantage of different types of retirement benefits offered by their employers to save money for their future retirement. Different retirement plans provide different options for how you can save, how much you can save, and what benefits you can expect from your employer. It is important to have an understanding of your benefits that allows you to protect yourself in the case that you are denied your benefits.

The Employment Retirement Income Security Act of 1974, or ERISA, is the federal statute that protects employees’ benefits. You can find out all you need to know about ERISA on our frequently asked questions page and on our ERISA and Insurance Litigation Blog. If you believe you are not getting your benefits, reach out to us to find out how we can utilize ERISA to help you recover the benefits you are owed.

Additionally, find out more about the difference between defined benefit plans and defined contribution plans below.

What Is a Defined Benefit Plan?

A defined benefit plan is a retirement plan that promises to pay a specific benefit each month once you reach a certain age. The plan defines the age of eligibility, commonly between 62 and 65. Some defined benefit plans promise a specific dollar amount as a benefit, like $200 per month once you reach retirement age and retire. Others promise a benefit that is calculated based on your salary and years of service with your employer.

For example, determining the benefit might involve calculating your average salary over the last few years and multiplying it by a percentage determined by your years of service with your employer(s).

Positive Aspects of Defined Benefit Plans

Employers often contribute more to defined benefit plans than to defined contribution plans every year, which can benefit you in the form of tax savings. A defined benefit plan may also allow you to accrue more benefits in less time than with other plans, depending on the plan structure. A defined benefit plan also allows you to rely on the security of predictable payments in retirement.

Example of a Defined Benefit Plan

Imagine that Bob works for a company that offers a defined benefit plan. Bob’s employer contributes a certain amount to the plan. The plan, or a contracted third party, will then invest the contributions. Bob does not have any say in those investments or how they are handled, but his employer guarantees that Bob will receive a certain pension benefit upon retirement, which may be $100 per month in pension funds for every year he works for his employer. If Bob worked 10 years with the employer, his employer would guarantee him a pension of $1,000 per month.

What Is a Defined Contribution Plan?

A defined contribution plan is a savings vehicle that helps employees save for retirement, but it does not provide a specific promised benefit amount. The employee contributes to the plan, typically with pre-tax dollars. The employer may match the employee’s contribution up to a certain amount.

Contributions are invested to accrue additional value over time. Once you reach retirement age, you can begin to withdraw from the retirement plan as needed and according to IRS tax requirements. Examples of defined contribution plans include 401(k) and 403(b) plans.

Positive Aspects of a Defined Contribution Plan

While employee and employer contributions are capped at lower annual rates annually in a defined contribution plan, contributions are discretionary, allowing for greater flexibility in employers offering, and employees participating in, such plans. Defined contribution plans tend to be more common in the private sector today and are more favored by many employers, partly because they are less complex and less expensive to manage than defined benefit plans.

Hypothetical Example of a Defined Contribution Plan

Use Bob as an example again, but now he has a defined contribution plan rather than a defined benefit plan. Bob decides to contribute 4% of his salary to the plan and the employer matches up to 3%. The money contributed goes into a retirement fund specifically for Bob, and he is able to see and make changes to how the money is invested. Bob can decide whether he wants to play it safe or be a bit more aggressive with his retirement investments.

When he retires, Bob does not receive a specific amount every month based on his tenure and average salary. Rather, he can simply withdraw the amounts he needs, in accordance with IRS rules, from his retirement fund.

Does ERISA Cover Both Defined Benefit and Defined Contribution Plans?

Both a defined benefit and a defined contribution plan are covered by ERISA, so long as the plan is offered as an employer-sponsored benefit by a business in the private sector.

What If You Are Being Denied the Benefits You Are Owed?

Based on the above information, the importance of understanding the nature of your retirement benefits is clear. If you do not understand how your benefits work, you do not know whether you are getting what you are owed.

If you believe you are not getting the benefits you are owed, your best course of action is to reach out to someone with expertise in handling ERISA pension/retirement matters, like the experienced ERISA attorneys at McKennon Law Group PC. The knowledgeable ERISA pension attorneys at McKennon Law Group PC have helped their clients recover benefits owed to them and can help ensure that you receive the pension benefits you are due under your pension plan. Contact McKennon Law Group PC today for more information.

Los Angeles Daily Journal Publishes Article on April 21, 2021 by Robert McKennon Entitled “Ruling Clarifies who Qualifies as an ERISA Fiduciary”

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 rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.