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McKennon Law Group Defeats Motion to Dismiss Breach of Fiduciary Duty Claim in Western Kentucky

Most Americans obtain their insurance benefits through their employment. These employee benefits include health insurance, dental insurance, disability insurance, and life insurance. Most of these benefits are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA imposes a variety of fiduciary obligations on the administrators for these employee benefit plans. One of those obligations is to not make misrepresentations to plan participants, i.e., the employees and insureds. When either a plan administrator (usually the employer) or a claims administrator (usually an insurance company) provides misinformation to a plan participant, the administrator may have breached its fiduciary duty to the plan participant. McKennon Law Group recently brought a breach of fiduciary duty claim in the Western District of Kentucky and defeated the employer’s Motion to Dismiss (the “Motion”) for failure to state a claim. See Blackburn v. Reliance-Standard Life Ins. Co., 2022 WL 17082673 (W.D. Ky. 2022).

Our client, Ashley Blackburn, is a nurse. She and her husband, Ray Blackburn, both worked for Baptist Healthcare System (“BHS”) in Kentucky. Through their employment, they obtained a variety of employee benefits, including disability insurance and life insurance. Our client and her husband obtained life insurance through Reliance Standard Life Insurance Company (“Reliance Standard”) that covered themselves. They also obtained supplemental life insurance that covered the other spouse. Before doing so, they asked BHS’s representative whether they were allowed to obtain supplemental coverage. They were told that they could. BHS’s representative told them that they were allowed to obtain up to $100,000 in supplemental coverage.

The couple paid for their supplemental coverage for ten years. During that time, our client’s husband developed cancer. Through BHS, he had disability insurance. While out on disability, his life insurance was automatically maintained under a waiver of premium provision of his disability policy. Our client had to spend increasingly longer periods of time away from work to tend to her husband and ultimately had to leave her job. When she left BHS, she converted the supplemental life coverage for her husband into an individual policy. This allowed her to maintain the insurance even though she had left her job to tend to her ailing husband.

Unfortunately, our client’s husband passed away due to cancer. When she submitted a life insurance claim to Reliance Standard, it denied her claim because the supplemental life insurance was improper and disallowed by the Plan language, contrary to what our client had been told by BHS’s representative. Ms. Blackburn hired McKennon Law Group PC, and we sued both the employer and Reliance Standard under ERISA Section 502(a)(3) alleging defendants breached their fiduciary duties by misleading her into believing that she was insured. She also sought statutory penalties under Section 1132(c) for defendants failing to timely disclose plan documents upon request. BHS moved to dismiss our claims against it. It insisted that even assuming that everything in our complaint was true, Ms. Blackburn was not entitled to relief. BHS raised a variety of arguments. It insisted that our client’s breach of fiduciary claim was improper because it was duplicative of an improper denial of benefits claim (a separate type of ERISA claim) and that, ultimately, any oral misrepresentations by BHS’s representative were irrelevant. The Court disagreed and denied the Motion.

The Court explained that a plan participant, such as our client, may bring a claim for breach of fiduciary duty when an administrator provides misinformation to the plan participant. The Court relied heavily on a Sixth Circuit case, Gregg v. Transportation Workers of America International, 343 F.3d 833, 847 (6th Cir. 2003). The Court explained:

[An administrator] also has a duty to honestly respond to all the beneficiary’s inquiries. See Gregg v. Transp. of Am. Int’l, 343 F.3d 833, 847 (6th Cir. 2003). “[O]nce an ERISA beneficiary has requested information from an ERISA fiduciary who is aware of the beneficiary’s status and situation, the fiduciary has an obligation to convey complete and accurate information material to the beneficiary’s circumstance . . . .” Krohn, 173 F.3d at 547. In Gregg, a union administered a group life insurance policy for its members. 343 F.3d at 847. At a meeting where members asked questions about the union’s new life insurance plan before deciding whether to join it, the union’s leaders neglected to share material facts about the policy and gave members information that was contrary to the policy’s express terms (which one of the leaders did not read). Id. at 847–48. The court held that the union breached its fiduciary duties to provide its members with all material information and to truthfully answer their questions. Id. at 848.

Here, Baptist, as the plan administrator, had a duty to answer all of Mrs. Blackburn’s insurance questions truthfully. See Gregg, 343 F.3d at 847; [DN 20-3 at 24]. When she asked whether she could obtain supplemental life insurance on her husband’s life, Baptist was dutybound to tell her she could not, for it knew full well that Mr. and Mrs. Blackburn were both Baptist employees.

Blackburn, 2022 WL 17082673, at *4. Contrary to BHS’s assertions, the oral misrepresentations were potentially a breach of its fiduciary duties to our client. It does not matter that the misrepresentations were not made in writing. It also does not matter what the applicable plan documents state. What mattered is that BHS actively misrepresented information to our client. See id. at **4-5.

As for BHS’s argument that the claim was duplicative and improper, the Court explained that some claims are of such a nature that a claimant cannot pursue a claim for improper denial of benefits in court because, pursuant to the applicable policy/plan terms, the insurer properly applied the plan terms. Instead, the injury stems from improper conduct directed to a plan participant. While Reliance Standard was correct that, under the plain language of the Plan documents, supplemental life insurance was not available to our client and her husband, that did not change the fact that BHS actively provided misinformation to and harmed our client. The Court correctly noted that there must be a remedy for such conduct. See id. at *3.

As the Court explained, whereas some courts state that a claimant cannot “repackage” a claim under both an improper-denial-of-benefits theory and a breach of fiduciary duty theory, those holdings relate to the damages sought, not to the nature of the claim. Under ERISA, a plan participant cannot obtain double relief, a payment under both legal theories. However, when the two claims arise from different conduct, then either claim is a viable avenue to relief, so long as the claimant only obtains relief once. Given that our client did not have a viable claim for relief under an improper-denial-of-benefits theory, the breach of fiduciary duty claim could not be a “repackaging” of such a claim. See id.

The Court accurately explained this area of the law. It is well established throughout the country that neither plan administrators nor claims administrators may provide misinformation to plan participants. To do so may be a breach of fiduciary duty.

When such conduct causes a plan participant harm, the plan participant may seek a variety of forms of equitable relief. The U.S. Supreme Court has addressed these types of fiduciary issues extensively and explained in Cigna Corp. v. Amara, 563 U.S. 421, 439 (2011), that a variety of equitable remedies such as reformation, surcharge, and equitable estoppel are available to ERISA plan participants when they establish breach of fiduciary duty claims. In short, they are entitled to the value of the benefits that they were promised.

Breach of fiduciary duty claims under ERISA are very complicated. There are multiple ways in which an administrator may breach its fiduciary duty to a plan participant. These issues are often intensely litigated. However, courts throughout the country are clear that an administrator may not make material misrepresentations to plan participants who rely on them. When a plan fiduciary such as Reliance Standard or BHS speaks, they must speak truthfully.

Eighth Circuit Rules Against Fiduciary On Claim Alleging Misrepresentation of Coverage

Signing up for employer benefit plans can be confusing and can lead to disputes where the parties are not careful. ERISA fiduciaries such as employers who sponsor benefit plans and insurers who fund them have duties to plan members to communicate fully and accurately regarding the scope of plan benefits, and they can be liable for damages caused by misrepresentations of them. Just such a case can be found with Delker v. MasterCard International, Inc., ___ F.4th ___, 2022 WL 38468 (8th Cir. 2022). There, the Eighth Circuit Court of Appeals addressed a not unusual situation – one in which a plan member reasonably believes that he or she is entitled to policy benefits based on the paperwork filled out in connection with the selection of benefits and based on the representations made by the employer and/or the insurer who is paying policy benefits. In Delker, the plan member’s beneficiary claimed that a miscommunication regarding the level of selected benefits caused the plan member to decline further available life insurance coverage. The plan member’s detrimental reliance on the employer’s (MasterCard’s) misrepresentations regarding the level of insurance benefits resulted in damages based on the amount of coverage that the plan member reasonably expected to receive, and MasterCard misled the plan participant by failing to procure the insurance coverage that its own insurance enrollment forms reasonably indicated would be provided.

The Delker court found that Edward Delker properly alleged in his complaint that MasterCard, as a plan fiduciary, violated its fiduciary duty by miscommunicating the scope of life insurance that was provided by the plan. Mr. Delker’s late wife had completed documents that appeared to show that she had elected to receive life insurance coverage in an amount that was three times her annual salary, and MasterCard had also informed her that she was entitled to a credit for that level of coverage and that she could receive it without making any additional payment.

However, MasterCard only obtained life insurance coverage for Ms. Delker for the amount of her annual salary. MasterCard claimed that Ms. Delker had not successfully elected to obtain coverage for the additional $288,000 in coverage, despite the fact that the enrollment form appeared to elect this coverage.

Because MasterCard was a functional fiduciary of the ERISA plan, it had a duty to communicate fully and completely with plan members like Ms. Delker regarding benefits. The Delker court found that the enrollment form supported the election of life insurance coverage for three times her annual salary. Accordingly, Mr. Delker was entitled to seek damages that resulted from MasterCard’s failure to enroll Ms. Delker in the requested coverage. Mr. Delker properly alleged that MasterCard breached its fiduciary duty by miscommunicating the fact that Ms. Delker had elected coverage for three times her annual salary. As a result, MasterCard could be found liable for the full amount of coverage because (1) Ms. Delker could reasonably believe she was covered for life insurance benefits of three times her annual earnings, (2) she did not seek to procure additional insurance and (3) the expectation damages, if proven on remand, would approximate the amount of the misrepresentation – two times her annual salary.

The Delker court described the nature and extent of ERISA’s fiduciary duties as follows:

“ERISA imposes upon fiduciaries twin duties of loyalty and prudence. …” Braden v. Wal‑Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009). The duty of loyalty requires that fiduciaries act in the sole interest of benefit plan participants and beneficiaries; the duty of prudence mandates “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B).

The court then cited its ruling in Howe v. Varity Corp., 36 F.3d 746, 754 (8th Cir. 1994), aff’d, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), noting that the duties of loyalty and prudence extend beyond prohibiting affirmative misrepresentations and require the fiduciary to advise or inform plan members of circumstances that threaten their interests:

Making materially misleading statements constitutes a violation of a fiduciary’s duties of loyalty and prudence. See Howe v. Varity Corp., 36 F.3d 746, 754 (8th Cir. 1994), aff’d, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). At times, this “duty goes beyond merely refraining from making affirmative misrepresentations” to include a duty to advise and inform about circumstances that threaten the interests of one to whom a fiduciary duty is owed. Id. In this context, a statement is materially misleading if substantially likely to mislead a reasonable employee making decisions about employer benefits and entitlements. Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 644 (8th Cir. 2007).

It is important to note “that the duty of loyalty requires an ERISA fiduciary to communicate any material facts which could adversely affect a plan member’s interests.” Shea v. Esensten, 107 F.3d 625, 628 (8th Cir. 1997). This includes “answering questions about a plan, noting changes in the plan, [and] disseminating information directly to plan participants concerning their rights within the plan.” Anderson v. Resol. Tr. Corp., 66 F.3d 956, 960 (8th Cir. 1995) (alteration in original) (quoting Pickering v. USX Corp., 809 F. Supp. 1501, 1567–68 (D. Utah 1992)). These are all “classic fiduciary activities” implicating the duties of loyalty and prudence. Id. (quoting Pickering, 809 F. Supp. at 1568). In addition to demonstrating that pertinent statements were materially misleading, a plaintiff must further establish that he reasonably relied to his detriment on such statements in order to succeed on an ERISA misrepresentation claim. Brant v. Principal Life & Disability Ins. Co., 50 F. App’x 330, 332 (8th Cir. 2002) (unpublished per curiam).

The court determined that MasterCard was acting in a fiduciary capacity because it was communicating with plan members regarding benefits. MasterCard could have breached its fiduciary duty to the Delkers by miscommunicating the amount of coverage that was provided under the plan. ERISA claims regarding the miscommunication of information about benefits can arise from either affirmative representations or from the failure to communicate material facts that could adversely affect a plan member’s interests. And disseminating information to plan participants is a classic fiduciary function.

The lesson for plan fiduciaries is that they must ensure that they accurately communicate with plan members regarding plan benefits because they can be held liable for damages caused by misrepresentations of those benefits. In this case, MasterCard’s insurance enrollment forms caused the plan member to believe that she had elected life insurance coverage in an amount that was three times her annual salary, and as a result, she declined the opportunity to purchase additional life insurance coverage under the plan or through an outside broker.

McKennon Law Group specializes in representing ERISA plan members in claims against ERISA fiduciaries involving the misrepresentation of plan benefits. If you believe that your insurer or employee benefit plan has miscommunicated information about your coverage and that this has caused you to suffer damages, please contact us at (949) 387-9595 for a free consultation.

Los Angeles Daily Journal Publishes Article by Robert J. McKennon Entitled “9th Circuit Ruling Expands Relief Under ERISA for Breach of Fiduciary Duties”

In the September 23, 2021 issue of the Los Angeles Daily Journal, the Daily Journal published an article entitled “9th Circuit Ruling Expands Relief Under ERISA for Breach of Fiduciary Duties” 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, Warmenhoven v. NetApp, Inc. The case involved repeated representations by the plan sponsor that it would provide lifetime medical benefits to retirees and their eligible spouses. Despite these representations, the plan sponsor amended the plan to remove these lifetime benefits. The Ninth Circuit found that Warmenhoven was potentially entitled to equitable relief based on the plan sponsor’s breach of its fiduciary obligations. The ruling confirms that ERISA plan beneficiaries may be able to obtain equitable relief when a plan fiduciary misrepresents plan benefits. For a full view of the article, take a look at our blog, HERE.

Los Angeles Daily Journal Publishes Article on September 7, 2021 by Robert J. McKennon and Larry J. Caldwell Entitled “High Court Clarifies Life Insurance Grace Period Law”

In its September 7. 2021 issue, the Los Angeles Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon and Larry J. Caldwell. The article addresses McHugh v. Protective Life Insurance Co., a new case in which the California Supreme Court held that the grace and notice periods in Insurance Code Sections 10113.71 and 10113.72 apply to life insurance policies issued and delivered in California before January 1, 2013, as well as to life insurance policies issued, delivered, or renewed after January 1, 2023. McHugh provides significant new protections against loss of life insurance coverage for the policyholders and beneficiaries on all life insurance policies issued or delivered in California prior to or after January 1, 2013. For a full view of the article, take a look at our blog, here.

Los Angeles Daily Journal Publishes Article by Robert J. 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. The case involved repeated representations by the plan that retirement benefits would be $2000 per month when they were, in fact, only $807 per month. While 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 them 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. The ruling confirms that such claims against non-fiduciaries engaging in ministerial acts are not preempted by ERISA. The ruling provides an important additional avenue for relief for plan members who are harmed as the result of such repeated gross misrepresentations of plan benefits. For a full view of the article, take a look at our blog, here.

The Current Wave of “Long-Haul” COVID-19 Patients Likely Means an Overwhelmed Social Security Disability System and More Long-Term Disability Claims

Even after the current COVID-19 pandemic is declared to be over, many people – possibly up to 10% or even 15% – of COVID-19 patients may continue to display symptoms of the virus beyond the couple weeks for which most people experience them. With 29 million Americans already contracting COVID-19, the number of people in the U.S. who may suffer from the virus for an elongated span of time is substantial. According to a recent Los Angeles Times article by Michael Hiltzik, the emergence of long-haul COVID-19 cases during this pandemic is likely to result in a drastic increase of long-term disability claims and a corresponding delay in the processing of those claims.

The Social Security disability program currently serves about 9.6 million people, including 8.1 million disabled workers and 1.5 million dependents of those workers. Given the volume of long-term COVID-19 cases which have and continue to present themselves in the U.S., if even a fraction of those affected by COVID-19 attempt to secure disability benefits through Social Security, the system may be utterly overwhelmed. Even at its most efficient, anyone who has applied for benefits will likely describe the process as slow, confusing and frustrating, at the very least. For the system to be inundated with possibly several times as many applicants as the system normally sees may be catastrophic for those with no alternative financial support.

Compounding the problem, access to the already-overburdened system is currently even more limited than it was prior to the pandemic due to the closing of Social Security field offices. While a portion of applicants are eligible to apply for benefits online, the vast majority are not so eligible; and even those eligible for online applications often require assistance to even attempt to navigate through the daunting, complex, labyrinth-like application process.

While the thought of facing the Social Security application process may drive away those who have other means of support, for many Americans, the disability benefits provided through Social Security will be vital to their ability to obtain even the most basic of human needs. Thus, the prospect of having an application take several months or longer to even begin to be reviewed will not dissuade those in dire need from submitting applications. When the field offices begin to re-open, the net result may very well be a backup of applications for which the system could not possibly be prepared, given the glacial pace of the machine on even its best day in non-pandemic circumstances.

Those able to have their applications reviewed will still face an uphill battle: the symptoms of long-haul COVID-19, which include chronic fatigue, nonspecific pain, headaches and “brain fog” are difficult to quantify and do not show up in medical tests, resulting in many denials of benefits based on a lack of tangible evidence regardless of the amount of pain or fatigue applicants actually experience.

While the Social Security Administration claims it evaluates applications based on function over diagnosis and that workers unable to work should receive benefits. It has also created a database of common symptoms of long-haul COVID-19, which will provide some guidance for judges ruling on appeals of benefit denials. But getting to a point where a worker’s appeal is reviewed by a judge can already take months or years, even without a massive back-up of applications.

Only time will tell how well the Social Security Administration handles the issues presented by long-haul COVID-19. If the current state of the system is an indicator, we anticipate long-haul COVID-19 workers applying for disability benefits to experience as much fatigue and headache from the application process as they do from the virus itself.

We believe this issue is not confined to the Social Security Administration. Along with Social Security applications will likely come a corresponding increase of claims for short-term disability and long-term disability benefits by workers through their respective insurance providers. Additionally, we believe that with such an increase in applications, both the Social Security Administration and insurance providers will be motivated to find any justification for denying workers benefits due to the impending surge in applications and the inevitable financial impact payment of so many claims could have for them. Accordingly, we recommend that if you have an individual disability policy or a group disability policy obtained through your employer, you should review your policy terms to determine what benefits, if any, may be available in the case you contract COVID-19 and have a resulting disability.

The experienced attorneys at McKennon Law Group PC have a long and successful track record of representing disability claimants in all aspects of the claim process, from appealing the initial denial of benefits and, if necessary, through each stage of litigation. If you have been denied benefits under an employee benefit plan, contact our office today for a free initial consultation.

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