Big, bureaucratic insurance companies and plan administrators can often mistakenly calculate benefits or provide incorrect accountings to insureds.  These mistakes can become especially pronounced over time where insureds rely upon benefit accountings and representations of coverage to plan for their financial future and to decide whether to purchase insurance.  With the Supreme Court’s decision in CIGNA Corp. v. Amara, 563 U.S. 421 (2011), the Court made clear that the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty could be applied to hold insurance companies and plan administrators accountable in policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).  Despite that decision, it remains particularly difficult for an ERISA claimant to plead equitable estoppel.  However, the recent Second Circuit opinion, Sullivan-Mestecky v. Verizon Communications, Inc., — F.3d —-, 2020 WL 2820334 (2d. Cir. 2020), provides clarity and support for this relief such that we may see more equitable estoppel claims that are successful under ERISA.  The decision further supports theories of surcharge, reformation and breach of fiduciary duty in situations where a plan administrator mistakenly calculates benefits and produces values that are in excess of plan terms.

In Sullivan-Mestecky, the Second Circuit considered the doctrines of estoppel, surcharge, reformation and breach of fiduciary duties in relation to an ERISA employee life insurance policy under which the plan administrator had confirmed coverage of over $600,000 for years, only to realize upon claim that it had committed a clerical error and that the actual policy value should have been closer to $11,000.  Ultimately, the court found that the beneficiary plaintiff, Kristine Sullivan-Mestecky, had properly plead her Section 502(a)(3) claims for equitable remedies under ERISA, and it reversed the district court’s decision that had found otherwise.

The plaintiff’s mother, Kathleen Sullivan, was employed by the New York Telephone Company, a predecessor entity to Verizon, from 1970 to 1978, during which period her annual income was $18,600.  In June 2011, Sullivan contacted the Verizon Benefits Center, which at the time was administered on behalf of Verizon by Aon Hewitt Company.  Verizon responded by sending her a “Retirement Enrollment Worksheet,” stating that she was eligible for a life insurance option from the Verizon plan that provided coverage in the amount of $679,000 through Prudential Insurance Company of America.  Sullivan followed the instructions on the worksheet and enrolled in this coverage option.  After enrolling and designating her daughter Kristine Sullivan-Mestecky as the beneficiary of the life insurance policy, Sullivan received various mailings from Verizon that confirmed the existence and coverage amount of the policy.  Sullivan reached out to Verizon and “expressed her understanding, and even surprise, about the extent of her benefits.  However, Center representatives repeatedly confirmed the existence and coverage amount of the policy.”  Id. at *1-2.

Due to a calculation error, Aon Hewitt had coded Sullivan’s annual $18,600 income as her weekly income, but this mistake was not caught until after she died.  Sullivan-Mestecky, understanding herself to be the beneficiary of a generous life insurance policy, allowed her aging mother to live rent-free at her home, covered her mother’s living expenses and paid off her debts, and also took an extended unpaid absence to care for her mother before her death.  Of course, Sullivan did not feel that it was necessary to take out 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, Sullivan-Mestecky believed her life insurance policy was worth $582,600.  After her mother’s death, Sullivan-Mestecky submitted a claim to Prudential, but Prudential paid only $11,400, which amount it stated was the true value of the policy.

Sullivan-Mestecky disputed the non-payment of her full benefits, and Verizon responded that it “had mistakenly calculated Sullivan’s large coverage amount and thus provided Ms. Sullivan with incorrect information about her life insurance policy.”  Id.  Sullivan-Mestecky therefore filed suit alleging claims under Sections 502(a)(1)(B) and 502(a)(3) of ERISA.  On July 7, 2016, the district court granted Verizon’s and Prudential’s motion to dismiss the Section 502(a)(3) claim.  On May 16, 2018, the district court granted summary judgment to both defendants on the Section 502(a)(1)(B) claim.

On appeal, the Second Circuit discussed equitable remedies under Section 502(a)(3).  The court found that Sullivan-Mestecky could appropriately seek equitable relief under the Supreme Court’s decision in Amara and that her Section 502(a)(3) claim could proceed against Verizon.  The court found that Sullivan-Mestecky could proceed against Verizon under the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty.

In the Second Circuit, to make a claim for estoppel under Section 502(a)(3), a plaintiff must plausibly allege five elements: “(1) a promise, (2) reliance on that promise, (3) injury caused by the reliance, . . . (4) an injustice if the promise is not enforced, and (5) extraordinary circumstances.”  Weinreb v. Hosp. for Joint Diseases Orthopaedic Inst., 404 F.3d 167, 172-73 (2d. Cir. 2005).  The Sullivan-Mestecky court examined Verizon’s repeated oral assurances to Sullivan about the value of her life insurance policy in determining whether Sullivan-Mestecky had pled extraordinary circumstances, and it joined the Sixth Circuit in finding that estoppel could be plausibly pled as an appropriate equitable remedy by an ERISA plaintiff who is alleging gross negligence in the absence of intentional inducement.  The court found that Sullivan-Mestecky had plausibly pled the five elements required to make an estoppel claim against Verizon, because Verizon had sent Sullivan an enrollment worksheet that indicated that she was eligible for a life insurance policy valued at $679,700, a retirement of confirmation worksheet, a confirmation of coverage on demand letter, a beneficiary confirmation notice and a Form W-2, all of which represented that Verizon was providing Sullivan with a generous life insurance policy.  The court found that these written documents constituted and reflected the promise that Sullivan-Mestecky sought to enforce and that she had amply pled reliance on that promise.  Sullivan-Mestecky, 2020 WL 2820334, at *5.

In considering the extraordinary-circumstances requirement of ERISA estoppel, the court found that this had been met, based on Verizon’s conduct that it found had amounted to gross negligence.  Id. at *6.  The court wrote:

Verizon’s agents sent numerous mailings informing and assuring Sullivan that she was entitled to a life insurance policy in the amount of $679,000.  She relied on these representations only after diligently and repeatedly confirming their veracity and meaning with the Verizon Benefits Center.  On calls with the Verizon Benefits Center, Sullivan expressed her surprise at the stated value of her life insurance policy, effectively alerting Verizon to the fact that it may have miscalculated the value.  Not only did Sullivan draw attention to the high coverage figure, but an Aon Hewitt employee flagged the policy amount, writing in an email to a colleague that the amount seemed high and asking if the company’s software was somehow computing the wrong amount.  Another Aon Hewitt employee then responded, erroneously, that the amount was correct.  Instead of opening an investigation that likely would have uncovered the clerical error that led Sullivan and her daughter to believe that she had procured a generous life insurance policy, Verizon representatives reassured Sullivan that her beneficiary would receive, after the age discount, more than half a million dollars in death benefits.  It was only after Sullivan’s death, when the purchase of alternative life insurance to support Sullivan-Mestecky was impossible, that Verizon attempted to correct its clerical error.  In contravention of what it had repeatedly and unambiguously represented to Sullivan in writing and on calls, Verizon paid Sullivan-Mestecky a total of $11,400, less than two percent of what Verizon had promised.  Verizon’s acts of gross negligence present circumstances far “beyond the ordinary.”  The persistence and size of Verizon’s error, notwithstanding the ample inquiry notice provided by Sullivan’s calls to the Verizon Benefits Center, were “remarkable.”  We find that Sullivan-Mestecky satisfactorily pled extraordinary circumstances.  Id.

The Sullivan-Mestecky court also considered surcharge under Section 502(a)(3) and found that this was dependent upon the plaintiff’s allegation of fiduciary breach, specifically that Verizon failed to act with the 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 as ERISA requires.  29 U.S.C. § 1104(a)(1)(B).  The court found that she had plausibly pled that Verizon had breached its fiduciary duties through its gross negligence in its management of Sullivan’s life insurance policy by consistently failing to provide complete and accurate information about Sullivan’s status and options in response to her questions about plan terms and/or benefits.  Sullivan-Mestecky, 2020 WL 2820334, at *6.  The court found that this fiduciary breach was sufficient to support the equitable remedy of surcharge.

Further, the Sullivan-Mestecky court considered the equitable remedy of reformation under Amara, which is described as “[t]he power to reform contracts (as contrasted with the power to enforce contracts as written)” as “a traditional power of an equity court, not a court of law.”  The Supreme Court wrote that “equity would reform [a] contract, and enforce it, as reformed, if . . . mistake or fraud were shown.”  Amara, 563 U.S. at 440.  The Sullivan-Mestecky court wrote that it need not discuss mutual mistake because the plaintiff had adequately pled that Verizon had committed equitable fraud by misrepresenting that Sullivan was entitled to a life insurance policy in the amount of $679,000.  As a result of Verizon’s fraudulent representations, the court found that Sullivan had reasonably but mistakenly expected that her beneficiary would receive generous death benefits, and Sullivan-Mestecky thereby adequately pled circumstances that would permit the district court to equitably reform the terms of her plan with Verizon, sufficient to bind Verizon to its fraudulent representations.

Insurance companies and plan administrators typically try to excuse their mistakes that often have the effect of causing tremendous financial disruption for claimants who rely upon them for accurate accountings of their benefits and coverage.  As the Sullivan-Mestecky matter shows, an insured could potentially receive a windfall from an insurance company or plan administrator’s mistake, as long as certain elements are met.  This case will serve as a useful guidepost for equitable claims under ERISA.

If your insurance company or plan administrator has mishandled or denied your claim, please contact our firm for a free consultation.  We have extensive experience handling equitable claims under ERISA.