Most employee benefits are governed by a federal law called the Employee Retirement Income Security Act of 1974 (“ERISA”), including life insurance, disability insurance, accidental death insurance, health insurance, pensions, and other benefits offered by employers to their employees through their employee benefit plans.  Sometimes the plan’s sponsor (which is usually the employer), plan’s administrator, and/or an insurance company (if the plan’s benefits are funded by an insurance policy), mistakenly charge, deduct from the employee’s paycheck, and accept his premiums for insurance of which he or his family is ineligible under the plan’s terms.  This can lead to dire financial results if the employee relies to his detriment on the fiduciary’s mistake.

For example, a prevalent practice exists in the group life insurance industry where the employers charge, and the insurers accept, premiums from their plan participants without verifying their eligibility for the coverage (until after the participant dies and his or her beneficiary makes a claim).  Then, the insurer investigates the claim and sometimes determines that the employee had been paying premiums, often for years, for coverage for which he or his family members were ineligible.  The insurer thus denies the claim based on ineligibility, and it returns the employee’s mistakenly collected insurance premiums without paying the valuable life insurance claim.  The glaring problem in this all-too-common scenario is that, by then, it is too late for the employee to secure alternate life insurance coverage.  His loved one is already dead.  The Department of Labor recently condemned “This egregious practice” because it “left grieving families without the life insurance for which their loved ones had paid.”  It vowed to “take appropriate action against any insurance company that collects regular premium payments from plan participants, and later plays a game of ‘gotcha’ to wrongfully deny benefits based on technicalities like ‘insurability’ after the participant passes away.”  See DOL News Release, 4/19/23, found at https://www.dol.gov/newsroom/releases/ebsa/ebsa20230419.

The Department of Labor’s policy statement begs the question:  Is an ERISA plan sponsor (employer) or administrator liable when they mistakenly collect premiums from an ineligible plan participant?  That is a complicated question under ERISA fiduciary duty law.  Until the very recent decision from the Ninth Circuit Court of Appeals in Keith McIver v. Metropolitan Life Insurance Company, et al., No. 23-55306, 2024 WL 4144075 (9th Cir. Sept. 11, 2024), the answer was unclear.  The courts had usually found that when an ERISA plan entity made a mistake in calculating and collecting premiums due, without more, it engaged in a “ministerial” function, not a fiduciary one, because no discretion or judgment was required.  So held the Ninth Circuit of Appeals in Bafford v. Northrup Grumman Corp., 994 F.3d 1020 (9th Cir. 2021), but in a slightly different context (pension benefit calculation errors).  Going forward, however, the answer is a resounding yes in certain circumstances.  That is, thanks to the McIver decision, employers, plan sponsors, and plan administrators who mistakenly collect premiums from an employee perform a fiduciary function and breach fiduciary duties if: (1) The plan documents ascribe to them the duty to make eligibility decisions (or those duties are delegated to them and they perform them in practice); (2) They fail to investigate the plan participant’s eligibility within a reasonable time of accepting his premiums; and (3) When a dependent participant that was once eligible becomes ineligible based on her divorce (or other dependent status change), the employee must provide sufficient notice of their divorce in accord with the plan documents to trigger the employer’s, sponsor’s, and administrator’s fiduciary duties.

In McIver, the McKennon Law Group PC obtained a favorable decision for one of its ERISA plan life insurance clients.  The Ninth Circuit clarified and drastically expanded the scope of ERISA plan sponsor’s/employer’s and administrator’s fiduciary duty liability in these ways, i.e., when they mistakenly collect dependent life insurance premiums for an ineligible plan participant.  It did so without any representation by the plan sponsor, administrator, or insurer to the employee or his family that their dependent life insurance coverage was in place (besides their continued premium deductions after notice of divorce).  That is a fair result because ERISA plan sponsors/employers, administrators, and insurers are often fiduciaries of plan participants and their beneficiaries.  As fiduciaries, they have a duty to act solely in the interest of the plan’s participants and beneficiaries for the exclusive purpose of providing them their benefits, and with care, skill, prudence, and diligence.  See 29 U.S.C. § 1104(a)(1).  That duty includes a duty to investigate suspicions that one has concerning the plan.  See McIver, 2024 WL 4144075, at * 2, citing Barker v. Am. Mobile Power Corp., 64 F.3d 1397, 1403 (9th Cir. 1995).  With these very high duties of loyalty and prudence and to investigate suspicions, why would a court allow a plan sponsor or administrator to mistakenly collect premiums for an ineligible plan participant (like a former dependent of the employee in McIver’s case), without investigating her eligibility within a reasonable time of accepting the premiums, and after receiving notice of the employee’s divorce from his former spouse, to the employee’s financial detriment with no consequence (especially because an employee’s divorce for most ERISA plans makes his former spouse ineligible for ongoing dependent life insurance coverage because she is no longer a dependent).

McIver is significant because it changed the landscape of ERISA fiduciary duty law on these types of issues in a favorable way for ERISA plan participants.  Our client, Keith McIver (“Keith”), worked for The Boeing Company for 31 years.  Early on, he enrolled in Boeing’s group ERISA life insurance plan.  As a Boeing employee, he was eligible to obtain life insurance for himself and his dependents, including his legal spouse, Bonnie McIver (“Bonnie”).  He enrolled and paid Boeing insurance premiums for decades to cover him and his then wife.  Boeing deducted dependent premiums from his paycheck biweekly for many years before he divorced, and for several months after he divorced.  Unknown to him, Bonnie’s insurance terminated when they divorced because, under the life insurance plan’s terms, only his “legal spouse” qualified for Boeing’s dependent life insurance coverage, not an ex-wife.  However, because Boeing continued to deduct the premiums from his paycheck for 11 months after he notified Boeing and its plan administrator, Employee Benefits Plan Committee (“EBPC”), of his divorce, he mistakenly thought Bonnie was still covered.  He thought Boeing would stop accepting his premiums if his ex-wife was not entitled to the coverage.

Boeing, and the insurance company that funded the plan’s benefits, Metropolitan Life Insurance Company (“MetLife”), did not investigate Bonnie’s ongoing eligibility for the insurance until several months after Keith had notified Boeing and EBPC of their divorce.  They waited for several months to investigate her continued eligibility, until after she died, and after he had made a claim for dependent life insurance benefits.  In the interim, Boeing continued to charge and deduct his premiums for the dependent coverage (incorrectly).  Then, when it was too late for Keith to obtain alternative life insurance on Bonnie, after she had died, MetLife told Keith that Bonnie’s coverage had ended when they divorced and, therefore, MetLife would not pay his dependent life insurance claim as her beneficiary.

McKennon Law Group PC filed a lawsuit against Boeing and EBPC for breach of fiduciary duty on Keith’s behalf.  We alleged in the lawsuit that they owed our client fiduciary duties of prudence and loyalty and to investigate his ex-wife’s continued, post-divorce eligibility (within a reasonably proximate time after Boeing took his premiums for the dependent coverage and he notified them of his divorce).  That Boeing and EBPC breached these fiduciary duties when Boeing, after our client notified both of them of his divorce, continued to charge and collect premiums from him for several months for his ex-wife’s dependent life insurance coverage, that had terminated on divorce, without timely investigating her eligibility.  That because EBPC had broad duties assigned to it under the group life insurance plan documents to make eligibility decisions (which EBPC assigned to Boeing), including after a marital status change, they had a duty to prudently and timely investigate her continued eligibility, reasonably proximate to the time that they received notice of his divorce and took his post-divorce notice premiums.  But Boeing and EBPC did not timely investigate or decide Bonnie’s ongoing eligibility (despite these plan duties), after Keith notified them of his divorce in accord with the plan documents.  Instead, Boeing mistakenly charged him dependent premiums for several months without investigating whether Bonnie was still eligible (when she was not eligible), in breach of the Boeing defendants’ fiduciary duties of prudence, loyalty, and to investigate her continued eligibility.

Boeing and EBPC filed a motion to dismiss the lawsuit.  They argued that they did not owe or breach any fiduciary duties to Keith (by mistakenly collecting his dependent life insurance premiums).  Specifically, that Boeing performed a ministerial not fiduciary function that involved no judgment or discretion when its payroll department mistakenly collected his premiums for coverage for which he had enrolled.  We opposed Boeing’s and EBPC’s motion to dismiss, but the federal district court granted it and dismissed the case with prejudice.  The court (and the Boeing defendants) incorrectly relied on the Ninth Circuit Court of Appeals’ decision in Bafford, 994 F.3d 1020.  Bafford held that an ERISA plan benefit calculation mistake that involves no discretion is not a fiduciary function.  The court analogized the Boeing payroll department’s conduct to Bafford.  It held that the Boeing defendants did not use any discretion when Boeing mistakenly charged Keith premiums for Bonnie’s dependent coverage and, therefore, did not owe or breach any fiduciary duties to him.  That collecting his post-divorce notice premiums was just a ministerial mistake, not a fiduciary function.

We appealed the adverse trial court’s decision to the Ninth Circuit on Keith’s behalf, and we won the appeal.  The employer Boeing and its plan administrator EBPC again argued that Bafford controlled the outcome of the case because their error in collecting premiums was a ministerial mistake.  The Ninth Circuit rejected this argument, emphasizing that because Boeing and EBPC had assigned or delegated duties under the plan to determine eligibility, and because Keith sent them his Qualified Domestic Relations Order (“QDRO”) that stated he was divorced, they performed fiduciary functions and breached fiduciary duties when they mistakenly collected Keith’s premiums for his dependent Bonnie’s coverage (without first investigating and deciding her continued eligibility within a reasonable time after they received his post-divorce notice premiums).  The court clarified that Bafford did not apply to Keith’s case, and it held that the operative Complaint plausibly alleged that the employer and plan administrator performed fiduciary functions and breached fiduciary duties under these circumstances.

In short, the Ninth Circuit agreed with Keith’s position that it just is not fair for an ERISA plan entity, who has duties assigned to it in the plan documents to decide eligibility, to mistakenly collect insurance premiums from an ineligible plan participant without timely deciding whether or not she is eligible.  That an employer, sponsor, or administrator of a group life insurance plan with plan eligibility decision duties cannot continue to charge premiums for dependent life insurance coverage (that had terminated on divorce), for months after they received notice of the divorce, without making an eligibility decision.  The appellate court agreed that such plan fiduciaries act inequitably and breach fiduciary duties of prudence, loyalty, and to timely investigate when they wait to decide eligibility until after the insured dies and the beneficiary makes a claim for her life insurance benefits.  And only then say, when it is too late to secure alternate life insurance, “sorry,” you don’t have the coverage that you have been paying premiums to us for months.  But here are your ill-gotten premiums back.

The appellate court reversed the district court’s Federal Rules of Civil Procedure 12(b)(6) dismissal of the case and remanded it back to that court to decide at trial whether Keith can prove the allegations he made in his operative Complaint.  Specifically, the Ninth Circuit Court of Appeals found:

• If the facts alleged in the Second Amended Complaint are true, Boeing and EBPC performed fiduciary functions when they continued to charge, deduct, and collect dependent life insurance premiums from Keith after they received notice via his QDRO stating that he was divorced.

• If the facts alleged in the Second Amended Complaint are true, Boeing and EBPC breached fiduciary duties owed to Keith by failing to investigate Bonnie’s ongoing eligibility for dependent life insurance coverage after he submitted, and they received, notice via the QDRO stating that they were divorced.

• Therefore, Keith’s Second Amended Complaint allegations are sufficient to defeat Boeing’s and EBPC’s motion to dismiss Keith’s breach of fiduciary duty claim against them.  And, therefore, the appellate court reversed the district court’s decision to dismiss them from the lawsuit.

Key Take Away

The Ninth Circuit McIver Court clarified and expanded ERISA plan participant’s rights, as well as employer’s, plan sponsor’s, and plan administrator’s fiduciary duties (which will also apply to group life insurers under the correct circumstances), particularly in the context of premium collection errors for dependent life insurance after notice of a divorce.  ERISA fiduciary duty law is quite complex.  Whether an employer, plan sponsor, plan administrator, or insurer performed a fiduciary function in a specific case requires careful analysis by an expert.