A new court case just sent a wake-up call – a $750,000 wake-up call – to employers about the importance of properly administering employee benefit plans.
The case (Erwood v. Life Ins. Company of North America, et. al.) involved an employee (Dr. Scott Erwood) suffering from a cancer. Dr. Erwood was covered by employer sponsored group life insurance. In the transition from FMLA leave to disabled/terminated status, the employer (WellStar Health Systems) failed to inform Dr. Erwood about the plan provisions governing conversion of the group life insurance policy to individual coverage. The policy lapsed, Dr. Erwood died without life insurance coverage, and Dr. Erwood’s spouse sought to recover the amount of the lost insurance coverage from WellStar.
Wellstar’s errors in this case may be worse than your typical administrative errors – but the legal principles articulated by the court can be extended to a broad range of administrative errors.
Some Key Facts
- While Dr. Erwood was on FMLA leave, the WellStar benefits representative reassured Dr. Erwood’s wife that coverage would remain the same and, although life insurance was discussed, conversion to individual coverage was not.
- The WellStar FMLA packet indicated that a conversion policy may be available, but the packet did not provide any information about conversion privileges or where to obtain such information.
- The administrative manual provided by the life insurance company (Life Ins. Co. of North America) explicitly stated that WellStar’s administrative responsibilities included an obligation to provide employees with a conversion brochure no more than 15 days after an employee terminates. The court found that WellStar did not follow these instructions because it believed the instruction was not “administratively feasible,” although wellstar admitted that completing the employer portion of the conversion form would take approximately 15 minutes.
- Conversion forms were available on the WellStar employee portal – but access to the portal was cut off on termination of employment.
Conclusions by the Court
In finding WellStar liable for the lost insurance coverage – $750,000 – the court articulated some conclusions of law that will extend beyond this case and will, undoubtedly, be cited by plaintiffs’ attorneys across America:
- “Once an ERISA beneficiary requests 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, even if that information comprises elements about which the beneficiary has not specifically inquired.”
- Fiduciary responsibility includes an obligation not to misinform and an “affirmative duty to inform when the trustee knows that silence might be harmful.”
- WellStar’s failure to send the conversion brochure, as required by the administrative manual, represented a failure “to act solely in the interests of participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries. In effect, the administrative failure was a fiduciary breach.
- References to the existence of conversion rights (in the FMLA packet and the WellStar SPD) were inadequate because they did not provide (a “mentally compromised” employee) with materials necessary to convert the policy, where to access necessary materials, and where to send such materials.
There are many lessons that employers can learn from this case. Perhaps the two most important lessons are that:
- Employers must truly understand – and implement – their administrative responsibilities. WellStar was given specific administrative tasks – and failed to carry them out.
- Providing information to an employee requires applying knowledge of the employee’s situation and providing a complete response. In effect, providing information in response to an employee’s inquiry is not a mere formality; it must be done in a thoughtful manner.
No doubt, you will be hearing more about this case. The decision was issued by a federal district court in western Pennsylvania – so it is subject to appeal and is not binding precedent on other courts. Nonetheless, if a wake-up call in a hotel room is loud enough, it will be heard in adjoining rooms. The same is true for court cases.