The US Court of Appeals for the Eleventh Circuit on June 28 held that an Employee Retirement Income Security Act plan beneficiary can bring a claim against a plan administrator or its agents under the act to recover life insurance benefits lost due to a breach of fiduciary duty.
The case, Gimeno v. NCHMD Inc., resolved an ERISA question of first impression.
In Gimeno, an employee elected supplemental life insurance coverage during open enrollment. In order to qualify for the supplemental coverage, evidence of insurability had to be sent to the human resources department. However, the HR department failed to send the employee the proper forms or notify him they were missing or necessary. Nonetheless, the employer deducted premiums for the supplemental coverage for three years and informed the employee that she had a total of $500,000 in life insurance coverage.
After the employee died, his spouse filed a claim with the plan’s insurance company. The insurance company denied the claim because the proper forms had never been completed. As a result, the spouse brought suit against the employer and the plan administrator under ERISA Section 502(a)(1)(B).
The employer and plan administrator moved to dismiss the suit, and the spouse conceded that an Section 502(a)(1)(B) claim for benefits was not proper and moved to amend the complaint to bring a claim for a breach of a fiduciary duty under ERISA Section 502(a)(3) for “appropriate equitable relief,” which the district court denied and became the subject of the appeal to the Eleventh Circuit.
‘Equitable Surcharge’ Under ERISA Section 502(a)(3)
The spouse argued that Section 502(a)(3) permitted equitable relief for fiduciary breaches, consistent with the US Supreme Court’s decision in CIGNA Corp. v. Amara (2011), which concluded that monetary relief is available in the form of an “equitable surcharge” against breaching fiduciaries.
The spouse persuaded the Eleventh Circuit that the employer’s failure to provide the forms to his spouse was a breach of fiduciary duty and that he should be able to bring a claim under Section 502(a)(3) to recover the $350,000 in supplemental life insurance coverage.
The Eleventh Circuit agreed with precedent established in the Second, Fourth, Seventh, Eighth, and Ninth Circuits. Prior to Amara, however, such cases were regularly dismissed by the courts.
Action Items for Employers Post-Gimeno
After Gimeno, employers and plan administrators in the Eleventh Circuit can immediately take action to avoid facing similar suits due to plan fiduciaries’ alleged inactions or misstatements. Though the apparent harm in Gimeno occurred during the enrollment process, its reasoning could be applied to statements, actions, or inactions that occur at any point during the plan administration process.
Employers should immediately perform the following actions.
To try and avoid a Gimeno-type lawsuit, employers should immediately perform an audit to confirm that all employees who elected and pay premiums for supplemental life insurance coverage have completed the necessary paperwork, including the evidence of insurability documentation.
This evaluation should include all current employees and may require confirmation that such paperwork has been received and accepted by the insurer. To the extent that an employee has not submitted the required documentation, the employer should send a monthly communication to the employee stating that such information is required before coverage becomes effective. If an employee fails to provide the required information, employers should consult their legal counsel and the insurer to decide if the supplemental coverage should be canceled and premiums returned to the employee.
With regard to other potential life insurance issues, employers and plan administrators should consider whether they are providing complete and accurate information to employees. This could include information about an employee’s ability to convert a policy, whether premium amounts being withheld match the coverage the employee elected, whether the enrollment website permits employees to sign up for coverage amounts that exceed their eligibility under the plan, and/or whether coverage continues during specified leave periods.
Other Benefit Audits
Because future plaintiffs may attempt to apply the reasoning of Gimeno to other benefit programs, employers and plan administrators should also consider other benefit plan audits to ensure they have been and continue to be properly administered. This should include reviewing plan documents, amendments, summary plan descriptions, agreements with service providers (including trustees, custodians and record keepers), enrollment records, the withholding and remission of contributions, loan and distribution processes.
Employers and plan administrators should also consider whether they have adequate annual training for human resources and other personnel who assist in plan administration. The training should include segments related to how to best manage communications with employees and avoid disseminating inaccurate or misleading information.
The law will continue to develop in the Eleventh Circuit under this new theory and plaintiffs like Gimeno may be awarded equitable surcharge as a remedy when relief is not otherwise available under Section 502(a)(1)(B).
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Todd Wozniak is a partner at Holland & Knight LLP and leader of the firm’s ERISA Litigation Team. He defends companies, fiduciaries, and public institutions throughout the US in ERISA, employee stock ownership plan, and other business disputes.
Cory Thomas is senior counsel at Holland & Knight LLP. He focuses his practice on the defense of employment matters, employee benefits, executive compensation, and ERISA litigation matters.