Group life insurance is perhaps the most common of the benefits provided by employers who sponsor employee benefit programs. Many times employees are given the opportunity to purchase supplemental coverage in addition to the employer-provided basic benefit.
Administering a group life insurance plan is easy – right? It's just a matter of enrolling the employee, obtaining a beneficiary designation form, calculating the premium, and remitting the premium to the insurer. What can go wrong?
Occasionally, things do go wrong, and employers find themselves having to pay a life insurance benefit from their own coffers when a beneficiary pushes back against a claim denial. Following are three examples of situations where this could happen.
1. Participant Fails to Provide Evidence of Insurability
Most life insurance policies have a "guaranteed issue" level of coverage. If an employee enrolls for coverage exceeding the guaranteed level, he/she typically must provide evidence of insurability (EOI). If the employer is responsible for monitoring whether EOI forms are required under a self-administration service model and fails to provide the necessary form to the employee, but collects premiums and indicates that the coverage is in effect, the employer can become responsible for payment of the benefit.
An example of this situation occurred in Van Loo v. Cajun Operating Co., 703 Fed. Appx. 388 (6th Cir. 2017). During open enrollment in 2008, Donna Van Loo enrolled for supplemental life in an amount that required EOI. There was no evidence that the EOI form was furnished to Donna by her employer or the insurer when she first enrolled for coverage that exceeded the guaranteed issue level. Donna increased her supplemental life insurance during subsequent open enrollment periods. Her elections were confirmed, and she paid the premiums for the supplemental coverage. In 2013, Donna began a disability leave. As she was no longer receiving a paycheck, the employer contacted her, and she mailed the premium payments to the employer to maintain her coverage.
Donna passed away in 2013. Upon discovering the lack of an EOI form, the insurer paid a life insurance benefit of $300,000 but denied $314,000 in benefits elected by Donna that exceeded the guaranteed issue amount.
The insurer had no contractual liability as it complied with the terms of the policy. The employer was found to have breached its fiduciary duty by making material misrepresentations to Donna that she was covered for the full $614,000 death benefit and accepting premium payments for the full amount of the supplemental coverage that she elected. Donna relied on the employer's misrepresentations to her detriment – believing that she was covered, giving up the opportunity to seek other coverage. The court concluded that the employer was responsible for paying the life insurance benefit of $314,000.
- Audit life insurance elections every open enrollment and for every new hire.
- Send EOI forms as necessary and/or direct the insurer to do so.
- Monitor the insurer's approval and implement the increased level of coverage after approval is received.
- Check that open enrollment confirmations do not lead the employee to believe that the life insurance benefit covers him/her before EOI is approved by the insurer.
2. Failure to Notify Former Employee of the Right to Convert
If an employee terminates employment, he/she generally has 30–31 days to convert or "port" their group life insurance benefit to individual coverage. In Vest v. Resolute FP US Inc., 2018 WL 4905751 (6th Cir.), the Sixth Circuit Court of Appeals considered whether an employer has an affirmative obligation to notify a former employee of his conversion rights.
Arthur Vest had basic life insurance and supplement insurance for $300,000. He began a disability leave in September 2015. Under the life insurance policy, basic benefits continued while on disability leave, but supplemental benefits ended unless converted. The supplemental coverage terminated on May 18, 2016, and the employer did not notify Arthur of his right to convert or port before he passed away in October 2016. The life insurance carrier paid the basic benefit but not the supplemental benefit.
The court found that Arthur's beneficiary did not plead sufficient evidence of a breach of fiduciary duty because ERISA does not require the employer to affirmatively disclose conversion rights to a former employee. There was no evidence that Arthur or his family members asked about life insurance benefits or conversion rights. Even though Arthur was on an LTD leave, the employer was not obligated to assume that life insurance benefits were important to him.
Although this case was a "win" for the employer, it could have had a different outcome if the participant or his family had asked about benefit continuation during the disability leave. Indeed, the dissent pointed to a Benefit Summary Report dated May 23, 2016 provided to Arthur that listed the life insurance benefit but did not indicate that it had to be converted within 31 days to continue in effect. The dissent would have found this to be a material omission for the purpose of pleading a fiduciary breach claim.
- Ensure participants receive a summary plan description and life insurance certificate, which includes an explanation of the conversion rules.
- Include a conversion form, or instructions on obtaining a conversion form, in a participant's termination packet.
- Provide conversion information to other participants who are losing coverage and may have conversion rights, such as those at the end of a disability continuation period.
3. Promising Coverage will Continue Beyond the Policy Terms
Employees may experience an unexpected illness or injury. An employer, believing it is doing the right thing, may tell the employee not to worry; the employer will make sure the life insurance stays in effect. Of course, the life insurance carrier will deny the benefit if it is not obligated to pay it under the terms of the policy.
For example, see McBean v. United of Omaha Life Insurance Co. and By Referral Only, Inc., Case No. 18cv16MMA (JLB) (S.D. Cal. Apr. 5, 2019). The employee was diagnosed with breast cancer and began a disability leave. Under the policy, basic benefits continued for up to 12 months, and supplemental benefits ended at the end of the month in which the leave began. The managing director of the employer told the employee that he would continue to pay the premiums to make sure she continued to maintain her life insurance.
Upon the employee's death, the insurer denied all benefits as the coverage had lapsed under the policy terms and refunded the premium payments to the employer.
The court found no liability on the part of the insurer but concluded that the employer was responsible for the full life insurance benefit of $143,550 due to its breach of fiduciary duty. As in the Van Loo case discussed above, the employer, acting in its fiduciary capacity, made material misrepresentations to the employee that her coverage would remain in effect. Due to these statements, the employee did not make any effort to exercise her conversion right or obtain other coverage. She reasonably relied on the misstatements to her detriment.
- Be familiar with the terms of the life insurance policy.
- Do not make promises that coverage will remain in effect beyond the express terms of the policy.
- If an employer wants to assist a disabled employee, it could consider paying the premiums on a conversion policy.
Group life insurance plans provide a valuable benefit and generally are not difficult to administer. However, things can go wrong, as illustrated by these cases. The key is to read and understand the policy and your responsibilities as an employer, and never promise or represent that a benefit that is not within the four corners of the policy will be provided. If policy language is unclear and unsure how to proceed, do not make assumptions; contact your insurance carrier for clarification and seek assistance from experienced employee benefits legal counsel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.