If you sponsor your employees’ life insurance plan, be careful or you might wind up paying the claim.
Lewis v. Kratos Defense and Security Solutions, Inc., et al. Case 1-12-cv-01012-TSE-TCB (E.D. Va. June 11, 2013). The Plaintiff in this case, the widow of the late Jimmy Lewis, brought this suit to recover benefits under her late husband’s employer-sponsored life insurance plan. Mr. Lewis had been employed by the Defendant Kratos at the time of his death and the Plaintiff was the named beneficiary under the policy. The other Defendant, Life Insurance Company of America (“LINA”), had issued the policy. During Mr. Lewis’s life, Kratos had told him that he was covered by life insurance and deducted money from his paycheck for premiums. After Mr. Lewis died, LINA determined that he had been ineligible for the life insurance policy and denied the claim for benefits. The Plaintiff claimed that Kratos had breached its duty to Mr. Lewis when, knowing that Mr. Lewis was not eligible for enrollment in the plan, it failed to tell Mr. Lewis that he was ineligible, enrolled him in the plan, deducted premiums from his paycheck, and forwarded the premiums to LINA. The Plaintiff also claimed that LINA – which was responsible for claim determinations under the plan – had breached its duties or abused its discretion in determining that Mr. Lewis did not qualify for benefits under the plan. Each side filed motions for summary judgment on these issues. The Court found that the employer was liable, but the insurer was not. How the Court got to that result takes some explanation of ERISA, the Employee Retirement Income Security Act of 1974, and how ERISA treats fiduciaries, the people responsible for administering an employee benefit plan.
In 2006, Mr. Lewis had started working with a company named SYS Technologies, after SYS had merged with his former employer. SYS had enrolled Mr. Lewis in life and disability insurance policies issued by the Principal Financial Group. In February 2008, SYS and Kratos agreed to merge. In April 2008, Mr. Lewis was diagnosed with a brain tumor but, despite the diagnosis, he continued to work full-time. Following the merger, the former SYS employees, including Mr. Lewis, remained enrolled in the Principal life insurance plan, but were advised that they would likely be switched to Kratos’s plan at some point in the future.
In December 2008, Mr. Lewis stopped working full time. He went down to 16 hours a week and began receiving short term disability benefits under the Principal plan. In March 2009, Mr. Lewis started receiving long term disability benefits, also under the Principal plan.
In May 2009, Kratos announced that it would transfer the former SYS employees, including Mr. Lewis, to the benefits plan that it offered its current employees and, in June 2009, offered an open enrollment period. Kratos offered two types on life insurance to its employees: a group life plan paid for by Kratos and a voluntary term life plan paid for by employees themselves through payroll deductions. Employees who enrolled in the voluntary term life plan during the open enrollment period did not have to undergo medical screening and therefore were eligible to enroll even with a pre-existing medical condition. The plan explicitly stated, however, that to be eligible to enroll an employee had to be a full-time former SYS employee who regularly worked at least 30 hours a week.
Mr. Lewis sent an email to Kratos’s HR department with several questions about his eligibility for the voluntary term life plan and whether it took into account his pre-existing conditions. HR did not answer him directly, but forwarded the email to LINA, which responded to Kratos HR but not to Mr. Lewis. LINA’s answer noted that Mr. Lewis could apply for the voluntary term life insurance, but that his coverage would not start until he was off of long term disability and urged that Mr. Lewis should check with Principal Financial Group to see about continuing coverage under that plan. The Court found no evidence that Kratos HR had ever forwarded this answer to Mr. Lewis.
Despite the fact that Mr. Lewis had only been working 16 hours a week since December 2008, Kratos continued to categorize him as a full time employee. Kratos later described this categorization as an inadvertent mistake. Plaintiff contended that this categorization led her and Mr. Lewis to believe that Kratos considered the combination of 16 hours a week plus long term disability to be the equivalent of full time employment. The Court noted that, whether or not Kratos had made a mistake in classifying Mr. Lewis as full time, it never corrected that mistake and, instead, enrolled Mr. Lewis in the voluntary term life plan, deducted the premiums from Mr. Lewis’s pay, and paid the premiums to LINA.
Kratos took additional steps that led the Plaintiff and Mr. Lewis to believe that he was enrolled in the voluntary term life plan. In June 2009, Mr. Lewis emailed his voluntary term life insurance application to Ms. Jung. He wrote, “Completed VTL application attached for your review. I am assuming that I do not need to complete the Evidence of Insurability Form?’ Kratos’s HR office responded, “Wonderful. That is correct – you are all set.” When Mr. Lewis later requested a copy of the policy, Kratos advised that he should simply use his enrollment form as proof of coverage. On several occasions between June 2009 and Mr. Lewis’s death in August 2010, he received additional electronic confirmation from the company that he was enrolled in the voluntary term life plan.
Following Mr. Lewis’s death, Plaintiff made a claim for benefits that LINA denied because Mr. Lewis had not met the plan’s requirement that he work 30 hours a week. Kratos pressed the claim on the Plaintiff’s behalf, and hired a consultant to advocate on the Plaintiff’s behalf, but LINA declined to change its decision.
The Court noted that with respect to the life insurance plan, Kratos and LINA had significantly different duties. The plan provided that Kratos was the Plan Sponsor and the Plan Administrator, and that as the Plan Administrator, Kratos had complete authority “to control and manage the operation and administration of the Plan.” The plan prescribed a more limited duty for LINA. Specifically, LINA was “the named fiduciary for adjudicating claims for benefits under the Plan, and for deciding any appeals of denied claims.” To that end, the plan provided that LINA “shall have the authority in its discretion to interpret the terms of the Plan, to decide questions of eligibility for coverage or benefits under the Plan, and to make any related findings of fact.” In accordance with the plan’s written terms, and in practice, Kratos determined which employees were eligible to participate in the plan, enrolled employees in the plan, and either paid the employees’ premiums or withheld the premiums from employees’ paychecks. On the other hand, LINA’s authority under the plan was limited to allowing or denying claims and construing the terms of the plan for that purpose.
There was no question that both Kratos and LINA were fiduciaries of the plan for purposes of ERISA. As fiduciaries, both Kratos and LINA are obligated to act “solely in the interest of the participants and beneficiaries” and “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 in the conduct of an enterprise of a like character and with like aims.” ERISA, however, makes it clear that a fiduciary may have a duty only with respect to certain, but not all, aspects of plan administration. Specifically, ERISA states that a person is a fiduciary with respect to a plan only to the extent that he exercises discretionary control, discretionary authority, or discretionary responsibility in the management or administration of the plan.
The Court looked to other, similar cases in which the employer and plan administrator had delegated its discretion over the handling and adjudication of claims to the insurance company, but had retained exclusive and absolute discretion over the determination of employee coverage and premium payments. In cases in which the employer made eligibility determinations that were not verified by the insurance company, courts have concluded that the employer was the ultimate fiduciary with regard to employee coverage. Moreover, courts have held that an employer who pays an employee’s insurance premiums has made a determination that the employee is covered.
Based on this precedent, the Court found that, although LINA was given the authority to “interpret the terms of the Plan, to decide questions of eligibility tor coverage or benefits under the Plan, and to make any related findings of fact,” Kratos had the exclusive authority “to control and manage the operation and the administration of the plan,” including making eligibility determinations, enrolling participants in the plan, and collecting their premiums. The Court concluded that Kratos was the ultimate fiduciary with regard to enrollment, and LINA had no fiduciary duty with respect to enrollment.
Because Kratos had a fiduciary duty to Mr. Lewis and other employees to make these enrollment determinations, the Court said that ERISA required Kratos to execute the duty “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 in the conduct of an enterprise of a like character and with like aims.” Kratos, however, failed in carrying out this duty, because it erroneously allowed Mr. Lewis to enroll in the plan, encouraged him to believe that he was covered by the plan, and deducted premiums from his salary to pay for the plan. The Court ruled in favor of the Plaintiff on her claim that Kratos had breached its duties.
Applying the same logic, the Court held that LINA had not breached its duties. LINA, in contrast to Kratos, had a different role under the plan, which specifically provided that LINA’s role was limited to adjudicating claims made under the plan and interpreting the terms of the plan. LINA had no duty under the plan to review the list of Kratos employees enrolled in the plan to ensure that they are eligible for enrollment. LINA also had no duty under the plan to communicate directly with employees to alert them that they were not eligible to enroll under the terms of the plan. No duty translates into no breach of duty.
The Plaintiff had also claimed that LINA abused its discretion in denying the claim. When an ERISA benefits plan vests the plan administrator with discretionary authority, a court reviews the administrator’s determinations under the plan for abuse of discretion. Under this standard, a court should affirm the plan administrator’s determination if the determination is the result of a deliberate, principled reasoning process and is supported by substantial evidence, even if the court would reach a different decision independently. In this case, the Plaintiff could not show that LINA had not considered evidence or that the process by which LINA reached its decision was not rational. What is more, the Court concurred with LINA’s decision. An undisputed fact was that the plan explicitly stated that an employee must be working 30 hours per week in order to receive benefits under the plan, and Mr. Lewis did not work 30 hours per week at any time that the LINA plan covered legacy SYS employees. Accordingly, the Court would not disturb LINA’s decision.
The Court set the stage for an award of damages and attorney’s fees to the Plaintiff from the Defendant Kratos, but left for another hearing the question of how those damages would be calculated. Plaintiff requested an award equal to the amount that would be paid under the insurance plan, plus her attorney’s fees. Plaintiff and Kratos, however, settled the case before that hearing on damages and fees ever took place. The terms of the settlement are not part of the Court’s record.
(As something of a postscript, LINA — which had prevailed in its claim that it was not liable to the Plaintiff — sought an award of its attorneys’ fees from the Plaintiff. The Court denied that motion.)