Seller Beware: Eighth Circuit Finds Insurer Potentially Liable for Enrollment Mistakes of Employer

February 27, 2015

Author: Joshua Bachrach

In Silva v. Metropolitan Life Insurance Company, 762 F.3d 711 (8th Cir. 2014), the Eighth Circuit joined a number of other circuits in recognizing equitable remedies of reformation and surcharge based on a breach of fiduciary duty under ERISA. The claim for supplemental life insurance benefits under the employer’s group policy was denied because the employee failed to submit evidence of insurability as required under the plan. However, in concluding that the plan insurer breached its fiduciary duties, the court relied primarily on the actions and omissions of the employer.

Factually, Silva applied late for supplemental life insurance under his employer’s benefit plan. Under the plan, evidence of insurability satisfactory to MetLife was required because of the late enrollment, a feature common to many group life policies. After electing the supplemental life insurance, the coverage appeared on Silva’s benefits election package on the employer’s intranet even though he never submitted evidence of insurability. In addition, the employer withheld premiums from the employee’s payroll.

According to the employer, Silva should have received a prompt when he selected the supplemental life insurance notifying him that he needed to obtain a Statement of Health form and complete it. The employer would then send the completed form to MetLife. Other than the employer’s statement to this effect, no evidence of this online prompt was presented. More problematic, after the claim was submitted it was learned that 200 other employees who signed up for supplemental life insurance also did not submit Statement of Health forms.

The district court ruled in favor of defendants on the claim for benefits under section 502(a)(1)(B) of ERISA, which permits a participant to sue to recover benefits due under the terms of the plan. The plaintiff tried to amend the complaint to assert a claim for breach of fiduciary duty; however, the court refused the request based on its conclusion that an award of benefits as sought for relief under section 502(a)(3) was not equitable as required under the statute. The Eighth Circuit reversed on both points.

Eighth Circuit Decision
With regard to the claim for benefits under section 502(a)(1)(B), the Eighth Circuit found outstanding issues of material fact that prevented it from deciding whether MetLife abused its discretion. Specifically, the court was critical of the lack of a description in the plan of what evidence of insurability was satisfactory to MetLife and the failure of the plan to reference the Statement of Health form that MetLife required. There is a dissenting opinion as to the dismissal of this claim only. According to the dissenting judge, the claim must fail “under the terms of the plan” because this plan stated that the life insurance only went into effect when evidence of insurability was accepted by MetLife, which did not occur.

Each of the appellate judges agreed that the plaintiff should be allowed to pursue claims for equitable relief under 502(a)(3) for breach of fiduciary duty. The court mentioned several times the fact that approximately 200 other employees were “registered” even though they did not submit Statement of Health forms. According to the court, this fact “suggest[ed] that there were some issues of notice regarding if and how Defendants requested this information.”

The Eighth Circuit disagreed with the district court over whether there was an available remedy for the alleged breaches. Noting that the Supreme Court “changed the availability of relief and the scope of that relief” in CIGNA Corp. v. Amara, __ U.S. __, 131 S. Ct. 1866 (2011), the appellate court concluded that remedies were available under ERISA. First, the court held that the plaintiff could pursue a claim for equitable surcharge against the plan administrator. Supporting such a claim in the opinion of the court was a breach of fiduciary duty by failing to provide the applicant with a summary plan description that may have explained the Statement of Health requirement.

Turning to MetLife, the court concluded that the plaintiff should be allowed to amend the complaint to include claims for reformation and estoppel. The court held that MetLife’s collection of premiums “coupled with the facts described above” may have reasonably induced the employee into believing he was insured. In this section, the court again emphasized the fact that premiums were accepted for 200 others who did not provide evidence of insurability. Finally, the court held that at the early pleading stage, the plaintiff could simultaneously seek relief under 502(a)(1)(B) and 502(a)(3) of ERISA because it was difficult to determine whether the claims were duplicative.

A few of the court’s conclusions in Silva are troubling. First, the court seemed to hold MetLife responsible for the employer’s failure to provide a summary plan description. It is the responsibility of the plan administrator alone to prepare and disseminate a summary plan description. Second, it was also the employer’s responsibility to properly enroll individuals. If the employer did so improperly, this should not be a basis for imposing liability on MetLife. While it sounds impressive that 200 people were allowed to enroll without evidence of insurability, it is meaningless to impose liability on the insurer if MetLife had no way of knowing until after the claim in this case was made. Likewise, the fact that the employer remitted premiums to MetLife is unimportant without additional information. Was billing self-administered by the employer? If MetLife simply received a lump sum of premiums without explanation as to the individuals or amounts being covered, it means nothing.

The Eighth Circuit simply allowed the plaintiff to pursue the claims for equitable relief. Whether those claims are supported is an entirely different question. Plan insurers confronted with these types of claims need to document the claim file with facts establishing that both enrollment and billing are self-administered by the employer where applicable.

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