Shields v. United of Omaha Life Ins. Co., No. 21-1290, __ F.3d __, 2022 WL 4864522 (1st Cir. Oct. 4, 2022) (Before Circuit Judges Barron, Selya, and Gelpí)
n May of this year, Your ERISA Watch analyzed Skelton v. Radisson Hotel Bloomington, in which the Eighth Circuit discussed the system by which employers and insurers divide the duties of administering employee life insurance coverage. Skelton demonstrated how that system often fails, to the detriment of employees and their loved ones. In particular, the Eighth Circuit described the arrangement in Skelton as “a haphazard system of ships passing in the night.”
Until that system changes, we will see more cases like this week’s notable decision, Shields v. United of Omaha, which has a similar fact pattern and a similar resolution. The case involved Myron Shields, who began working for Duramax in 2008. Through his employment he obtained life insurance coverage from defendant United of Omaha, which insured Duramax’s employee life insurance benefit plan.
Like many such plans, Duramax’s plan had a basic life insurance benefit and a voluntary benefit. Employees were automatically guaranteed coverage for the basic benefit and could elect coverage for voluntary benefits. However, to receive coverage greater than $100,000 under the voluntary plan, employees were required to provide a “statement of physical condition or other evidence of good health” to United.
Myron enrolled in the voluntary plan and chose coverage greater than $100,000. However, he was not given an evidence of good health form, or any other kind of form, to complete by either Duramax or United. Prior to his death, he asked Duramax to verify his coverage, and Duramax told him he had the full coverage he had elected. Indeed, for a decade Duramax deducted premiums for the full coverage from Myron’s paycheck and transmitted them to United. Furthermore, Duramax represented to United on at least one occasion that Myron was enrolled for excess coverage under the voluntary plan.
Myron died in 2018, after which his wife, Lorna Shields, submitted a claim to United. As you have undoubtedly already guessed, United did not pay the full amount of voluntary coverage elected by Myron. United denied Lorna’s claim for benefits in excess of $100,000 on the ground that Myron had not complied with the plan’s “evidence of good health” requirement.
Lorna unsuccessfully appealed this decision, and then brought suit under ERISA, alleging that she was entitled to the excess benefits under 29 U.S.C. § 1132(a)(1)(B), or, alternatively, that United breached its fiduciary duty under 29 U.S.C § 1132(a)(3). The district court granted summary judgment to United on both claims, and Lorna appealed.
The First Circuit made short work of Lorna’s arguments under her (a)(1)(B) claim. The court stated that Myron had not submitted to United “any document that might be construed as either a ‘statement of physical condition’ or ‘other evidence of good health,’” and thus it was not arbitrary and capricious for United to determine that the plan’s conditions were not met.
Furthermore, the First Circuit was “not persuaded” that United had waived the good health requirement. The court stated that waiver required an intentional, knowing relinquishment of a right, and the evidence that United had accepted premiums and had been notified of Myron’s elections was insufficient to constitute a knowing waiver.
Nor, according to the court, did Duramax waive the requirement on United’s behalf. While it was true that Duramax had incorrectly responded to Myron that he was fully covered, the record did not show that Duramax knew at the time that Myron had run afoul of the good health requirement. As a result, Duramax’s response, even if wrong, could not constitute a knowing, voluntary waiver.
The court then turned to Lorna’s breach of fiduciary duty claim. Lorna made two arguments in support of this claim: (1) United breached its duty to notify Myron that he was uninsurable; and (2) United breached its duty by accepting premiums for nearly a decade while “making no effort to confirm” his coverage eligibility.
The First Circuit rejected the first argument, agreeing with the district court that “nothing in the record permits a supportable inference that United made an insurability determination regarding Myron’s excess coverage that could have triggered the claimed duty to notify.”
Lorna’s second argument gained more traction, however. The First Circuit determined that an insurer can be a “functional fiduciary” under ERISA when a benefit plan gives it “the discretion to choose when to accept premiums from an employee and when to determine if an employee is eligible for coverage.” Such a fiduciary has the duty “to make eligibility determinations for each employee from whom the insurer accepts premiums reasonably proximate to the acceptance of those premiums.”
United contended that ERISA did not support imposing such a duty on insurers, and the First Circuit noted that the American Council of Life Insurers and the Department of Labor had submitted dueling amicus briefs on this issue. ACLI argued that imposing such a duty on insurers would be “administratively onerous and expensive,” and thus conflict with ERISA’s goals. DOL contended that not imposing such a duty “would encourage abuse” and incentivize administrators to set up a system in which the insurer is “completely blind” to whether employees paying for coverage are actually eligible for that coverage, all the while accepting premiums for “non-existent coverage.”
The First Circuit determined that “DOL has the better of the argument.” The court observed that if an insurer did not have such a duty, the only risk the insurer would face would be the return of employee premiums, and even then “this risk would only materialize in the (likely small) subset of circumstances where plan participants actually needed the benefits for which they had paid.” The upside for insurers, however, was enormous: “essentially risk-free windfall profits from employees who paid premiums on non-existent benefits but who never filed a claim for those benefits.” Thus, ERISA’s purpose of protecting beneficiaries was fulfilled by imposing a fiduciary duty on insurers.
Two more questions remained: did the plan language actually impose such a duty on United, and if so, did United breach that duty? The First Circuit answered the first question in the affirmative. The court noted that the plan gave United “the discretion and the final authority to construe and interpret” the Plan, including to “decide all questions of eligibility and all questions regarding the amount and payment of any [Plan] benefits within the terms of the [Plan] as interpreted by [United].” The plan also provided that benefits under the plan “will be paid only if [United] decide[s], in [United’s] discretion, that a person is entitled to them.” The court concluded that this was a sufficiently broad grant of authority to encompass the more specific fiduciary duty to make eligibility determinations in a timely fashion.
As for the final question regarding breach, the First Circuit remanded. The court stated that the district court did not address what the record showed “about whether United took reasonable steps to confirm Myron’s eligibility for excess coverage in a timely manner after accepting his premiums.” Thus, the First Circuit left “the determination about what the record supportably shows – and conclusively establishes – with respect to the breach question to the District Court to make in the first instance.”
In short, this is yet another case that should prompt insurers and employers to reevaluate how they administer life insurance plans. The tide is clearly turning toward employees and beneficiaries on this issue, and the Department of Labor’s input shows that it is of growing importance.
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