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Widower wins insurance dispute

8th Circuit ruling faults poor benefits enrollment system

Even though a woman’s application for supplemental life insurance benefits was never fully processed, her widower is entitled to them. On May 6, 2022, the 8th U.S. Circuit Court of Appeals ruled that the wife’s employer violated the Employee Retirement Income Security Act (ERISA).

Beth Skelton was an employee at Radisson Hotel in Bloomington, working as a corporate sales manager there since 2013. In 2020, management of the Radisson was taken over by Davidson Hotel Co. Davidson had a benefits plan that included health insurance, dental, life insurance, and long-term disability for its employees.

Life insurance was provided through Reliance Standard Life Insurance Co. The employer collected employees’ premiums and then remitted them to Reliance in one monthly check, only listing the total number of employees insured—a practice called “bulk billing.”

When Skelton began her employment, she was automatically enrolled in a $100,000 basic life insurance policy. She did not elect to get supplement life insurance. However, Skelton reconsidered seven months later, when her husband regained custody of his son.

Reliance had sole discretion to determine eligibility for supplemental life insurance in certain circumstances, including when an employee sought it more than 31 days after employment. In those circumstances, an employee was required to provide Evidence of Insurability — which included proof of good health. Evidence of Insurability was not required, however, if the supplement life insurance applicant was seeking it within 31 days of a qualifying life event change.

Skelton asked Human Resources whether the change in custody of her stepson qualified as a life event change. The Human Resources director told Skelton it did qualify. Soon after that discussion, Skelton applied for the maximum supplemental life insurance available: $238,000. Reliance sent Skelton a document, stating that Skelton was required to provide Evidence of insurability. The parties did not agree whether this form was ever submitted; however, Skelton did not receive notice that this form was not received. Skelton got another document on January 1, 2014, that stated that she did have supplement term life insurance, with the reason “regain[ing] custody of dependent child” offered.

Just one month later, Skelton’s health began to deteriorate, and she was forced to go on medical leave. While on medical leave, her employer told her that she would have to pay the premiums to maintain benefits while she was out. Skelton paid for a few months but was past due. Reliance then told Skelton she may be eligible to have those premiums waived due to her disability. Skelton received waiver of the premiums.

Then, in December 2015, Skelton died. Corey Skelton, her husband, contacted both her employer and insurance provider regarding the supplemental life insurance policy. He was told that the supplemental life insurance was in “pending status” since the EOI form was never received. The employer did admit that it sent letters listing pending premiums for the supplemental life insurance policy, which should not have been sent out until the coverage was actually approved. But it would not agree that Beth Skelton had coverage.

Corey Skelton then sued the employer and insurer, asserting that they both violated ERISA by mishandling Beth Skelton’s supplemental life insurance enrollment. The District Court determined that Reliance breached its fiduciary duty to ensure its administrative system did not collect premiums until coverage was effective. Reliance was ordered to pay damages, as well as pre- and post-judgment interest. Reliance appealed to the 8th Circuit.

Joshua Bacharach, partner at Wilson Elser, who represented Reliance, argued, “We are a fiduciary, your honor, for determining eligibility for benefits. But that is different from being a fiduciary…for purposes of notification and premium payment.” He asserted, “[Skelton] was charged premiums by [employer]—not by my client.”

The court was not persuaded, noting that both logos of employer and insurer were on the letterhead of the document Skelton received that she would have premiums deducted. “You’re both in it together, and you’re a fiduciary, counsel,” the panel responded.

Jodell Galman, who represented the Skeltons, said, “Let’s put it this way: Reliance is trying to parse facts about what it is a fiduciary for … Reliance had the final say on determining eligibility for benefits. And that is what this issue is.”

The Department of Labor submitted an amicus brief in support of plaintiff-appellee. In the brief, the department averred: “Reliance’s broad argument that it had no fiduciary duties related to the collection of insurance premiums, if accepted by this Court, would diminish insurers’ ERISA-imposed duty to design a prudent system that address well-known risks in circumstances where the insurer allows employees to handle the initial process of applications and to withhold premiums from employees. The result of such a diminished duty on insurers would likely be more beneficiaries who are denied coverage after having been left to believe they were covered by their payment of premiums.”

It continued, “The Secretary accordingly urges this Court to reject Reliance’s attempt to avoid diligent oversight by relying on a compartmentalized system to escape all responsibility.”

The court determined that Reliance did have a fiduciary role as it determined eligibility for coverage and conducted enrollment for the coverage. Reliance attempted to argue that it only had a fiduciary responsibility with regard to eligibility but not enrollment. The court responded, “Reliance’s own documents show this is a false dichotomy.” The court continued, “Instead the Policy states that a person in Skelton’s situation ‘will become insured’ ‘the first of the month following the date [Reliance] approve[s] [the] required proof of good health.’ This means enrollment occurs automatically as a result of Reliance’s eligibility decision.”

As a fiduciary, the court determined, Reliance breached its duties of prudence and loyalty when it failed to maintain an effective enrollment system. The court maintained that, to fulfill its duty of prudence, Reliance should have avoided using a system where employer and insurer have different lists of eligible and enrolled participants. The insurer never communicated with the employer about which employees still needed to submit an EOI, nor did it provide a list of employees it deemed eligible and enrolled. Thus, employer did not know whether an employee had been declined or needed to submit an EOI to complete coverage.

“Reliance … maintained a haphazard system of ships passing in the night,” the court wrote.

The court also found that Reliance violated its duty of loyalty. Skelton paid premiums, despite being told she would not pay premiums until the application was approved.

“By receiving Skelton’s premiums without giving her a corresponding benefit of coverage—while serving as a fiduciary for her eligibility and enrollment—Reliance profited at her expense because it avoided any financial risk of having to pay coverage for her,” the court affirmed.

Reliance attempted to blame a poor system—one in which it failed to communicate with employer about enrollment—as the cause of the problem. The court was unpersuaded, stating, “[A]llowing a fiduciary to escape liability because it designed an enrollment system that ensured it would not know it was collecting ‘premiums on non-existent benefits’ would endorse willful blindness—and the exact ‘perverse incentive’ this Circuit has decried.”

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