A life insurance decision issued by the U.S. Court of Appeals for the Eighth Circuit may be summed up by quoting a single sentence from the opinion: “Misleading an [Employee Retirement Income Security Act]-plan participant has consequences.” Skelton v. Reliance Standard Life Insurance Co.[1] teaches how lax benefit enrollment practices can be costly.
Beth Skelton, who was employed by Davidson Hotels LLC, an organization that owns several hotels, including the Radisson in Bloomington, Minnesota, chose not to enroll in her employer’s supplemental life insurance program when she first began her employment. However, she later changed her mind, and sought additional life insurance after her husband regained custody of his son, her stepson.
Typically, employees who seek to add additional coverage need to complete a form attesting to their good health, known as an evidence of insurability, or EOI, form. Under the life insurance plan offered by Skelton’s employer and insured by Reliance Standard, though, completion of an EOI form was not required if the employee sought additional coverage due to a life event change such as marriage, the birth of a child or changes in employment status.
Skelton asked her employer whether regaining custody over her stepson was such an event, and when she was assured it was, she applied for $238,000 in supplemental life insurance. Skelton was subsequently told, though, that only an adoption would qualify as a life event, and she was asked to complete an EOI form.
Skelton was also notified that the additional coverage would not go into effect, nor would she be asked to pay premiums, until approval of the supplemental insurance application was issued by the insurer’s medical underwriting unit.
Although Reliance Standard denied ever receiving an EOI form from Skelton, she received verification of the additional coverage and began having premiums deducted from her paycheck, which were forwarded to and accepted by Reliance.
A few months later, in February 2014, Skelton went on medical leave and was granted a waiver of premium payments due to her disability. She died in December 2015.
After Skelton’s death, Reliance denied her husband’s life insurance claim for the supplemental life insurance benefits based on an assertion that it had never received an EOI form, thus rendering Skelton ineligible for supplemental life insurance.
Reliance acknowledged, though, that premiums had been paid, and further admitted that no premiums should have been collected until the coverage was approved.
Skelton’s husband sued both his wife’s employer and Reliance Standard for the supplemental life insurance benefits.
The claim against the employer was settled, but the case continued against Reliance, which argued it had no liability since the employer handled enrollment and premiums.
Both the U.S. District Court for the District of Minnesota and the court of appeals disagreed and found for the plaintiff.
The district court found, and the court of appeals affirmed on May 6, that the terms of the policy made Reliance Standard a fiduciary with respect to the employee’s eligibility and enrollment to receive supplemental life insurance benefits.
Documentation relating to the administration of the policy stated that enrollment was “subject to final determination by Reliance,” which the court found imbued Reliance with fiduciary responsibility.
The court ruled that Reliance Standard breached its fiduciary duty of prudence and loyalty because it failed to maintain a record of eligible enrolled participants. Instead, it “maintained a haphazard system of ships passing in the night.”
The court expressed concern about the legal consequence of Reliance’s acceptance of Skelton’s premium payments, pointing out that it had told Skelton she would not have to pay premiums until the coverage was approved, yet Reliance “then took her premiums without approving her application — profiting on its broken promise.”
The court observed that this was not the first time Reliance Standard has been in this position, citing two prior rulings where Reliance was found liable to pay life insurance benefits after it had collected premiums from employees it later determined were ineligible to receive benefits.[2]
The U.S. Department of Labor filed an amicus brief in support of Skelton.[3] Secretary of Labor Marty Walsh emphasized the importance of plan fiduciaries having a system in place to “[mitigate] the risks of wrongfully collecting premiums before ascertaining eligibility.”[4]
The secretary made a policy argument that letting Reliance avoid fiduciary liability would effectively reward insurers that have deficient enrollment practices that fail to address “wellknown risks in circumstances where the insurer allows employers to handle the initial processing of applications and to withhold premiums from employees.”[5]
The DOL argued that if the court were to rule in favor of Reliance Standard, it would lead to “more beneficiaries who are denied coverage after having been led to believe they were covered by their payment of premiums.”[6]
The secretary of labor presented a sound policy argument. Skelton would have been unaware that her coverage was ineffective since she was paying premiums that Reliance accepted.
Reliance Standard could have insulated itself from liability by maintaining a ledger tracking the employees covered under the plan. While doing so would have imposed some expense on Reliance Standard, that expense would surely have been far less than the $238,000 it was obligated to pay due to its sloppiness.
The lesson taught by this ruling is a valuable one both for parties that insure plans as well as for those who find themselves in the same situation as Skelton. Reliance Standard tried to delegate the administration of the life insurance program to Skelton’s employer, but it retained ultimate decision-making authority over approving eligibility for coverage. The Eighth Circuit’s ruling was a strong admonition to Reliance Standard and other insurers to put checks in place to ensure that premiums are not collected until eligibility is confirmed.
This case ended up being an illustration of the immortal line from the movie “Cool Hand Luke”: “What we’ve got here is a failure to communicate.” That lack of communication resulted in Reliance Standard’s liability.
The Eighth Circuit emphasized the breadth of ERISA’s fiduciary duties. Those duties include a duty to act with care, skill, prudence and diligence[7] in administering all aspects of benefit plans.
Reliance Standard retained control over ascertaining coverage eligibility, and while some aspects of benefit plan enrollment were delegated to Skelton’s employer, the insurer’s retained powers necessitated stricter controls, which the court found were lacking.
The Skelton ruling is therefore a reminder to all parties acting as fiduciaries that ERISA imposes strict standards of behavior. Given the importance of benefits such as life insurance, the Eighth Circuit sent a powerful message to ERISA fiduciaries that they need to maintain strict procedures and guidelines in administering benefits, and that sloppiness or negligence will be punished.
For employees and their beneficiaries, the ruling in this case teaches that when employees have been led to believe coverage is in effect because they were charged and paid premiums, ERISA’s fiduciary duties impose liability on insurers and employers that fail to deliver the benefits when they are needed.
For claimants who find themselves in the same situation as Skelton, if coverage has been verified and premium payments were accepted, the ruling makes it clear that a denial of benefits may very well be open to challenge.
ERISA’s fiduciary duties are not just aspirational, but will become the basis of liability when those duties are breached. When a plan fiduciary misleads an employee, consequences ensue.
Mark D. DeBofsky is a shareholder at DeBofsky Law.
This article was first published by Law 360 on May 19, 2022.
[1] Skelton v. Radisson Hotel Bloomington, 2022 U.S. LEXIS 12238, 2022 WL 1434778 (8th Cir. May 6, 2022).
[2] Patterson v. Reliance Standard Life Ins. Co., 986 F. Supp. 2d 1140, 1150 (C.D. Cal. 2013) (“Reliance Standard did not conduct any such investigation and only investigated the eligibility of Ms. Dietrich for supplemental life insurance coverage after her death.”) and Chov. First Reliance Standard Life Ins. Co., 852 Fed. Appx. 304, 305 (9th Cir. 2021) (holding Reliance liable where employer erroneously collected premiums from ineligible person for over a year despite unsubmitted EOI).
[3] The Secretary of Labor’s amicus brief is available at https://www.dol.gov/sites/dolgov/files/SOL/briefs/2021/Skelton-12-06-21.pdf.
[4] Secretary of Labor Amicus Brief at 25.
[5] Secretary of Labor Amicus Brief at 26.
[6] Id.
[7] 29 U.S.C. § 1104(a)(1)(B).
