The continuation of life insurance coverage after employment ends is fraught with issues that frequently lead to litigation. Normally, group coverage ends on the last day of employment; however, most group life insurance policies have features that allow coverage to be converted to individual coverage, placing the onus on the employer to give notice of conversion rights, and placing the burden on the employee to timely elect conversion. Hauth v. Prudential Ins.Co. of America, 2010 U.S.Dist.LEXIS 81226 (N.D.Iowa Aug. 10, 2010) is an illustration of what can go wrong and how a court was able to cut through the Gordian knot to solve a difficult problem.
Marvin Hauth, who had been employed by MCI, later a part of Verizon, died 41 days after his employment ended, and his widow, Junelle Hauth, sought life insurance indemnity although her husband had never completed an application to convert his life insurance to individual coverage. Despite that fact, Junelle Hauth argued that no notice of conversion had been given before her husband’s death, but that even if such notice had been given, her husband was terminally ill at the time and incapable of making financial decisions, thus tolling the period to elect conversion.
The court focused on the issue of whether notice had been given. A document from a Verizon benefits administrator contained an entry stating that the conversion privilege was offered the day after Marvin Hauth’s employment terminated; however, there was no indication as to how notice was given, the manner in which notice was given, by whom the notice was given or the form by which notice was given. The plaintiff relied heavily on Canada Life Assurance Co. v. Estate of Lebowitz, 185 F.3d 231 (4th Cir. 1999). There, too, an issue arose as to whether the departing employee was given adequate notice of his right to convert life insurance coverage. Although Liebowitz was given a life insurance conversion application at his exit interview, the court deemed that action inadequate, holding:
The conversion application cannot constitute written notice because it does not provide sufficient information. We rule that adequate written notice here must be in writing and explicitly include: (1) when the group coverage will expire, (2) when the right of conversion will expire, (3) the procedure to follow in order to convert the group policy into an individual policy and (4) the amount of premium required to complete conversion. Since the conversion application did not provide this minimal information, it did not constitute “written notice” as required by the policy.
Because the notice was inadequate, the 4th Circuit determined that Liebowitz’s survivor was entitled to benefits. Here, too, the policy required that Marvin Hauth be given “written notice of the conversion privilege.” Although Prudential concluded notice had been given, there was no substantial evidence supporting that conclusion. The court pointed out: “Significantly, no document purporting to be the actual written notice provided to Marvin Hauth exists in the administrative record. Nor is there any document alleged to be a copy of such written notice.” Thus, in the total absence of any relevant documentation establishing that notice had been given, the court concluded, “no reasonable personcould have found precisely what, if any, writing concerning his conversion rights was provided to Marvin.” Because none of the four requirements set forth inLiebowitz were established, the court found that Marvin Hauth was not given adequate written notice of his conversion rights.
The court buttressed its conclusion with inferences based on “common sense.” Since it was undisputed that Marvin Hauth was terminally ill at the time his employment terminated, “there is no logical reason a person in Marvin’s tragic situation would not seek to convert his group life insurance policy to an individual policy if they were given adequate notice of their right to do so.” The court also found that Prudential could not reasonably rely on the Verizon documentation that merely made a conclusory statement that the conversion privilege was offered. Nowhere was it indicated that the conversion privilege was offered in writing as required by the policy – an oral notification would be inadequate. The court found the claims form does not even provide a scintilla of evidence that Marvin Hauth was informed of his conversion privilege in writing. Moreover, the claims form provides no details by which a reasonable person could ascertain that the information provided Marvin Hauth was sufficient to constitute adequate written notice of his conversion privilege. Indeed, given the complete lack of any supporting evidence in the record to substantiate the claims form’s entry regarding a conversion privilege being offered to Marvin Hauth and considering the substantial number of forms the court has come across in the past that were incorrectly filled out, the court is unwilling to conclude that this lone, unsubstantiated claims form was correctly filled out.
Consequently, the court concluded that $74,000 in life insurance plus interest was awarded.
There are a number of related issues that arise in these situations: Most policies provide that if the insured dies within 30 days of employment ending, a conversion application need not be provided and that benefits are payable. But a more important provision found in most group life insurance policies is that a disabled employee may be able to continue coverage under a waiver of premium due to the disability. Oddly, that provision does not appear to have been applicable here since Marvin Hauth was on long-term disability due to pancreatic cancer. It is unclear from the opinion whether a waiver of premium on account of disability provision was even in the applicable policy. But since group life insurance coverage normally ends when active employment ceases, it is prudent to investigate the existence of the waiver of premium when employment ends on account of disability. Unfortunately, what often occurs instead is an illustration of the maxim, “no good deed goes unpunished.” Many employers, out of sympathy for the disabled employee, often continue paying premiums to maintain coverage or advise the employee to continue paying the premiums. That is what occurred in Amschwand v. Spherion, 505 F.3d 342 (5th Cir. 2007); cert. denied 128 S.Ct. 2995 (2008), where life insurance was denied on account of an employer misleading the disabled employee into believing that coverage continued while premiums were being paid even though the employee was no longer actively employed. Tragically, Amschwand’s survivor was left without a valid claim for life insurance. Further compounding the injury, the court concluded that based on ERISA’s limited remedies, Mrs. Amschwand was unable to sue her husband’s employer for the misrepresentation since such a claim sought monetary damages rather than an equitable remedy. Fortunately, Hauth had a much better ending and illustrates the duties placed on human resources personnel in fully notifying employees of their post-employment right to benefits.
This article was initially published in the Chicago Daily Law Bulletin.