In a recent case, the Ninth Circuit Court of Appeals opined that plan sponsors must furnish more detailed notice of the applicable deadlines governing life insurance conversions to meet their obligations as plan fiduciary. Situations involving life insurance conversion rights continue to raise difficult administrative issues for employers, insurers, and third-party administrators (TPAs). As some courts are becoming more willing to recognize claims under the Employee Retirement Income Security Act of 1974 (“ERISA”) in this area, employers are encouraged to focus on ensuring adequate administration of their life insurance benefits.
Recommended Employer Action
- Review life insurance policies to determine a participant’s conversion rights when their group coverage ceases;
- Clearly communicate the deadlines and requirements for plan participants to exercise their conversion rights;
- Determine whether the life insurance carrier or TPA is assisting in providing plan participants with conversion notices;
- Include the conversion notice as a part of the paperwork provided to employees going out on leave and to terminating employees.
9th Circuit Case
In a dispute over life insurance benefits after a participant’s death, the Ninth Circuit Court of Appeals reversed a district court’s decision by rejecting the conclusion that the employer’s ERISA fiduciary duties were limited to sending the participant the certificate/Summary Plan Description (SPD) that explained their conversion rights.
The plan participant in Estate of Foster v. Am. Marine SVS Grp. Benefit Plan obtained life insurance coverage through an employer-sponsored ERISA group life insurance plan. The life insurance certificate/SPD provided that coverage would end on the last day of the month in which a participant was no longer eligible for coverage and gave participants a 31-day window to convert group coverage to individual coverage. After the participant died, the spouse, as named beneficiary, sought life insurance benefits under the policy. The insurer denied the claim on the basis that the participant had failed to timely convert his group coverage. The participant’s spouse sued the employer alleging a violation of their fiduciary duties under ERISA by failing to provide the participant adequate notice of his conversion rights.
Though the employer provided the plan participant with a life insurance certificate/SPD, the Ninth Circuit found the certificate/SPD provided was ambiguous as to how the plan participant could exercise his conversion rights and his deadline for doing so. Accordingly, the court concluded that the certificate/SPD contained incomplete information, and the employer had a duty to “paint a more complete picture” for the participant.
Notice of Life Insurance Conversion Rights
Despite the fact that ERISA does not explicitly require employers to provide plan participants with a notice of conversion rights, some courts have found that employers who fail to provide plan participants with adequate conversion rights information can be found in breach of their fiduciary obligations under ERISA and be ordered to pay beneficiaries the life insurance benefit they would have received if they were informed of their conversion rights and had exercised those rights.
- Notice in Summary Plan Description may not be sufficient
- While a participant’s conversion rights are typically outlined in a plan’s summary plan description (SPD), distributing the SPD alone, may not be sufficient to satisfy an employers’ notice obligation because it may not provide adequate detail about when coverage ceases, the process of converting coverage, and applicable deadlines. Employers often mistakenly believe that the information contained in the SPD is sufficient to satisfy their fiduciary obligations or that their life insurance policy carrier will be providing adequate notices. To avoid these potential issues and to ensure plan participants are taking advantage of their life insurance benefits, employers should provide a notice of conversion rights to plan participants in addition to the plan SPD that clearly outlines this important information (unless a clear notice is already provided by the carrier).
- Employers have the sole responsibility to meet their fiduciary obligations
- It is important to recognize that employers/plan sponsors are responsible for providing plan participants with adequate information about their rights under the plan, which includes rights to conversion. Carriers do not have this responsibility; however, they may assist plan sponsors by taking on the responsibility of providing adequate notice. Employers should review their contract with their life insurance carrier to determine whether it outlines the responsibility for providing such notices. Employers should not assume their carrier is providing these notices, as it is common for contracts to make the employer (not the carrier) responsible. Employers should also review such notice to ensure it is accurate and complete.
ERISA covered employers and plan sponsors should be aware of litigation surrounding life insurance conversion rights and may want to take stock of their current processes to provide notice and information about conversion rights. Employers that take the Ninth Circuit’s recommendation to furnish more detailed notices should ensure the accuracy of any participant-specific communications they provide, which may require active coordination with their life insurance policy carrier.