Ninth Circuit Addresses Fiduciary Duty to Notify Employees of Life Insurance Conversion Rights

In Estate of Foster v. Am. Marine Servs. Grp. Benefit Plan, et al. (9th Cir. February 9, 2021), the U.S. Court of Appeals for the Ninth Circuit held that an employer’s obligation to notify a participant of life insurance conversion rights is not necessarily satisfied by furnishing an SPD. Rather, ERISA fiduciary obligations may warrant further explanation under the circumstances.

The case involves ERISA claims brought by the spouse of a deceased employee against his former employer and group life insurance plan sponsor. While employed, the participant was entitled to life insurance coverage under the group plan. Sadly, the participant was diagnosed with terminal esophageal cancer and was later laid off. The employer subsequently assisted the participant with filing for long-term disability benefits. The participant was also permitted to remain on the employer’s payroll for a period of time, using previously accrued paid time off. During this interval, the employer continued to pay for the participant’s group life insurance coverage.

The terms of the group life insurance plan allowed the participant to convert the policy to individual coverage and pay the premiums once the employer provided coverage ended. Under normal circumstances, this conversion was permitted within a 31-day period following the occurrence of specific events. The conversion right was disclosed in the insurance certification and SPD, which were indisputably provided to the participant. However, the participant never converted the group life insurance coverage to an individual policy.

Upon the participant’s death, the spouse (as named beneficiary) filed a claim for life insurance benefits with the group health plan’s insurer. The insurer denied the claim, citing the lapse in coverage due to the participant’s failure to convert the group life insurance coverage to an individual policy within the required timeframe.

Following this denial, the spouse alleged that the employer had violated its ERISA fiduciary obligations (amongst other charges) by failing to timely provide adequate notice of the conversion rights to her husband. The district court ruled that the employer had fulfilled the required notice obligations by providing the participant with an SPD that explained the conversion rights.

On appeal, the Ninth Circuit reversed, holding that the employer’s ERISA notification obligations were not limited to the SPD distribution. The court also observed that the plan policy and SPD did not clearly explain when the participant’s conversion rights commenced under these circumstances. Additionally, the terms provided an exception in the event of total disability, which allowed for continuation of the coverage without premium payments. Furthermore, the employer was aware of the participant’s grave circumstances. As a result, the court held that the employer was not entitled to summary judgment because questions of material fact existed as to whether the participant received sufficient notice that the life insurance coverage would end if he did not convert the policy to an individual one within a specific timeframe. The Ninth Circuit remanded the case back to the district court for further proceedings.

Employers who sponsor ERISA group life insurance plans should be aware of the ruling. Although this decision is most relevant to employers within the Ninth Circuit’s jurisdiction, other courts have adopted similar expansive views of ERISA fiduciary notice obligations. Therefore, employers may want to review their group life insurance plan administrative procedures, SPDs and communications to ensure that applicable conversion rights and deadlines are sufficiently and accurately disclosed.

Estate of Foster v. Am. Marine Servs. Grp. Benefit Plan, et al. »