The stories of an employer and a long-term disability insurer and claims fiduciary for an ERISA plan, defendants in two recent cases, ring so true. In the first case, the insurer was designated as claims fiduciary for an employer’s long-term disability plan, and ended up in litigation with the least friendly standard of review – de novo review – of the disability benefit determination. This happened because the claims administrator failed to timely respond to the employee’s challenge of the amount of disability benefits awarded. In the second case, the employer had to pay a $750,000 death benefit due to its failure to notify a disabled, and then terminated, employee of his right and the process to convert his group life insurance policy to an individual policy. This failure was coupled with assurances from human resources to the former employee’s spouse that nothing more was required to ensure that all benefits would continue, and was found to be a breach of the employer’s fiduciary duty.
Neither case involved difficult ERISA concepts, and neither set new precedent. They drew our attention because both involved seemingly small and avoidable mistakes with costly implications for well-meaning employers or administrators.
In Coats, the claims administrator could have avoided the court’s de novo review of the disability benefit determination (as opposed to the deferential “abuse of discretion” standard), and maybe even litigation, by timely responding to the participant’s claim, even if only to say that it required more time (assuming there were legitimate reasons requiring a more lengthy review time). We have no doubt that the claims administrator was aware of the timeframe for responding; anyone even tangentially involved with ERISA plans is familiar with the claims procedure that is included in every summary plan description (and laid out in great detail in the applicable Department of Labor regulations). Likely there was a process for making sure that claims were timely addressed, but it seems that process failed.
In Erwood, the employer could have avoided liability by sending the notice of the life insurance policy conversion right when the employee terminated employment. Here, too, there was some level of awareness of the requirement to notify the participant of his conversion rights: the insurance company had provided a process for the employer to follow, but the process had been ignored as unworkable.
In neither case was it likely that problems arose due to a lack of knowledge of the specific rules that should have been followed; what may have been lacking is a good understanding of why it’s important to follow those rules. Easier said than done, of course, but the cases serve as a good reminder that establishing, following, and monitoring a compliant process matters. And if the rules seem unworkable, see if you can re-work them and find a way to comply. The cost of noncompliance can be steep.