Waiver & Estoppel Archives - McKennon Law Group

Signing up for employer benefit plans can be confusing and can lead to disputes where the parties are not careful. ERISA fiduciaries such as employers who sponsor benefit plans and insurers who fund them have duties to plan members to communicate fully and accurately regarding the scope of plan benefits, and they can be liable for damages caused by misrepresentations of them. Just such a case can be found with Delker v. MasterCard International, Inc., ___ F.4th ___, 2022 WL 38468 (8th Cir. 2022). There, the Eighth Circuit Court of Appeals addressed a not unusual situation – one in which a plan member reasonably believes that he or she is entitled to policy benefits based on the paperwork filled out in connection with the selection of benefits and based on the representations made by the employer and/or the insurer who is paying policy benefits. In Delker, the plan member’s beneficiary claimed that a miscommunication regarding the level of selected benefits caused the plan member to decline further available life insurance coverage. The plan member’s detrimental reliance on the employer’s (MasterCard’s) misrepresentations regarding the level of insurance benefits resulted in damages based on the amount of coverage that the plan member reasonably expected to receive, and MasterCard misled the plan participant by failing to procure the insurance coverage that its own insurance enrollment forms reasonably indicated would be provided.

The Delker court found that Edward Delker properly alleged in his complaint that MasterCard, as a plan fiduciary, violated its fiduciary duty by miscommunicating the scope of life insurance that was provided by the plan. Mr. Delker’s late wife had completed documents that appeared to show that she had elected to receive life insurance coverage in an amount that was three times her annual salary, and MasterCard had also informed her that she was entitled to a credit for that level of coverage and that she could receive it without making any additional payment.

However, MasterCard only obtained life insurance coverage for Ms. Delker for the amount of her annual salary. MasterCard claimed that Ms. Delker had not successfully elected to obtain coverage for the additional $288,000 in coverage, despite the fact that the enrollment form appeared to elect this coverage.

Because MasterCard was a functional fiduciary of the ERISA plan, it had a duty to communicate fully and completely with plan members like Ms. Delker regarding benefits. The Delker court found that the enrollment form supported the election of life insurance coverage for three times her annual salary. Accordingly, Mr. Delker was entitled to seek damages that resulted from MasterCard’s failure to enroll Ms. Delker in the requested coverage. Mr. Delker properly alleged that MasterCard breached its fiduciary duty by miscommunicating the fact that Ms. Delker had elected coverage for three times her annual salary. As a result, MasterCard could be found liable for the full amount of coverage because (1) Ms. Delker could reasonably believe she was covered for life insurance benefits of three times her annual earnings, (2) she did not seek to procure additional insurance and (3) the expectation damages, if proven on remand, would approximate the amount of the misrepresentation – two times her annual salary.

The Delker court described the nature and extent of ERISA’s fiduciary duties as follows:

“ERISA imposes upon fiduciaries twin duties of loyalty and prudence. …” Braden v. Wal‑Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009). The duty of loyalty requires that fiduciaries act in the sole interest of benefit plan participants and beneficiaries; the duty of prudence mandates “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. § 1104(a)(1)(B).

The court then cited its ruling in Howe v. Varity Corp., 36 F.3d 746, 754 (8th Cir. 1994), aff’d, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), noting that the duties of loyalty and prudence extend beyond prohibiting affirmative misrepresentations and require the fiduciary to advise or inform plan members of circumstances that threaten their interests:

Making materially misleading statements constitutes a violation of a fiduciary’s duties of loyalty and prudence. See Howe v. Varity Corp., 36 F.3d 746, 754 (8th Cir. 1994), aff’d, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). At times, this “duty goes beyond merely refraining from making affirmative misrepresentations” to include a duty to advise and inform about circumstances that threaten the interests of one to whom a fiduciary duty is owed. Id. In this context, a statement is materially misleading if substantially likely to mislead a reasonable employee making decisions about employer benefits and entitlements. Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 644 (8th Cir. 2007).

It is important to note “that the duty of loyalty requires an ERISA fiduciary to communicate any material facts which could adversely affect a plan member’s interests.” Shea v. Esensten, 107 F.3d 625, 628 (8th Cir. 1997). This includes “answering questions about a plan, noting changes in the plan, [and] disseminating information directly to plan participants concerning their rights within the plan.” Anderson v. Resol. Tr. Corp., 66 F.3d 956, 960 (8th Cir. 1995) (alteration in original) (quoting Pickering v. USX Corp., 809 F. Supp. 1501, 1567–68 (D. Utah 1992)). These are all “classic fiduciary activities” implicating the duties of loyalty and prudence. Id. (quoting Pickering, 809 F. Supp. at 1568). In addition to demonstrating that pertinent statements were materially misleading, a plaintiff must further establish that he reasonably relied to his detriment on such statements in order to succeed on an ERISA misrepresentation claim. Brant v. Principal Life & Disability Ins. Co., 50 F. App’x 330, 332 (8th Cir. 2002) (unpublished per curiam).

The court determined that MasterCard was acting in a fiduciary capacity because it was communicating with plan members regarding benefits. MasterCard could have breached its fiduciary duty to the Delkers by miscommunicating the amount of coverage that was provided under the plan. ERISA claims regarding the miscommunication of information about benefits can arise from either affirmative representations or from the failure to communicate material facts that could adversely affect a plan member’s interests. And disseminating information to plan participants is a classic fiduciary function.

The lesson for plan fiduciaries is that they must ensure that they accurately communicate with plan members regarding plan benefits because they can be held liable for damages caused by misrepresentations of those benefits. In this case, MasterCard’s insurance enrollment forms caused the plan member to believe that she had elected life insurance coverage in an amount that was three times her annual salary, and as a result, she declined the opportunity to purchase additional life insurance coverage under the plan or through an outside broker.

McKennon Law Group specializes in representing ERISA plan members in claims against ERISA fiduciaries involving the misrepresentation of plan benefits. If you believe that your insurer or employee benefit plan has miscommunicated information about your coverage and that this has caused you to suffer damages, please contact us at (949) 387-9595 for a free consultation.

Sometimes employers offer their employees the opportunity to purchase additional insurance coverage for the employees themselves and for their dependents as part of an employee benefit plan. In such cases, the employer often functions as a plan administrator and as the agent of the insurance company issuing the policy. To attempt to insulate themselves from legal liability, insurers often insert “non-waiver” provisions relating to the agency status of the employers to whom they sell life, health and disability insurance coverage.

Cho v. First Reliance Standard Life Insurance Co., 2021 WL 2885855 (9th Cir. 2021) involved an employee who purchased additional life insurance coverage in the amount of $500,000 for her dependent spouse through her employer, Giorgio Armani Corporation. Ms. Cho signed up for the coverage and paid premiums for it for more than a year when Ms. Cho’s dependent spouse died. First Reliance denied the claim based on the policy provision that clearly provided that the insured submit “proof of good health” for the coverage. Ms. Cho was forced to file suit against First Reliance in order to get the benefits of the insurance she had purchased and paid for. She claimed that First Reliance had waived its right to enforce the requirement for “proof of good health” because its behavior was “so inconsistent with an intent to enforce” it. The district court agreed and awarded her the full $500,000 policy benefit.

First Reliance appealed to the Ninth Circuit Court of Appeals. It contended that a “non-waiver” clause in the policy immunized it from liability and distinguished the case from the Ninth Circuit’s decision in Salyers v. Metropolitan Life Insurance Co., 871 F.3d 934, 940 (9th Cir. 2017), which the court commented was very similar on the facts. First Reliance claimed that it was not responsible for the acts and omissions of the plan administrator even though the plan administrator handled “nearly all the administrative responsibilities” of the plan. The Ninth Circuit easily found that the plan administrator was the agent of First Reliance, and, therefore, First Reliance was liable for the plan administrator’s conduct:

Cho is entitled to the benefits for which she paid. Because the plan was self-administered and Armani handled “nearly all the administrative responsibilities,” its “direct interaction with plan participants” would have suggested it was acting with “apparent authority on the collection of evidence of insurability.” See Salyers, 871 F.3d at 940–41 (citation and internal quotation marks omitted). For over a year Armani accepted Cho’s premiums without any submission of evidence of insurability though it “knew or should have known” the terms of the plan required such evidence. See id. at 941. Armani’s actions were “so inconsistent with an intent to enforce” the requirement that it was reasonable for Cho to believe she was not required to submit such evidence. See id. (citation and internal quotation marks omitted).

Cho, supra, 2021 WL 2885855, at *1.

This was an easy case – Armani “knew or should have known” that the terms of the plan required submission of proof of good health, and “Armani’s actions were ‘so inconsistent with an intent to enforce’ the requirement that it was reasonable for Cho to believe she was not required to submit such evidence.”

The Ninth Circuit did not enforce the non-waiver clause because “[a]llowing insurers like First Reliance essentially to vitiate Salyers and the good behaviors it seeks to promote by including one sentence in their plans would be unfair and unjust.”

Insurance companies can always be counted upon to do what they can to try to avoid liability through the use of self-serving provisions like the non-waiver clause at issue in Cho. However, they are still subject to principles of equity and fairness – they cannot “contract their way out” of liability for the substantial gross negligence of themselves or their agents.

If you have been unfairly denied insurance coverage based on mistakes made by insurance companies or their agents, McKennon Law Group, PC may be able to help you. We specialize in handling ERISA cases like this one and obtaining the maximum policy benefits, holding insurers responsible for the coverage they agreed to provide.

In the January 4, 2021 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon entitled “ERISA Ruling Expands Protection for Employees, Beneficiaries.” The article addresses a recent case by the Ninth Circuit Court of Appeals, Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross and Blue Shield of Illinois, which found that while anti-assignment provisions in ERISA matters are valid and enforceable, plan administrators can waive the right to assert and enforce these provisions when their actions are inconsistent with the provision or they are aware that the claimant is acting as an assignee. This opinion will greatly benefit employees who have medical insurance and sign agreements with their medical providers to assign their rights to collect payment from their health insurers. The Ninth Circuit’s opinion will be not only useful for claimants/employees who have health insurance claims, but also those who have disability, life or other employee benefit claims as the decision in Beverly Oaks will serve to prevent employers and insurers from making misrepresentations regarding ERISA plan terms and/or taking actions inconsistent that which they had previously represented.

By Robert J. McKennon

The Employee Retirement Income Security Act of 1974, or ERISA, governs most employer-sponsored benefit plans. ERISA establishes protections for employees in the administration of their employer-sponsored benefits, requiring that the administrator adhere to certain requirements when determining a plan participant’s eligibility for benefits. Typically the ERISA plan’s terms govern, although that is not always the case.

All too familiar to patients of health care providers are agreements that assign to the health care providers their right under an ERISA plan to collect insurance benefits under their patients’ health insurance plans. However, most health insurance plans have anti- assignment provisions that prohibit insureds from assigning their right to collect insurance proceeds directly. Anti-assignment provisions in ERISA plans are valid and enforceable. Davidowitz v. Delta Dental Plan of Cal., Inc., 946 F.2d 1476, 1481 (9th Cir.1991); Spinedex Physical Therapy USA Inc. v. United Healthcare of Arizona, Inc., 770 F.3d 1282, 1296 (9th Cir. 2014). Therefore, courts have prevented health care providers from suing insurers under ERISA where health insurance plans have anti-assignment provisions, thus frustrating the efforts of health care providers to collect insurance proceeds to satisfy unpaid claims.

In its landmark 2011 decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), the U.S. Supreme Court signaled a broad expansion of the availability of equitable remedies under ERISA. The doctrines of equitable estoppel and waiver have provided plan participants with methods of forcing an employer or insurance company to honor their representations and take responsibility for previous conduct. But what about applying these equitable doctrines for the benefit of health care providers? There has been some recent good news for them.

The recent case of Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross and Blue Shield of Illinois, 2020 DJDAR 132372 (Dec. 18, 2020) further expands protection for employees and their beneficiaries by expanding the circumstances their medical providers can sue insurers directly based on an assignment, even where the plan at issue contained an anti-assignment provision. In Beverly Oaks, the U.S. 9th Circuit Appeals Court allowed an out-of-network healthcare provider to assert equitable claims under ERISA seeking a direct recovery of unpaid claims from Blue Cross and Blue Shield of Illinois (BCBS).

Beverly Oaks Physicians Surgical Center, LLC (Beverly Oaks) performed out-of-network procedures on 14 patients who had employer-sponsored health insurance plans administered by BCBS. Each patient signed a form granting the center the right to collect benefits on their behalf. The center sought and obtained preapproval for each claim from BCBS, the latter stating it would typically pay between 50% to 100% of the claim.

After performing the procedures, the Beverly Oaks submitted the claims to collect ERISA benefits. BCBS either denied every claim or paid a small reimbursement amount and paying only $140,000 of the total $1.4 million of benefits sought. At no time during the pre-surgery conversations or during the administrative claim process did BCBS advise Beverly Oaks that it intended to assert an anti-assignment provision as a basis for denying reimbursement sought under a patient assignment of benefits.

Beverly Oaks filed a lawsuit alleging that BCBS waived or was equitably estopped from asserting the anti-assignment provision in the plan since BCBS did not assert that provision in pre-surgery telephone conversations or the administrative claim process. BCBS argued that the anti-assignment provision was valid and enforceable, even though the first time BCBS asserted the provision as a defense to payment was in litigation. The district court agreed that the anti-assignment provision was valid and enforceable. Beverly Oaks appealed.

In reversing the trial court’s order, the appeals court found that while anti-assignment clauses are valid and enforceable, plan administrators can waive the right to assert and enforce these provisions when their actions are inconsistent with the provision or they are aware that the claimant is acting as an assignee.

The court defined waiver as follows: “Waiver is ‘the intentional relinquishment of a known right.’ Gordon v. Deloitte & Touche LLP Grp. Long Term Disability Plan, 749 F.3d 746, 752 (9th Cir. 2014) (citing Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1559 (9th Cir. 1991) (Waiver occurs when ‘a party intentionally relinquishes a right, or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.’)).

The court found that Beverly Oaks had plead adequate facts to support waiver, including Beverly Oaks indicated on the claim form submitted to BCBS that it was acting as its patient’s assignee, BCBS processed each claim, denied in full or underpaid Beverly Oaks’ billed charges, and at no time during pre-surgery telephone conversations or the administrative claim process did BCBS raise the anti-assignment provision as a basis to deny benefits. This was to enough to show that BCBS should have been aware that Beverly Oaks sought to collect plan benefits through a patient assignment. The court also commented on BCBS’ silence and payment during the claims process, commenting that this behavior was “’so inconsistent with an intent to enforce’ the anti-assignment clause as to ‘induce a reasonable belief that [the right to enforce the clause] ha[d] been relinquished.’” The court held that “Blue Cross thus cannot raise the anti-assignment provision for the first time in litigation when Blue Cross held that provision in reserve as a reason to deny benefits.”

In addition to waiver, the court found the alleged facts also plausibly showed that BCBS made actionable misrepresentations upon which Beverly Oaks reasonably relied and therefore, were equitably estopped from raising the anti-assignment provisions. “Equitable estoppel ‘holds the fiduciary to what it had promised and operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.” Specifically, the court pointed to telephone conversations between BCBS representative and Beverly Oaks wherein the representative stated that Beverly Oaks was eligible to receive payment, thus inducing Beverly Oaks to move forward with the claims process. In addition to traditional requirements to establish equitable estoppel, under 9thCircuit authority, Beverly Oaks also had to allege (1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan. The court held that these requirements were properly alleged facts that show a BCBS made a promise that it reasonably should have expected to induce action or forbearance on Beverly Oaks’ part, combined with a showing of repeated misrepresentations over time. Thus, the 9th Circuit reversed and remanded the case the case to the district court.

While federal courts consistently find anti-assignment clauses in ERISA matters enforceable, the decision in Beverly Oaks will have wide-reaching implications not only for medical providers, but also for plan participants and their beneficiaries. Plan and claim administrators must beware that making misrepresentations regarding plan terms, making representations about whether a procedure is covered or failing to raise certain defenses during the pre-claim and claim administrative review process could give rise to equitable claims that inure to the benefit of plan participants, their beneficiaries, and to their assignees. Because waiver and equitable estoppel serve as some of the legal systems’ fundamental checks on the fairness of a party’s actions and these doctrines serve to prevent employers and insurers from performing actions contradictory to what they have previously guaranteed or established via their words or conduct, decisions like Beverly Oaks are to be lauded.

Big, bureaucratic insurance companies and plan administrators can often mistakenly calculate benefits or provide incorrect accountings to insureds. These mistakes can become especially pronounced over time where insureds rely upon benefit accountings and representations of coverage to plan for their financial future and to decide whether to purchase insurance. With the Supreme Court’s decision in CIGNA Corp. v. Amara, 563 U.S. 421 (2011), the Court made clear that the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty could be applied to hold insurance companies and plan administrators accountable in policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Despite that decision, it remains particularly difficult for an ERISA claimant to plead equitable estoppel. However, the recent Second Circuit opinion, Sullivan-Mestecky v. Verizon Communications, Inc., — F.3d —-, 2020 WL 2820334 (2d. Cir. 2020), provides clarity and support for this relief such that we may see more equitable estoppel claims that are successful under ERISA. The decision further supports theories of surcharge, reformation and breach of fiduciary duty in situations where a plan administrator mistakenly calculates benefits and produces values that are in excess of plan terms.

In Sullivan-Mestecky, the Second Circuit considered the doctrines of estoppel, surcharge, reformation and breach of fiduciary duties in relation to an ERISA employee life insurance policy under which the plan administrator had confirmed coverage of over $600,000 for years, only to realize upon claim that it had committed a clerical error and that the actual policy value should have been closer to $11,000. Ultimately, the court found that the beneficiary plaintiff, Kristine Sullivan-Mestecky, had properly plead her Section 502(a)(3) claims for equitable remedies under ERISA, and it reversed the district court’s decision that had found otherwise.

The plaintiff’s mother, Kathleen Sullivan, was employed by the New York Telephone Company, a predecessor entity to Verizon, from 1970 to 1978, during which period her annual income was $18,600. In June 2011, Sullivan contacted the Verizon Benefits Center, which at the time was administered on behalf of Verizon by Aon Hewitt Company. Verizon responded by sending her a “Retirement Enrollment Worksheet,” stating that she was eligible for a life insurance option from the Verizon plan that provided coverage in the amount of $679,000 through Prudential Insurance Company of America. Sullivan followed the instructions on the worksheet and enrolled in this coverage option. After enrolling and designating her daughter Kristine Sullivan-Mestecky as the beneficiary of the life insurance policy, Sullivan received various mailings from Verizon that confirmed the existence and coverage amount of the policy. Sullivan reached out to Verizon and “expressed her understanding, and even surprise, about the extent of her benefits. However, Center representatives repeatedly confirmed the existence and coverage amount of the policy.” Id. at *1-2.

Due to a calculation error, Aon Hewitt had coded Sullivan’s annual $18,600 income as her weekly income, but this mistake was not caught until after she died. Sullivan-Mestecky, understanding herself to be the beneficiary of a generous life insurance policy, allowed her aging mother to live rent-free at her home, covered her mother’s living expenses and paid off her debts, and also took an extended unpaid absence to care for her mother before her death. Of course, Sullivan did not feel that it was necessary to take out an additional life insurance policy due to the generous value of her employer policy.

Based on her mother’s age at the time of her death, Sullivan-Mestecky believed her life insurance policy was worth $582,600. After her mother’s death, Sullivan-Mestecky submitted a claim to Prudential, but Prudential paid only $11,400, which amount it stated was the true value of the policy.

Sullivan-Mestecky disputed the non-payment of her full benefits, and Verizon responded that it “had mistakenly calculated Sullivan’s large coverage amount and thus provided Ms. Sullivan with incorrect information about her life insurance policy.” Id. Sullivan-Mestecky therefore filed suit alleging claims under Sections 502(a)(1)(B) and 502(a)(3) of ERISA. On July 7, 2016, the district court granted Verizon’s and Prudential’s motion to dismiss the Section 502(a)(3) claim. On May 16, 2018, the district court granted summary judgment to both defendants on the Section 502(a)(1)(B) claim.

On appeal, the Second Circuit discussed equitable remedies under Section 502(a)(3). The court found that Sullivan-Mestecky could appropriately seek equitable relief under the Supreme Court’s decision in Amara and that her Section 502(a)(3) claim could proceed against Verizon. The court found that Sullivan-Mestecky could proceed against Verizon under the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty.

In the Second Circuit, to make a claim for estoppel under Section 502(a)(3), a plaintiff must plausibly allege five elements: “(1) a promise, (2) reliance on that promise, (3) injury caused by the reliance, . . . (4) an injustice if the promise is not enforced, and (5) extraordinary circumstances.” Weinreb v. Hosp. for Joint Diseases Orthopaedic Inst., 404 F.3d 167, 172-73 (2d. Cir. 2005). The Sullivan-Mestecky court examined Verizon’s repeated oral assurances to Sullivan about the value of her life insurance policy in determining whether Sullivan-Mestecky had pled extraordinary circumstances, and it joined the Sixth Circuit in finding that estoppel could be plausibly pled as an appropriate equitable remedy by an ERISA plaintiff who is alleging gross negligence in the absence of intentional inducement. The court found that Sullivan-Mestecky had plausibly pled the five elements required to make an estoppel claim against Verizon, because Verizon had sent Sullivan an enrollment worksheet that indicated that she was eligible for a life insurance policy valued at $679,700, a retirement of confirmation worksheet, a confirmation of coverage on demand letter, a beneficiary confirmation notice and a Form W-2, all of which represented that Verizon was providing Sullivan with a generous life insurance policy. The court found that these written documents constituted and reflected the promise that Sullivan-Mestecky sought to enforce and that she had amply pled reliance on that promise. Sullivan-Mestecky, 2020 WL 2820334, at *5.

In considering the extraordinary-circumstances requirement of ERISA estoppel, the court found that this had been met, based on Verizon’s conduct that it found had amounted to gross negligence. Id. at *6. The court wrote:

Verizon’s agents sent numerous mailings informing and assuring Sullivan that she was entitled to a life insurance policy in the amount of $679,000. She relied on these representations only after diligently and repeatedly confirming their veracity and meaning with the Verizon Benefits Center. On calls with the Verizon Benefits Center, Sullivan expressed her surprise at the stated value of her life insurance policy, effectively alerting Verizon to the fact that it may have miscalculated the value. Not only did Sullivan draw attention to the high coverage figure, but an Aon Hewitt employee flagged the policy amount, writing in an email to a colleague that the amount seemed high and asking if the company’s software was somehow computing the wrong amount. Another Aon Hewitt employee then responded, erroneously, that the amount was correct. Instead of opening an investigation that likely would have uncovered the clerical error that led Sullivan and her daughter to believe that she had procured a generous life insurance policy, Verizon representatives reassured Sullivan that her beneficiary would receive, after the age discount, more than half a million dollars in death benefits. It was only after Sullivan’s death, when the purchase of alternative life insurance to support Sullivan-Mestecky was impossible, that Verizon attempted to correct its clerical error. In contravention of what it had repeatedly and unambiguously represented to Sullivan in writing and on calls, Verizon paid Sullivan-Mestecky a total of $11,400, less than two percent of what Verizon had promised. Verizon’s acts of gross negligence present circumstances far “beyond the ordinary.” The persistence and size of Verizon’s error, notwithstanding the ample inquiry notice provided by Sullivan’s calls to the Verizon Benefits Center, were “remarkable.” We find that Sullivan-Mestecky satisfactorily pled extraordinary circumstances. Id.

The Sullivan-Mestecky court also considered surcharge under Section 502(a)(3) and found that this was dependent upon the plaintiff’s allegation of fiduciary breach, specifically that Verizon failed to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use as ERISA requires. 29 U.S.C. § 1104(a)(1)(B). The court found that she had plausibly pled that Verizon had breached its fiduciary duties through its gross negligence in its management of Sullivan’s life insurance policy by consistently failing to provide complete and accurate information about Sullivan’s status and options in response to her questions about plan terms and/or benefits. Sullivan-Mestecky, 2020 WL 2820334, at *6. The court found that this fiduciary breach was sufficient to support the equitable remedy of surcharge.

Further, the Sullivan-Mestecky court considered the equitable remedy of reformation under Amara, which is described as “[t]he power to reform contracts (as contrasted with the power to enforce contracts as written)” as “a traditional power of an equity court, not a court of law.” The Supreme Court wrote that “equity would reform [a] contract, and enforce it, as reformed, if . . . mistake or fraud were shown.” Amara, 563 U.S. at 440. The Sullivan-Mestecky court wrote that it need not discuss mutual mistake because the plaintiff had adequately pled that Verizon had committed equitable fraud by misrepresenting that Sullivan was entitled to a life insurance policy in the amount of $679,000. As a result of Verizon’s fraudulent representations, the court found that Sullivan had reasonably but mistakenly expected that her beneficiary would receive generous death benefits, and Sullivan-Mestecky thereby adequately pled circumstances that would permit the district court to equitably reform the terms of her plan with Verizon, sufficient to bind Verizon to its fraudulent representations.

Insurance companies and plan administrators typically try to excuse their mistakes that often have the effect of causing tremendous financial disruption for claimants who rely upon them for accurate accountings of their benefits and coverage. As the Sullivan-Mestecky matter shows, an insured could potentially receive a windfall from an insurance company or plan administrator’s mistake, as long as certain elements are met. This case will serve as a useful guidepost for equitable claims under ERISA.

If your insurance company or plan administrator has mishandled or denied your claim, please contact our firm for a free consultation. We have extensive experience handling equitable claims under ERISA.

In the March 6, 2020 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon. The article addresses a recent case by the Supreme Court of the United States, Intel Corporation Investment Policy Committee v. Sulyma, which upheld the Ninth Circuit’s holding that generic disclosures by plan administrators do not trigger the three year statute of limitations for breach of fiduciary duty claims under ERISA. Given the Supreme Court’s emphasis on what the individual plan beneficiary consciously knows and the increasing importance of breach of fiduciary duty claims under ERISA, this will likely help a variety of plan beneficiaries by guaranteeing that their otherwise meritorious claims are not barred by a statute of limitations triggered by stray statements in the volumes of documents ERISA plans send to their beneficiaries every year.

Victory for Plan Beneficiaries in US Supreme Court Ruling

The Supreme Court’s decision in a case last week will have wide-reaching implications. Now, plan administrators can no longer hide behind the volumes of unintelligible disclosures they make every year. Employers and plan fiduciaries may now be exposed to litigation challenging plan actions for a much longer time than they had anticipated.

By Robert J. McKennon

Just a decade ago, breach-of-fiduciary-duty claims under the Employee Retirement Income Security Act were not common. That changed in 2011 when the U.S. Supreme Court broadened the scope of equitable relief available under ERISA utilizing breach of fiduciary claims in its landmark decision in Cigna Corp. v. Amara, 563 U.S. 421, 441 (2011). The Supreme Court recognized that equitable relief under ERISA could take a variety of forms, including, equitable estoppel, waiver and monetary damages in the form of equitable surcharge. Before, even if there had been a breach, the available remedies were often meaningless. Now, courts have the power to order the offending administrator to provide meaningful redress. A claim may arise from a plan’s refusal to honor a life insurance policy after it has received numerous premiums and made repeated statements that someone was covered under the policy. And, a plan may be held liable for making misstatements about the value of someone’s pension benefits. In a post-Amara world, breach of fiduciary duty claims under ERISA have become increasingly important.

Breach of fiduciary duty claims under ERISA are subject to a somewhat complicated statute of limitations. Under 29 U.S.C. Section 1113, there are three different potential deadlines by which a suit must be brought. First, “under §1113(1), suit must be filed within six years of the date of the last action which constituted a part of the breach or violation or, in cases of breach by omission, the latest date on which the fiduciary could have cured the breach or violation.” Second, “suit must be filed within three years of the earliest date on which the plaintiff had actual knowledge of the breach or violation.” Id. (emphasis added). Finally, in cases of fraud or concealment, suit must be brought within six years of the date of discovery. See id.

Given the importance of these claims in a post-Amara world, the significance of the Supreme Court’s recent decision in Intel Corporation Investment Policy Committee v. Sulyma, 2020 DJDAR (Feb. 26, 2020), becomes clear. In Sulyma, the Supreme Court handed down a commonsense opinion that will help employees secure their pension and employee benefits. In Sulyma, the court clarified that disclosure of information by a plan administrator in a generic mailing does not necessarily mean that a beneficiary possesses the “actual knowledge” required to trigger the three-year statute of limitations on a breach of fiduciary duty claim arising under ERISA.

Like many employees, Christopher Sulyma did not pay much attention to the lengthy disclosures and prospectuses associated with his employer’s 401(k) plan. Sulyma worked for Intel Corporation between 2010 and 2012, during which time he was automatically enrolled in Intel’s Target Date 2045 Fund. The fund was managed by an investment committee appointed by Intel’s board of directors. Intel provided Sulyma with various disclosures about the fund’s investments, which were also available on two websites. These documents revealed that the fund had made allocations to alternative investments such as hedge funds and private equity funds, which charged higher-than-average fees and underperformed in the market. Although Sulyma accessed some of the disclosures during his employment, he testified that he did not know that Intel had allocated the fund’s portfolio in alternative investments, or that this was the reason for the fund’s poor performance.

In 2015, Sulyma eventually learned of the fund’s poor performance and brought claims against Intel’s oversight committees under section 1104 of ERISA on the basis that Intel had made imprudent investments, failed to disclose those investments, failed to monitor the performance of those investments and failed to remedy other defendants’ ERISA violations despite knowing about them. What followed was a battle over whether Sulyma’s claims were barred by ERISA’s three-year statute of limitations.

Intel moved to dismiss Sulyma’s complaint, arguing in the district court that ERISA’s three-year statute of limitations barred Sulyma’s claims. Sulyma filed his action against Intel on October 29, 2015, and Intel claimed Sulyma had actual knowledge of the alleged breach before October 2012 because he had access to the fund documents as early as 2010. The district court sided with Intel and imputed the knowledge of the fund’s portfolio allocation to Sulyma.

On appeal, the 9th U.S. Circuit Court of Appeals reversed the district court’s granting of summary judgment. Neither “knowledge” nor “actual knowledge” is defined in ERISA. The 9th Circuit emphasized the plain meaning of the phrase. It concluded that actual knowledge refers to what the person consciously knows. The 9th Circuit found that the district court had erred when it inferred that Sulyma had actual knowledge merely because he had received fund documents that disclosed Intel’s investment strategy.

The Supreme Court affirmed the 9th Circuit’s ruling. The Supreme Court explained that “Although ERISA does not define the phrase ‘actual knowledge,’ its meaning is plain.” “[T]o have ‘actual knowledge’ of a piece of information, one must in fact be aware of it.” The court examined a variety of sources to confirm this meaning, but, as the court explained, “Dictionaries are hardly necessary to confirm the point, but they do.” Of note, the term “actual” separates the type of knowledge required by Section 1113 from the legal concept of constructive knowledge. Constructive knowledge is the kind in which the law imputes knowledge “to a person who fails to learn something that a reasonably diligent person would have learned.” By contrast, actual knowledge means that the person, at some point, consciously knew the fact in question. Here, Congress clearly intended to make clear that the person must be aware of the fact in question in order for the three-year statute of limitations to begin. Mere inclusion of the fact amid the text in volumes of documents regularly sent to plan participants is insufficient to impart actual knowledge.

The Supreme Court’s decision was not entirely bad for Intel or employers. The court explained that the “usual ways” of proving actual knowledge remain available to plan administrators. “Inferences from circumstantial evidence” can still be used by plan administrators to establish when the statute of limitations should begin to run. Furthermore, a participant cannot engage in “willful blindness,” the act of refusing to inform oneself of a piece of information. However, constructive knowledge cannot trigger the three-year statute of limitations.

The Supreme Court’s decision in Sulyma will have wide-reaching implications. Now, plan administrators can no longer hide behind the volumes of unintelligible disclosures they make every year. Employers and plan fiduciaries may now be exposed to litigation challenging plan actions for a much longer time than they had anticipated. Given the significant increase in ERISA breach of fiduciary duty claims and litigation, employees who seek to recover promised employee benefits will greatly benefit from this ruling.

Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith and ERISA litigation. He can be reached at (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.

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