Articles

The casenote of the month is from the Disability E-News Alert! a monthly newsletter describing new disability insurance developments.  For subscription information, e-mail Mark DeBofsky or visit www.disabilityenewsalert.com .

Hedeen v. Aon Corp., 2004 U.S.Dist.LEXIS 21706 (N.D.Ill. 10/28/2004)(Issue: Fiduciary Liability).  The plaintiff, an employee of Aon, missed a portion of his new employee orientation and was unaware that he needed to submit an enrollment form within thirty days of starting his employment in order to receive benefits.  Once he realized his error, Aon’s benefits department advised him to file an appeal; and upon submission of the appeal, the benefits department notified Hedeen that it would accept his enrollment.  Hedeen then filled out the form and received notification that his enrollment was effective with the exception of long term disability – as to that benefit, Aon advised that enrollment would be “effective as of the date of approval by the insurance carrier.”   Subsequently, Aon sent Hedeen a form listing the benefits he had elected which confirmed coverage under the long-term disability plan and advised that a payroll deduction was being taken for premiums.  More than a year later, Hedeen became disabled and applied for benefits; however, Prudential denied the claim on the ground that Hedeen never provided “evidenced of insurability” to Prudential as required by the policy for anyone applying after the initial enrollment date.  The record showed, though, that the enrollment form was sent by Aon to Prudential. 

Before the court was a motion to dismiss filed by Prudential. The court granted the motion, finding that Hedeen failed to comply with the policy terms; thus, he could not bring a claim for benefits pursuant to 29 U.S.C. §1132(a)(1)(B).  The court determined it had to interpret the policy as written, and as the policy made clear, anyone who enrolls after 59 days of employment (within 31 days after the date one first becomes eligible for coverage) is required to provide evidence of insurability.  The court could find no ambiguity in the policy language; therefore, the claim for benefits failed as a matter of law. 

Turning to other sections of §1132, the court found a claim under §1132(a)(2) inapplicable because there is no entitlement to individual relief under that section.  The court cited Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 (1985) (holding that recovery for violation of § 1132(a) inures only to the plan, not to the individual participant or beneficiary), and therefore dismissed a potential claim under (a)(2).   The court also dismissed a potential claim under §1132(a)(3) which allows for individualized equitable relief, finding that such a claim is duplicative of §1132(a)(1)(B). 

Finally, the court dismissed a claim for estoppel against Prudential based on Aon’s benefit confirmation notice.  Because the misrepresentation was not made by Prudential, the court found estoppel could not be applied.  From the face of the form, the court determined that Prudential could not have authored the form.  The court also rejected an argument that Prudential could be held liable for Aon’s statement under agency principals.  The court ruled that the employer does not act as the insurer’s agent. 

Although the opinion is unclear on the point, we examined the complaint, and what remains is an estoppel claim against Aon along with a breach of fiduciary duty claim against Aon. 

Discussion:      A recent decision from California dealt with the identical issues raised in Hedeen – Gaines v. Sargent Fletcher, Inc. Group Life Insur.Plan, 329 F.Supp.2d 1198 (C.D.Cal. 2004).  Gaines, a life insurance case, also discussed whether an insurer could properly invoke the policy’s evidence of insurability requirements.  In contrast to Hedeen, Gaines held the insurer could not evade responsibility for the claim by asserting the failure to obtain evidence of insurability was the employer’s fault:

However, rather than exonerating Hartford and justifying its refusal to pay on Gaines's claim, the evidence that Hartford's system is designed to assure receipt of payment without a corresponding mechanism to insure that the beneficiary has properly qualified for the purchased benefit further supports the Court's conclusion that Hartford labored under a conflict of interest. In short, Hartford makes sure it gets paid, but makes no effort to assure that the beneficiary is getting what he or she paid for. This is a choice made by Hartford, but it hardly serves as support for its claim that it could not, in the exercise of reasonable diligence, have known that Gaines purchased coverage for his wife, in the amount of $ 150,000.

Once again, Hartford seeks to avoid responsibility by pointing to the failings of Sargent Fletcher. Its effort is of no avail. By Hartford's own admission, and Sargent Fletchers's definition of "self-administered," Hartford utilizes Sargent Fletcher's role as Plan Administrator solely to carry out the most basic of ministerial, bookkeeping functions. Sargent Fletcher does not make determinations as to whether an employee's application for coverage is accepted or denied. Nor is it empowered with the ability to approve or disapprove coverage. Hartford admits that coverage determinations are at its sole discretion. (Objection to Gaines Decl. at 2). Thus, even in the context of carrying out its ministerial functions, logic dictates that Sargent Fletcher cannot notify an employee that coverage has been denied when Hartford has not communicated to Sargent Fletcher that there is a defect in the employee's enrollment application. Clearly, when the Plan is self-administered there is no safety mechanism to protect participants if either of their fiduciaries fails to execute their responsibilities with the requisite degree of competence and care.

In short, the design of Hartford's system permits it to act with selective knowledge -- i.e. to be aware of coverage when payment is at issue but ignorant of the beneficiary's satisfaction (or not) of coverage requirements. Hartford can therefore maximize its profits, without, at the same time, maximizing the protection of beneficiaries who purchase Hartford's products through their ERISA plan. Instead, when disputes of the present sort arise, Hartford deflects liability by minimizing its role and blaming the employer. Based on these facts, the Court concludes that Plaintiff has presented substantial, material evidence of a conflict of interest, and that  Hartford has failed to rebut that presumption.  329 F.Supp.2d at 1214-15 

The court also applied the doctrine of “reasonable expectations” to find, “Defendants' position that Plaintiff is not entitled to the full benefits for which he paid because he neglected to satisfy a prerequisite of coverage of which he was not made aware defeats the reasonable expectations of the insured.”  Id. at 1217.   

Unlike the district court in Hedeen, the court in Gaines found the requirement of providing proof of good health ambiguous, and applied the doctrine of contra proferentem against the insurer, construing ambiguities in favor of the insured.  The court buttressed its finding by determining:

Prior to the submission of his claim, Gaines was never notified of Hartford's disapproval of his application for benefits because there was no such disapproval. Rather, it appears that Hartford now contends that it can disapprove the application after the claim for benefits has arisen. While this argument may be supported by the Plan language, that only goes to show that the relevant Plan language regarding disapprovals is also ambiguous and contains a trap for the wary and unwary alike. It does not specify when disapprovals must be made or to what type of disapprovals the clause pertains, such as limited disapprovals of evidence of good health, disapprovals of coverage itself, claim disapprovals, or all of these determinations.  Id. at 1218. 

Thus, the court in Hedeen punished the plaintiff for failing to comply with a provision about which he knew nothing at a time when he was in good health and could have qualified for coverage if he were aware that Prudential had not accepted his coverage.   

Finally, the court in Gaines concluded, 

On the basis of the foregoing discussion, the Court concludes that a reasonable term would require Hartford to provide written notification of denial of coverage once it has been placed on notice of the application for benefits and before accepting premium payments. Because no such disapproval was communicated to Plaintiff in this case, and because Hartford accepted premium payments from Plaintiff (and indeed from numerous other employees) and only disputed coverage when Plaintiff submitted a claim on his wife's death, the Court concludes that Hartford's conduct, if permitted to stand, would defeat Plaintiff's reasonable expectations. Hartford's determination that Plaintiff lacked coverage without ever notifying him of any defect in his application, conduct that falls far short of its fiduciary obligations (see infra), conflicts with any reasonable interpretation of the Plan language committing Hartford to notify applicants of disapprovals. n15 Under any reasonable interpretation of the Plan, and giving due consideration to ERISA principles governing the conduct of fiduciaries, the Court concludes that Hartford cannot now deny Plaintiffs claim.  Id. at 1219.

The court then turned to Sargent Fletcher’s fiduciary liability and deemed the company responsible for not informing Gaines of the Hartford requirements.  Along the same lines, the court returned to Hartford’s liability to find that Hartford waived the right to insist on evidence of good health:

Here Sargent Fletcher and Hartford knew that Plaintiff (and indeed many others) had not submitted a personal health statement, knew of the coverage being purchased, knew that premiums were being paid for that-coverage, and received and accepted payments without giving any indication that any of the Sargent Fletcher employees had failed to comply with a precondition to obtaining insurance coverage. The Court finds that conduct sufficient to constitute a voluntary relinquishment of the right to require submission of a personal health statement. Moreover, giving effect to the waiver in this case does not expand the scope of the ERISA plan; rather it provides the Plaintiff with an available benefit for which he paid. Thus, the Court finds that application of the waiver doctrine is appropriate under present circumstances.  Id. at 1222.

Likewise, the court ruled that both Sargent Fletcher and Hartford were estopped from denying coverage.

The problem with the posture in which the court has left the case in Hedeen is that unless the court determines the plan is separate from the insurance policy, and that the plaintiff can collect plan benefits from Aon, he would face the problem of seeking legal relief from Aon, which is barred by Great West v. Knudson, 122 S.Ct. 708 (2002).  This case should have turned out the same way as Gaines; perhaps Judge Marvin Aspen will reconsider.

This note appeared in the Disability E-News Alert! For subscription information, please go to www.disabilityenewsalert.com .