On July 5, 2012, the Court of Appeals for the Fourth Circuit in McCravy v. Metropolitan Life Insurance Company relied on the U.S. Supreme Court’s majority opinion in CIGNA Corp v. Amara to expand the relief available under ERISA section 502(a)(3) to include the remedies of surcharge and estoppel. Specifically, the court held on rehearing that, if applicable, these remedies would allow a putative beneficiary of a life insurance policy to recover the full amount of the policy proceeds, rather than only a premium refund, where the plan administrator led her to believe inaccurately that she had coverage. In so holding, the Fourth Circuit reversed its own earlier decision in the case, and cast doubt on the continued viability of other decisions both within and outside of the Fourth Circuit, which had construed section 502(a)(3) narrowly to bar “make whole” relief.  

The plaintiff in McCravy participated in her employer’s life insurance plan, which included coverage for eligible dependent children. She elected to purchase the dependent coverage for her 19-year old daughter and, thereafter, paid premiums until her daughter’s death at the age of 25. When she applied for the life insurance proceeds, the plaintiff was told that her daughter did not qualify as an eligible dependent child at the time of her death because she had attained age 25 and coverage under the plan only extended to children under the age of 19, or under 24 if enrolled full-time in school. The insurer offered to refund the premiums it had mistakenly accepted, but the plaintiff refused. Instead, she brought suit, principally under ERISA section 502(a)(3), claiming that the carrier breached its fiduciary duty and should be estopped from denying coverage. The plaintiff claimed that she relied on the insurance company’s continued acceptance of premiums in concluding she had group coverage. Otherwise, according to the plaintiff, she would have converted her daughter’s policy to an individual policy within 31-days of the date her daughter’s group coverage terminated.

Relying on pre-Amara case law, both the district court and the Court of Appeals for the Fourth Circuit limited the plaintiff’s right of recovery for the alleged breach to a refund of the premiums mistakenly paid. The Fourth Circuit then granted rehearing to reconsider its decision in light of Amara. 

Applying the majority’s opinion in Amara—which it found binding regardless of its characterization as dicta—the McCravy court reversed the district court’s decision limiting the plaintiff’s right of recovery to a premium refund. The court reasoned that the surcharge remedy, if applicable to the facts of the case, would allow the plaintiff to recover the policy proceeds. Under principles of equity, surcharge allowed monetary compensation to be paid to a beneficiary for a loss caused by a trustee’s breach of fiduciary duty. As for estoppel, it could translate into a full recovery by preventing the insurer from denying the plaintiff the right to convert her daughter’s group policy to an individual policy later than the applicable conversion period. To hold otherwise and limit a plaintiff to a premium refund, the court stated, would promote abuses by fiduciaries, who could accept mistaken premiums on non-existent benefits knowing that their liability would be limited to a premium refund in any event.

Notably, the Fourth Circuit made no finding that there had been a breach of fiduciary duty or that the circumstances necessary for surcharge or equitable estoppel were present. In fact, the court suggested that the district court would have to revisit the liability determinations it had made, in part because they were made on the basis of a summary plan description, rather than the actual plan documents. The court remanded these important questions for resolution by the district court.     

Lessons Learned

The Fourth Circuit’s decision is certainly notable insofar as it applied the dicta in Amara to recognize the availability of surcharge and equitable estoppel remedies under ERISA section 502(a)(3). But the questions the court left open regarding liability are arguably more important than those it answered. 

From a practical standpoint, the decision reinforces the importance of coordination between the terms of a benefit plan, and the payroll systems and insurers implementing the terms of the plan. Plan administrators should continue to train and monitor those charged with communicating with participants and implementing their benefit choices to ensure that they are conveying complete and accurate information and providing accurate plan administration. Additionally, plan administrators who collect information regarding initial dependent eligibility should ensure that it is input into a system that allows the information to be used to terminate eligibility when the dependent is no longer young enough for coverage. The case also underscores the importance of periodic dependent eligibility audits, since it is quite possible that an employer that engages in regular audits of dependent eligibility and that communicates regularly with plan participants about the requirements for eligibility of dependents would be relieved of liability for an error in allowing payroll deductions to continue for a short period of time after loss of eligibility. 

In parallel, plan administrators should carefully review their plan documents and written communications to ensure their clarity and to place on the participant the responsibility to ensure continued eligibility/enrollment. Better document drafting may reduce the risks of costly litigation.