Eighth Circuit: Life Insurer Breached ERISA Fiduciary Duties by Maintaining Faulty Enrollment System

In Skelton v. Radisson Hotel Bloomington, No. 21-2641, __F.4th__, 2022 WL 1434778 (8th Cir. May 6, 2022), Plaintiff-Appellee Corey Skelton sued his deceased wife’s employer, Davidson Hotels LLC, and its life and long-term disability carrier, Defendant-Appellant Reliance Standard Life Insurance Company, for the mishandling of the enrollment of his wife’s supplemental life insurance. Upon the Skeltons’s custody of Ms. Skelton’s dependent stepson, Davidson mistakenly advised Ms. Skelton that the change of custody qualified as a life event that allowed her to elect supplemental life insurance, which she did in the amount of $238,000. Reliance advised Ms. Skelton that she would need to complete evidence of insurability (EOI) and return it to Reliance, and she would not be charged premiums until it approved the coverage. However, Davidson sent Ms. Skelton a benefit verification document and began charging her premiums for the supplemental insurance coverage. There is no evidence that Ms. Skelton submitted EOI to Reliance. Davidson sent Reliance premiums for all employees in one check with a worksheet listing only the total number of employees insured, a practice known as “bulk billing.” Reliance’s system did not collect information which would allow it to determine that it was receiving premiums mistakenly collected by Ms. Skelton.

After Ms. Skelton died, Mr. Skelton filed a claim for the supplemental life benefits which Reliance denied on the basis that coverage was pending because it did not receive EOI. Mr. Skelton sued Davidson, Reliance Standard, and other parties alleging violations of ERISA. Mr. Skelton settled with Davidson, who paid $175,000 for the ERISA claim. The district court then granted summary judgment to Skelton against Reliance and ordered Reliance to pay damages of $63,000, plus interest. Reliance appealed.

The Eighth Circuit affirmed the district court’s judgment. First, the court determined that Reliance had a fiduciary role in Skelton’s attempted enrollment for the supplemental life coverage. The policy makes Reliance a fiduciary for Ms. Skelton’s eligibility and enrollment because it delegates Reliance as the “claims review fiduciary” and it had exclusive discretion to determine eligibility for supplemental life insurance. Reliance’s ability to decide Ms. Skelton’s eligibility made Reliance a fiduciary for Ms. Skelton’s application process. The court explained that the mere receipt of bulk-billing payments does not automatically make an insurer a fiduciary but here, the policy and Reliance’s practices make it a relevant fiduciary. Second, the court determined that Reliance breached its fiduciary duties of prudence and loyalty by not maintaining an effective enrollment system. “A reasonably prudent insurer … would use a system that avoids the employer and insurer having different lists of eligible, enrolled participants.” Reliance had a duty of loyalty to verify that premiums it received came only from eligible, enrolled employees. Reliance profited on its broken promise by telling Ms. Skelton she would not pay premiums until it approved her application but then taking her premiums without approving her application. Allowing Reliance to escape liability because it designed a faulty enrollment system would endorse willful blindness. The district court properly granted summary judgment to Skelton and calculated the amount that Reliance owed to him. The court did not address the merits of Skelton’s ERISA Section 502(a)(1)(B) claim because he failed to exhaust administrative remedies by appealing the denial to Reliance Standard.