Pennsylvania Federal Court Awards Life Insurance Beneficiaries Relief in Form of Equitable Surcharge

A federal judge awarded the beneficiaries of a deceased life insurance participant $120,000 in equitable surcharge after finding that the plan administrator breached its duties by misrepresenting coverage. See Weaver Bros. Ins. Assocs., Inc. v. Braunstein, 2014 BL 160149, E.D. Pa., No. 2:11-cv-05407-JHS, 6/10/14). According to the United States District Court for the Eastern District of Pennsylvania, U.S. Supreme Court's ruling in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011), empowers courts to award monetary relief under the Employee Retirement Income Security Act's equitable remedies provision. The opinion was issued June 10 by Judge Joel H. Slomsky.

By way of background, following Deborah Braunstein was an employee of Weaver Bros. After her death in January 2011, Weaver Bros. and its claims administrator, Fortis Benefits Insurance Co., denied life insurance benefits to Deborah's beneficiaries under her life insurance policy with Weaver Bros. on the grounds that her policy lapsed in October 2010, one year after her cancer diagnosis caused her to take disability leave. Weaver Bros. sought a judicial declaration that it wasn't obligated to inform Braunstein of the policy lapse or the need to convert to individual coverage. Braunstein's beneficiaries counterclaimed for fiduciary breach and sought equitable surcharge to cover the loss of life insurance benefits. In March 2013, the court determined that Weaver Bros. was an ERISA fiduciary and that it breached its duties by failing to provide Braunstein with an adequate summary plan description. One year later, the court held a non-jury trial on the remaining claims.

 

In addition to providing an inadequate SPD, the court said that Weaver Bros. made material misrepresentations to Braunstein about the status of her benefits during her period of disability.

Specifically, the court said that the human resources manager for Weaver Bros., Sandra Colangelo, told Braunstein that she would be treated as an active employee even though Colangelo hadn't read the plan's certificate of insurance or SPD. Colangelo also failed to inform Braunstein of the conversion requirement when she sent her beneficiary designation forms to update, the court said.

Further, the court said that evidence in the record demonstrated that Braunstein relied on these misrepresentations to her detriment, because she would have converted her policy to individual coverage had she known about the lapse. The court also rejected the argument of Weaver Bros. that it had no affirmative duty to inform Braunstein about the need to convert her policy. “Because Colangelo knew that Braunstein had cancer and that she sought Colangelo's assurance that her paperwork was sufficient, Colangelo had an affirmative duty to at least read the SPD and Certificate of Insurance and give Braunstein proper advice on which she could rely,” the court concluded. Weaver Bros.' argument that it didn't intentionally deceive Braunstein also failed to sway the court, which found that evidence of intentional deception wasn't required to establish a fiduciary breach based on a plan administrator's material misrepresentations.

 

Weaver Bros. also argued that it couldn't be liable for Colangelo's oral misrepresentations, because they contradicted the written terms of the plan. The company pointed to decisions of Second and Seventh circuit holding that participants bringing misrepresentation claims must point to written statements containing the alleged misrepresentations. Noting that the Third Circuit hadn't “specifically addressed this precise question,” the court nevertheless declined to follow the reasoning of the Second and Seventh circuits. According to the court, Third Circuit precedent makes clear that ERISA forbids fiduciaries from materially misleading participants, and such precedent “does not exclude oral misrepresentations from ERISA's reach.”Further, the court said that even if it followed the Second and Seventh circuits' reasoning, Weaver Bros. still wouldn't prevail, because Colangelo “confirmed her misrepresentations” in a letter to Fortis.

 

Finally, the court found that the beneficiaries' claim for surcharge to cover the lost life insurance benefits qualified as appropriate equitable relief under ERISA Section 502(a)(3). The court said that the Supreme Court's Amara ruling empowered it to “award monetary compensation analogous to the historical relief of ‘surcharge' to the Braunstein Beneficiaries for Weaver Bros.' breach of fiduciary duty.” Given this, the court awarded the beneficiaries surcharge totaling $120,000, along with prejudgment interest.

 

The beneficiaries were represented by James C. Bailey, Michael A. Tilghman II and Jason H. Ehrenberg of Bailey & Ehrenberg PLLC, Washington.

b&e Obtains Victory After Bench Trial In ERISA Case

Firm partner James Bailey obtained a victory on behalf of Firm clients in an ERISA fiduciary breach case in the United States District Court for the Eastern District of Pennsylvania.  After a bench trial before Judge Joel Slomsky, the Court found in favor of b&e's clients on all dispositive legal issues, namely, that the employer was acting as an ERISA fiduciary, that the Summary Plan Description at issue was inadequate,  and that the employer made material misrepresentations to a former employee concerning her employee benefits.  

The Proliferation of Noncompetition Agreements

Interesting article on the expansion of noncompetition agreements/clauses in today's New York Times. Whereas noncompetes used to be geared mostly towards positions in the technology and related sectors (which positions were highly paid and highly skilled), we are starting to see more and more businesses in other, unrelated areas use them as a tool to keep employees and/or keep departing employees from competing. The Times article notes that non-competes have made their way into jobs such as summer camp counselors and hair stylists. There are policy arguments both for and against noncompetes. Traditionally, the argument was that an employer should be allowed to keep an employee who has been trained and paid well by the employer from competing for a reasonable period of time after the employment relationship ends (based on the notion that the employer spent time and money educating and training the employee). However, noncompetes have made their way into lower-paying, less-skilled positions. It is somewhat difficult to articulate a reasonable basis for such agreements where significant time and expense has not been put into training. The article can be found at http://www.nytimes.com/2014/06/09/business/noncompete-clauses-increasingly-pop-up-in-array-of-jobs.html?ref=us&_r=0.

Texas University’s Race Admissions Policy Is Debated Before 5th Circuit Court of Appeals

Interesting article in today's NY Times about the Fisher case the Supreme Court heard a while back. The Fifth Circuit just held oral argument. http://www.nytimes.com/2013/11/14/us/texas-universitys-race-admissions-policy-is-debated-before-a-federal-court.html?ref=us

IRS,DOL and HHS Issue Final Wellness Program Regulations

On May 29, 2013, the U.S . departments of Health and Human Services and Labor and the Internal Revenue Service issued final regulations regarding employee wellness programs under the Patient Protection and Affordable Care Act (PPACA). The final rules were published in the Federal Register on June 3, 2013 (78 F.R. 33157) and will take effect 60 days later, on August 2, 2013.

Under the final regulations implementing the Health Insurance Portability and Accountability Act (HIPAA) non-discrimination and wellness provisions issued in 2006, wellness programs are divided into two categories:  “participatory wellness programs” and “health-contingent wellness programs.” The new final regulations under the PPACA further divide health-contingent plans into two sub-categories: “activity-only” wellness programs and “outcome-based” wellness programs. 

The final rules require that health-contingent wellness programs be reasonably designed, uniformly available to all similarly situated individuals and accommodate recommendations made at any time by an individual’s physician, based on medical appropriateness. The final rules also clarify the “reasonable design” requirement for health-contingent wellness programs and the reasonable alternatives they must offer to avoid prohibited discrimination. Notably, the final rules establish criteria for an affirmative defense against a claim that the plan discriminated based on health status in violation of HIPAA.  

The final rules are largely consistent with earlier proposed regulations, which were released on November 20, 2012, but are reorganized for clarification. The final regulations also increase the maximum permissible reward under a health-contingent wellness program offered in connection with a group health plan (and any related health insurance coverage) from 20 percent to 30 percent of the cost of employee coverage, and further increase the maximum permissible reward to 50 percent for programs targeting tobacco use prevention or reduction.

The final regulations are effective for plan years beginning on or after January 1, 2014, and apply to both insured and self-funded health plans, regardless of grandfathered status. 

Five Bailey & Ehrenberg Attorneys Honored as 2013 Super Lawyers and Rising Stars

Bailey & Ehrenberg is pleased to announce that five of the firm’s attorneys have been named to the 2013 Washington, D.C. Super Lawyers and Rising Stars lists as being among the top attorneys in Washington, D.C. Three of Bailey & Ehrenberg’s partners have been selected to the 2013 Washington, D.C. Super Lawyers in the areas of employment law and employee benefits. Only five percent of all attorneys in Washington, D.C. are recognized as Super Lawyers each year. The following Bailey & Ehrenberg attorneys were named as 2013 Super Lawyers:

• James C. Bailey (Employment & Labor)
• Jeffrey B. Cohen (Employee Benefits/ERISA)
• Jason H. Ehrenberg (Employee Benefits/ERISA)

In addition, two of our attorneys have been selected to the 2013 Washington, D.C. Rising Stars list. The Rising Stars list recognizes attorneys who are 40 years old or younger, or who have been practicing for 10 years or less. Each year, no more than 2.5 percent of the lawyers in a state are selected by Super Lawyers to receive this honor. Bailey & Ehrenberg’s attorneys included in this year’s Rising Stars list are:

• Michael A. Tilghman II (Employee Benefits/ERISA)
• Sara M. Klayton (Employment & Labor)

Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annuals selections are made using a rigorous multiphase process that includes statewide surveys of lawyers, an independent research evaluation of candidates and peer review by practice area. Selections are made on an annual, state-by-state basis.

Participants' Stock-Drop Claims Overcome Moench Presumption in Wilmington Trust Litigation

The United States District Court for the District of Delaware ruled on May 3, 2013 that a group of participants challenging Wilmington Trust Corp.'s ("WT Corp.") decision to continue offering company stock in its defined contribution retirement plan alleged sufficiently dire circumstances to overcome the presumption of prudence that shields plan fiduciaries from liability. See In re Wilmington Trust Corp. ERISA Litigation, D. Del., No. 1:10-cv-01114-SLR, 5/3/13. The participants alleged that WT Corp. stock price declined by 90 percent during a period in which plan fiduciaries failed to acknowledge the “concerns of its banking peers” regarding problems in the housing and commercial real estate market. The Court denied the fiduciaries' motion to dismiss this claim, finding that the participants pleaded facts sufficient to overcome the presumption of prudence.

However, the Court did dismiss claims of failure to disclose material information and failure to properly monitor the plan's investment committee.

 

By way of background, according to the complaint, the plaintiffs each invested in WT Corp. stock through their individual accounts in the WT Corp. Thrift Savings Plan. In December 2010, they filed a proposed class action against WT Corp. and related individuals and entities challenging the plan's investment in company stock during a period in which the stock price declined by 90 percent.

According to the complaint, WT Corp. increased its exposure to commercial real estate and construction loans throughout 2007 and failed to acknowledge the “concerns of its banking peers” regarding the viability of the housing market as late as January 2008. In April and May 2008, WT Corp. “continued to assert that its construction and home loan portfolios were locally focused and not suffering from the deteriorating housing market conditions in the rest of the country,” the participants alleged. By December 2009, WT Corp.'s commercial real estate and construction loans made up about 22 percent of its loan portfolio, which the participants claimed was “twice that of other banks.” By the time WT Corp. was acquired by M&T Bank Corp. in 2011, its stock price fell 90 percent from $43.19 per share in January 2007 to $4.45 per share in May 2011. The complaint alleged that the defendants' continued investment of plan assets in WT Corp. stock breached their ERISA fiduciary duties of care, loyalty, and monitoring. The complaint also challenged the defendants' alleged withholding of material information about plan investments.

 

In evaluating the participants' claim of breach of the fiduciary duty of care, the Court applied the Moench presumption, which requires plaintiffs to point to a plan sponsor's impending collapse or other dire circumstances to show that a reasonable plan fiduciary would have divested the plan of employer stock. The Moench presumption, articulated by U.S. Court of Appeals for the Third Circuit in Moench v. Robertson, 62 F.3d 553,  (3d Cir. 1995), is frequently cited as a grounds for dismissal of employer stock-drop cases.The Court determined that the Moench presumption applied, because the plan language directed the fiduciaries to “primarily invest in common stock of the Employer.” Under this standard, the Court found that the participants' complaint demonstrated that WT Corp. “continued to make construction loans after its peers acknowledged the housing market decline” and “seemingly turn[ed] a blind eye to the market's decline.” Further, WT Corp. relied on “outdated appraisals for its loan decisions” throughout the class period. Given these allegations, the Court concluded that the participants set forth allegations that “plausibly suggest a dire enough situation to support an abuse of discretion by the fiduciaries (at least, sufficient to permit discovery).”The Court also allowed the participants to proceed with their claim of breach of the fiduciary duty of loyalty. The participants asserted that the compensation of certain individual defendants “was tied to the performance of WT Corp's stock and that they had information that was inconsistent with the rosy picture of WT Corp's financial condition they continued to paint as corporate officers.” Although the Court cautioned that “the mere fact that compensation is tied to stock prices…is not necessarily enough to show the existence of a breach,” it found that the participants' allegations were sufficient to withstand the motion to dismiss.

 

The Court agreed with the defendants that the participants failed to state a claim for violations of ERISA's disclosure requirements. According to the Court, the plan description and written communications provided the participants with information regarding plan investments and associated risks, including summaries of past performance and warnings against fluctuations resulting from market conditions. These activities satisfied ERISA's disclosure obligations, the court concluded.The Court also dismissed the participants' claim that WT Corp.'s chief executive officer breached the duty to properly appoint, monitor, and oversee the committee responsible for determining plan investments. According to the Court, “even if [the CEO] had informed the Committee of the true financial and operating condition of WT Corp, the Committee was precluded from doing anything with that information until the information was publicly disclosed.”