A recent news release indicates that the US Department of Labor (DOL) has an investigatory initiative focused on the issue of “insurability” under life insurance benefits. This issue arises when insurance premiums are collected for ERISA insurance benefits but there is a failure to complete the necessary process of confirming evidence of insurability. The result is that the employee believes they have insurance coverage, but coverage is not available when sought because the evidence of insurability was never completed. The DOL views such failures as a potential breach of ERISA’s fiduciary duties by either the insurer, the employer, or both.
The DOL announced in April 2023 that it had reached a settlement in one such case with a large insurance company but stated that parallel investigations have revealed similar practices among other insurance companies. These statements suggest this is a broader DOL investigatory initiative, and both insurers and plan sponsors could be vulnerable to DOL investigation in this area (and possible liability for breach of ERISA fiduciary duties for failing to confirm insurability at the time insurance premiums are paid).
The settlement agreement and accompanying news release provide one example of how this issue may arise. The settlement involved an employer providing basic life insurance policies to its employees and allowing employees to purchase additional coverage. To qualify for this supplemental coverage, the employee had to provide “evidence of insurability,” or “proof of good health” (in addition to paying additional premiums).
In some arrangements, the DOL found that employers deducted premiums from the workers’ paychecks but failed to collect all “evidence of insurability” forms from these workers. Then, when beneficiaries sought to collect benefits, the insurers found that there was no evidence of insurability on file and denied the supplemental coverage amounts (while agreeing to refund the premiums collected for supplemental coverage that were not available).
The DOL’s view, as reflected in the recent settlement, is that there may be a fiduciary duty under ERISA to determine eligibility at or near the time when the insurers receive premiums. In issuing the settlement press release, the DOL stated “[w]hen workers pay life insurance premiums, they should be confident that their beneficiaries will get the benefits they purchased to provide for their financial security.”
This has also been an area of private ERISA litigation, with beneficiaries bringing suit for breach of fiduciary duty and/or entitlement to benefits against employers and insurers.
The insurability issue clearly raises concerns for insurers and may require changes to existing practices. The recent DOL settlement required the impacted insurance company to notify its employer clients that they must confirm that the insurer has received any required forms for coverage before the employers can deduct premiums from employees’ paychecks.
It also prohibits the insurance company from denying benefits based on lack of evidence of insurability when premiums were collected for more than three months. Insurers should be aware that this could be costly for them, in addition to any fiduciary duty issues that it raises. These process changes may be appropriate for other insurers to adopt to offset potential liability in the future.
Employers should also be aware of the ongoing DOL focus on this issue and the risks that come with gaps in the insurability process. Part of the recent DOL settlement states that employers may be liable for claims by beneficiaries for supplemental coverage if they failed to give notice to the participants that the insurer had not approved their evidence of insurability. Given these risks, employers may want to review their current document collection practices in this area.
For concerns about how this issue of insurability may impact ERISA plans, ERISA fiduciary responsibilities, or the role of an insurer, or any questions about the ongoing DOL investigations, please feel free to contact the author or your Morgan Lewis contacts.
Summer law clerk Victoria McCaslin contributed to this post.