Here we have the latest episode in the sprawling saga of equitable remedies under ERISA. The question, as always, is whether a participant is entitled to something for which the plan document does not expressly provide. This time, the answer appears to be “yes.” Let’s catch up.
As explained in our August 2011 article, the Supreme Court’s 2011 decision in CIGNA Corp. v. Amara demanded a new focus on participant communications. In Amara, the Court strongly suggested that certain remedies that courts had previously branded as off-limits under ERISA are, in fact, available to plan participants. These remedies can—and almost certainly will—subject plan sponsors and fiduciaries to significant new liabilities, including monetary damages.
In ruling on a discrepancy between a pension plan document and its SPD, the Supreme Court mentioned the following remedies in particular:
- Estoppel (denying a plan sponsor the right to rely on the plan’s terms when the sponsor has made contrary representations to participants about their benefits);
- Reformation (revising a plan's terms to conform to the terms of a defective SPD); and
- Surcharge (a form of monetary revenge against a trustee or other fiduciary for breaching its fiduciary duty to a participant.
Our May 2012 article explained that the first federal appellate court to apply the Amara decision (the Ninth Circuit) rejected those remedies when a pension plan’s SPD promised more generous benefits than the plan document itself. But in that case, Skinner v. Northrup Grumman Retirement Plan B, the facts were particularly weak for the plaintiffs.
The facts were more favorable (and more dramatic) in the second appellate court decision to interpret Amara. And in McCravy v. Metropolitan Life Insurance Company, the Fourth Circuit not only approved those remedies, it gave them a ringing endorsement. Plan sponsors and fiduciaries should therefore take note.
McCravy v. Metropolitan Life Insurance Company
Debbie McCravy was a participant in an accidental death and dismemberment plan sponsored by her employer and insured by Metropolitan Life Insurance Company (“MetLife”). The plan provided coverage for eligible dependent children through age 24. For a child to be covered beyond that age, the dependent coverage had to be converted to an individual policy. Ms. McCravy enrolled her 19-year-old daughter Leslie as her dependent. She paid premiums for Leslie’s coverage—as a dependent—until Leslie was murdered at the age of 25.
As Leslie’s beneficiary, Ms. McCravy filed a claim for benefits with MetLife. Her claim was denied on the ground that Leslie, at the time of her death, no longer satisfied the plan’s definition of an eligible dependent child. Instead, MetLife issued Ms. McCravy a refund of the premiums it had improperly accepted since Leslie turned 25.
Ms. McCravy rejected the refund and instead sued MetLife in federal court. Although she advanced numerous federal- and state-law theories, the only ones relevant to this article are those she advanced under Section 502(a)(3) of ERISA.
Section 502(a)(3) is a catch-all provision under which participants who cannot seek relief under ERISA’s specific remedial provisions (or under the terms of the plan) may instead seek “appropriate equitable relief.” The legal saga we have been following (for over a decade now) centers on the Supreme Court’s guidance as to what constitutes “appropriate equitable relief.”
Ms. McCravy alleged that MetLife had violated its fiduciary duties by accepting her premiums when it knew that Leslie was no longer eligible for coverage. She argued, in several ways, that she was entitled to monetary relief for that violation. For example, she argued that the doctrine of surcharge entitled her to monetary relief in the amount of the denied benefit. She also argued that MetLife was equitably estopped from allowing her to convert Leslie’s coverage, after Leslie’s death, from a dependent-child policy to an individual policy. She also argued that the doctrine of “equitable tolling” (or “reinstatement to the status quo”) allowed her to retroactively convert Leslie’s coverage.
The trial court, which issued its opinion well before the Supreme Court’s decision in Amara, rejected all of Ms. McCravy’s equitable arguments. It held, instead, that she was entitled to only a refund of the premiums she had paid after Leslie was no longer eligible to be covered as a dependent child.
With respect to both her equitable estoppel argument and her tolling argument, the trial court pointed out that the remedy Ms. McCravy sought would require the plan to be administered contrary to its express terms. Specifically, estopping MetLife from denying coverage for Leslie would have required the plan to pay benefits on behalf of a person expressly excluded from coverage, and allowing her to retroactively convert Leslie’s policy to an individual policy would have waived the plan’s application requirement. The court held that neither course was permissible under ERISA. As for her surcharge argument, it simply held (citing previous Supreme Court and Fourth Circuit opinions) that ERISA did not contemplate such a theory.
Tellingly, however, the trial court opinion reveals a frustration felt by many courts at the straightjacket imposed by the Supreme Court’s narrow interpretation of ERISA’s remedial provisions:
[W]hile this Court is compelled to such a holding by the law of ERISA as interpreted by higher courts, it cannot ignore the dangerous practical implications of this application. The law in this area is now ripe for abuse by plan providers, which are almost uniformly more sophisticated than the people to whom they provide coverage. With their damages limited to a refund of wrongfully withheld premiums, there seems to be little, if any, legal disincentive for plan providers not to misrepresent the extent of plan coverage to employees or to wrongfully accept and retain premiums for coverage which is, in actuality, not available to the employee in question under the written terms of the plan.
If the employee never discovers the discrepancy, the plan provider continues to receive windfall profits on the provision in question without bearing the financial risk of having to provide coverage. If the worst happens and the employee does file for the benefits for which he or she had been paying and seeks the coverage he or she believed was provided, the plan provider may then simply deny the employee’s benefits claim, and have their legal liability limited to a refund of the premiums.
Plaintiff’s allegations in this case present a compelling case for the availability of some sort of remedy for the breach of fiduciary duty above and beyond the mere refund of wrongfully retained premiums.
Despite the trial court judge’s obvious frustration, the Fourth Circuit agreed with his holding that Ms. McCravy was entitled to nothing more than a small refund of premiums, and it therefore affirmed the trial court’s ruling in favor of MetLife. Later that same day, however, the Supreme Court issued its decision in Amara. The Fourth Circuit immediately granted a rehearing based on this new guidance.
In its second opinion in the case, the Fourth Circuit interpreted Amara as correcting a misimpression in the lower courts that the equitable remedies available under Section 502(a)(3) were extremely narrow. As explained in our earlier articles, Amara held that any of the remedies traditionally available in a court of equity are available under Section 502(a)(3), including what plaintiffs (and their lawyers) have for years viewed as the holy grail: monetary relief for losses sustained as the result of fiduciary breaches.
The Fourth Circuit reversed its earlier decision (on surcharge and all of Ms. McCravy’s other equitable theories) and remanded the entire case to the trial court. As noted above, the trial-court judge has already made clear how he would decide these issues absent the restrictions on equitable remedies that applied before Amara. And in remanding the case, the Fourth Circuit quoted the trial judge’s entire lament (above) about his inability to award monetary relief to Ms. McCrary. In other words, the case on remand does not look particularly good for MetLife.
What Does This Mean for Plan Sponsors?
- Focus on Participant Communications. McCravy’s first, and most important, message for plan sponsors is the same message we announced when the Supreme Court handed down the Amara decision: clear, consistent, and accurate communication of the plan’s terms to participants is indispensable for a sponsor seeking to limit its liability and its exposure to litigation costs. The more clearly the plan’s terms have been communicated to participants, the harder it is for a participant to argue that he or she should be compensated for a discrepancy between what he or she expects and the terms of the plan. (In McCravy, of course, this focus would have been on communicating the plan’s eligibility and enrollment rules.)
- Coordination Between Benefits and Payroll Departments. McCravy also highlights the need for a sponsor’s benefits and payroll departments to coordinate the plan’s implementation, not only internally but also with outside service providers, trustees, and insurers. Had Ms. McCravy been timely notified, in a written communication, that her daughter was no longer eligible for coverage as a dependent, the case would have either turned out differently or never happened at all.
- Periodic Audits. Periodic eligibility audits and routine communication with plan participants can not only discover and correct errors (before lawsuits occur), but also shield a sponsor from liability for errors when premiums continue to be withheld – briefly after eligibility has expired. Such an audit would have discovered that Leslie McCravy was no longer eligible for the coverage her mother was continuing to purchase.