District Court Rules Against Company for Failure to Provide Life Insurance Conversion Information

On April 13, 2017, the U.S. District Court for the Western District of Pennsylvania (the Court) ruled in favor of the plaintiff in Erwood v. WellStar Health Sys, Inc., 2017 WL 1383922 (W.D. Pa 2017). In this case, the widow of a Wellstar employee (Erwood) sued WellStar because they had failed to provide a notice of Erwood’s right to convert his life insurance upon termination. As background, Erwood discovered that he had terminal brain cancer in 2012. Wellstar offered 36 weeks of FMLA coverage during which Erwood could keep his benefits. During that 36 weeks, Erwood and his wife communicated with Wellstar HR employees multiple times, and even had a meeting to discuss how they could keep all their benefits in place should Erwood be terminated.

After the end of the FMLA leave, Erwood was terminated, and Wellstar did not provide any life insurance conversion information at termination. Since the Erwoods had met with Wellstar about continuing all benefits, they assumed they were covered. However, upon filing the life insurance claim following Erwood’s death, the claim was denied since Erwood was not an employee at his death and had not continued the policy through conversion.

The interesting thing about this case is that there is no specific obligation under ERISA to provide employees with post-termination information about life insurance conversion rights. It is worth noting that some states require an employer policyholder of a group term life insurance policy to provide a notice of conversion rights to terminated employees. However, the court approached this situation as a violation of ERISA’s fiduciary duty to act in the best interest of participants and beneficiaries.

The facts reflected that the insurer had provided a manual to Wellstar that stated that it was a fiduciary duty for Wellstar to notify terminated employees of their right to conversion by 15 days after termination. The insurer had even provided a Conversion Brochure and a form entitled “Notice of Right to Convert Group Life Insurance” that WellStar could have provided to the Erwoods. However, WellStar had not provided any additional notice to Erwood beyond a mention of the right to convert that was placed in the SPD.

The court even found the notice in the SPD to be insufficient because the SPD had been placed on the employer portal, and Erwood’s access to the portal expired when he was terminated. Additionally, WellStar claimed that they had provided a notice of conversion when they gave Erwood a packet before his FMLA leave. However, the notice did not clearly state the time within which a severely ill and mentally compromised employee must apply for conversion.

As such, the court held that WellStar failed to adequately inform the Erwoods regarding the necessary steps required to keep their life insurance benefits, and this failure was a material one upon which the Erwoods detrimentally relied. As a result, the court found for the Erwoods and entered a verdict against WellStar in the amount of $750,000 (which constituted the amount of the life insurance proceeds that would have been due them if the claim had been properly filed).

Since this verdict was rendered in a district court, it is not necessarily precedent for most employers. However, it does underscore the need for employers to ensure that they diligently administer their plans in a way that is compliant with their plan documents, insurer contracts and state requirements. Additionally, all HR staff who work with employees should be trained to accurately discuss benefits and the requirements employees must meet to access those benefits.

Erwood vs. WellStar »