Second Circuit Holds Employer Liable for Service Provider’s Error

September 15, 2020

A recent United States Court of Appeals for the Second Circuit decision reminds employers that fiduciary responsibility under ERISA ultimately lies with the employer, even when the actions of a service provider or third-party administrator (TPA) are in question.

In Sullivan-Mestecky v. Verizon Communications Inc., the Second Circuit vacated the district court’s dismissal of Sullivan-Mestecky’s §502(a)(3) claim against Verizon and remanded the claim for further proceedings, among other issues. For reference, §502(a)3 authorizes a beneficiary of an employee benefit plan to bring an action to seek equitable relief as a result of fiduciary breaches, which are violations under ERISA. As further background, ERISA requires fiduciaries to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use.”

In this case, Sullivan-Mestecky, as the beneficiary of a life-insurance policy of her mother Kathleen Sullivan, brought suit against Verizon claiming fiduciary breach for failure to pay the entire life insurance benefit. The facts in this case demonstrate that Sullivan received various communications from Aon Hewitt (a service provider on behalf of Verizon) stating that her life insurance coverage “1x pay” amount was $679,700. However, upon Sullivan’s death, only $11,400 was provided as the death benefit, which was consistent with the terms of the plan.

As it turns out, Aon Hewitt had coded Sullivan’s annual $18,600 income as her weekly income, basing the communicated $679,700 coverage amount on an erroneous salary of $970,920. While the written plan terms were correct, what was repeatedly communicated to Sullivan by Aon Hewitt regarding her coverage amount was incorrect.

The Second Circuit concluded that Sullivan-Mestecky reasonably pled that Verizon breached its fiduciary duties by failing to provide complete and accurate information regarding the plan (supporting its remand of the §502(a) (3) claim). The Second Circuit further explained as part of its conclusion that as the plan administrator, Verizon was responsible for assessing Sullivan’s eligibility and for enrolling Sullivan in her benefits plan. Further, when Verizon arranged for Aon Hewitt to communicate with Sullivan about her benefits as the service provider, Verizon was performing a fiduciary function and bound by ERISA’s fiduciary requirement to properly administer the plan. The Second Circuit explains that Aon Hewitt’s negligence is imputed to Verizon, as Aon Hewitt’s principal, and states that “Verizon cannot hide behind Aon Hewitt’s actions to evade liability for the fiduciary breach that occurred here.”

The outcome of the case serves as a reminder to employers of fiduciary obligations under ERISA, and that such obligations are that of the employer (as the plan administrator) even when utilizing service providers or TPAs. So employers should routinely review and monitor service providers’ work to ensure that it accurately reflects the plans terms.

Sullivan-Mestecky v. Verizon Communications Inc.  »