Insurers Are Not Obligated to Inform Terminated Employees of their Life Insurance Conversion Rights - Bim Group

Insurers Are Not Obligated to Inform Terminated Employees of their Life Insurance Conversion Rights

READ TIME: 5 MINUTES

A recent case in an Indiana federal court serves as a reminder to employers that insurers are generally not obligated to inform terminated employees of their conversion rights. In Estate of Maribeth Presnal v. Dearborn National Life Insurance Company et al (the “Presnal Case”), the district court affirmed that insurers do not owe a duty to terminated employees of informing them of their rights to convert their life insurance policies. It is typically the responsibility of the employer to provide such notice. However, the court also held that the employer’s summary plan description (SPD) was sufficient notice of the right, but that mental incapacity could constitute an “extraordinary circumstance,” warranting am extension of the deadline to convert to a personal policy or make premium payments.

As a reminder, ERISA plans are generally considered contracts between employers and employees. So, if an employer fails to meet its responsibilities and the insurer is not obligated to pay the benefits as a result, the liability for such payment could be the responsibility of the employer. It is a common issue that employers fail to notify terminating employees of the conversion right regarding life insurance, leading to disputes over benefit payments upon the death of former employees.

In the Presnal Case, the employee, who was enrolled in the employer’s group term life insurance policy at $145,000, resigned from her position due to cognitive decline. However, following her termination, she never converted her life insurance policy to a personal policy or paid the premiums on the policy to continue coverage. The former employee’s estate brought an action against the insurer and the employer alleging that Dearborn and Beacon breached its fiduciary duties regarding the requirement to notify the employee of her conversion right in an exit interview. In addition, the estate also argued that the insurance policy’s time limits for conversion or making premium payments should be equitably tolled (i.e., extended) because of the former employee’s mental incapacity.

Equitable Tolling of Conversion Under ERISA

ERISA permits equitable tolling of contractual time limits in “extraordinary circumstances.” Mental incapacity may be considered an “extraordinary circumstance” if it prevents an individual from managing their affairs or acting upon their legal rights. The court in the Presnal Case held that the Decedent’s “progressive neurodegenerative disease (which) causes

executive dysfunction and impairs a patient’s judgment, insight, and decision-making abilities” could constitute an “extraordinary circumstance,” warranting equitable tolling and therefore discovery was needed to determine if her incapacity prevented her from managing her affairs or acting upon her legal rights.

Conversion of Policy after Employee Termination or Resignation

Finally, the court affirmed what has been understood as it relates to life-insurance conversion notice obligations: the obligation to inform departing employees of their right to convert their life insurance policy to a personal policy falls on the employer, not the insurer. However, the Court also emphasized the dangers of overburdening ERISA plan administrators with requirements to meet individually with each departing employee to specifically inform them of their right to convert a group term life insurance policy to individual coverage following termination unless the employee specifically asked for further information and clarification. Because the employee never sought clarification from the employer and there was no evidence the SPD was deficient regarding the notice of the right to convert the life insurance policy, the Court refused to impose liability on the employer for failing to inform the employee personally of her rights to convert her policy after termination of her employment.

Action Items for Employers

To avoid litigation and potential liability for failure to notify employees of their conversion rights, employers should take the following actions.

  • Verify the duration between the time when an employee is no longer “actively at work” and when their life insurance coverage expires, as defined in the relevant life insurance Employers may not unilaterally decide to extend life insurance coverage during extended leaves.
  • Ensure the ERISA SPD provided to employees clearly notifies the employees of their rights to convert their life insurance policies after termination of employment (or a leave longer than the “actively at work” timeline) and includes the deadlines and steps to convert such coverage in a timely manner.
  • Ensure that exit packages include the SPD or other notice to reference the SPD for terminating employees regarding the conversion
  • Be aware of any mental incapacity that may render an employee unable to manage their affairs or act upon their legal rights, resulting in equitable tolling of contractual time limits.

 

This information is general in nature and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.

Recent Insights

July 9, 2024
News, Webinar

Webinar: Keep it Classy – Identifying Employees Properly

Tuesday, August 13, 2024 1 – 2PM CST Register Now Registration Code:UBA410EW   Attend this month’s webinar to learn how to properly classify employees for benefit eligibility. ​ Gain insights into:​​ Allowable employment-based classifications for benefits and contributions Risks arising from misclassifying or discriminating against employees Offering benefits to 1099 employees and related tax implications […]
Read more
July 9, 2024
News

EEOC Issues Final Regulations for the Pregnant Workers Fairness Act

READ TIME: 6 MINUTES The Equal Employment Opportunity Commission (EEOC) has recently released extensive final regulations under the Pregnant Workers Fairness Act (PWFA). The regulations were published in the federal register on April 19, 2024, and will take effect on June 18, 2024. Here’s what employers need to know. Overview of PWFA The PWFA took […]
Read more
July 9, 2024
News

Group Health Plan Fiduciaries are the Subject of New ERISA Class Actions

READ TIME: 5 MINUTES Retirement plan fiduciaries are no stranger to ERISA class action lawsuits. These lawsuits typically allege that imprudent processes and lack of oversight led to excessive fees for investment options, recordkeeping services, and investment management services. Similar class actions are beginning to find their way to group health plan fiduciaries thanks to […]
Read more
June 26, 2024
News

HIPAA Privacy Rule to Support Reproductive Health Care Privacy

READ TIME: 6 MINUTES Following the Supreme Court’s decision in Dobbs v. Jackson Women’s Health Organization, which overturned Roe v. Wade and its constitutional protection of abortion, many states adopted extreme abortion bans and other restrictions on reproductive health care. Along with these new laws came concerns from both patients and providers that protected health […]
Read more