In a case of first impression for the court, the U.S. Court of Appeals for the First Circuit recently ruled that an insurer owes a fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) to all employees enrolling in group benefit plans to verify eligibility for coverage at or near the time of enrollment.

In Shields v. United of Omaha Life Insurance Co., 50 F.4th 236 (1st Cir. 2022), the plaintiff-appellant was supposed to be the beneficiary of a $100,000 excess voluntary life insurance policy that her late husband tried to acquire through his employer. The decedent enrolled in 2008 and, according to the plan’s terms, was supposed to have provided evidence of insurability at the time of enrollment. However, at the time of enrollment, neither the insurer nor the employer provided him with any forms to prove his insurability or “evidence of good health.” Following the employee’s plan enrollment, the employer deducted premiums for the life insurance policy from his paycheck from 2008 until his death in 2018, remitting those premiums to the insurer in one lump sum along with premiums for other plan participants.¹ 

Following the death of her husband, the plaintiff-appellant submitted a claim for life insurance benefits. The insurer denied payment for the $100,000 excess voluntary life coverage explaining that because the decedent had not provided “evidence of good health” at the time of enrollment, he never had coverage. The plaintiff-appellant filed suit against the insurer in the U.S. District Court for the District of Maine seeking benefits under ERISA § 502(a)(1)(B) and equitable relief for breach of fiduciary duty under § 502(a)(3). The district court granted summary judgment for the insurer on all claims.

On appeal, the First Circuit affirmed the district court’s ruling on the § 502(a)(1)(B) claim finding that the insurer’s decision to deny benefits was not arbitrary and capricious because the plan required proof of insurability and that the insurer did not waive the requirement that a participant provide such proof.

However, the court broke new ground when, as a matter of first impression, it held that an insurer that accepts premiums from an employee and has authority under the plan to determine if the employee is eligible for coverage has a fiduciary duty to make eligibility determinations “reasonably proximate” to acceptance of those premiums.

Specifically, the court explained,

Our Circuit has not had occasion to decide in any prior case whether an insurer is a functional fiduciary under ERISA in circumstances like those at issue here. But, as we have explained, under ERISA, a party is a fiduciary “to the extent” it “has any discretionary authority or discretionary responsibility in the administration” or “management” of a plan. 29 U.S.C. § 1002(21)(A). Thus, if a plan confers on an insurer the discretion to choose when to accept premiums from an employee and when to determine if an employee is eligible for coverage, then the insurer has the kind of discretion in setting the relative timing of those two determinations that would suffice to impose a functional fiduciary duty on the insurer in exercising that discretion with respect to the plan's employees. As a result, such an insurer has a fiduciary duty to those employees to make eligibility determinations for each employee from whom the insurer accepts premiums reasonably proximate to the acceptance of those premiums.

The First Circuit relied on cases from the Fourth and Eighth Circuits to support its recognition of this fiduciary duty.²

The American Council of Life Insurers (ACLI), however, submitted an amicus brief arguing that placing such a duty on insurers would conflict with the goals of ERISA for a uniform system that was not so administratively onerous and expensive as to discourage employers from offering benefits. The ACLI also argued that employers were best positioned to regulate and verify enrollment of its employees. It pointed out that other courts outside of the First Circuit had reached the opposite conclusion of the Fourth and Eighth Circuits.³

The U.S. Department of Labor, by contrast, submitted an amicus brief taking the opposite position. The DOL argued that construing ERISA to not impose a fiduciary duty on insurers to verify eligibility at the time of enrollment would incentivize a system “in which [the insurer is] completely blind to whether employees paying for ... coverage ... [are] actually eligible for that coverage while accepting premiums for ‘non-existent coverage’ nonetheless.”

The First Circuit concluded that despite the circuit split, “the DOL has the better of the argument.” The court reasoned that “with no such fiduciary duty in place, the upside for the insurer would be ‘essentially risk-free windfall profits from employees who paid premiums on non-existent benefits but who never filed a claim for those benefits.’” As such, the court vacated the district court’s ruling on the breach of fiduciary claim and remanded for further consideration.

Although the court ruled against the insurer, it advised that insurers could shift the duty of eligibility verification to employers through the plan’s language. In Shields, the life insurance plan stated that the insurer had discretion to make eligibility determinations and to determine whether an employee is entitled to the coverage for which premiums are paid. But the court noted that nothing would stop a plan from designating the employer as the sole party responsible for “enrollment” and eligibility verification.

Despite the Shields opinion’s departure from the rulings of other circuit courts of appeal in a manner that could have supported a petition for certiorari to the U.S. Supreme Court, the parties settled in November before either side sought Supreme Court review. Accordingly, the Shields opinion recognizing an insurer’s fiduciary duty to make eligibility determinations near the time of accepting premiums remains binding precedent in the First Circuit. 

Further, the ruling stands as a warning both insurers and employers should heed, particularly those operating in the First, Fourth and Eighth Circuits. Primarily, employers should check their benefits plans’ terms to determine who is responsible for enrollment duties and eligibility verification, including determining when to accept premiums from employees. Where the insurer retains those responsibilities and depending upon the applicable plan language, it may now be required to undertake the administratively onerous burden of verifying eligibility before collecting any premiums to avoid claims of breach of fiduciary responsibility in the administration of the plan.

In the wake of Shields, employers and insurers operating in the First Circuit should consult counsel to ensure compliance with their current plans and to understand their duties under ERISA.