Every month, the International Foundation releases the Legal and Legislative Reporter, a compilation of new employee benefits-related case summaries. Below is a summary we thought you’d be interested in. Content provided by Morgan, Lewis & Bockius LLP.

The U.S. Court of Appeals for the Ninth Circuit reverses and remands the district court’s decision to deny the plaintiff’s claim that the defendant breached its fiduciary duty under the Employee Retirement  Income Security Act of 1974 (ERISA) because the precedent case law does not apply.

The plaintiff is a participant in a long-term disability plan sponsored by her employer and administered by the defendant insurance company. The defendant is the third-party administrator of the long-term disability benefits under the plan. The plan is governed by ERISA.

The plaintiff filed a claim for long-term disability benefits under the plan, which was approved. When the plaintiff’s long-term disability benefit amount was calculated, the plaintiff contacted the defendant multiple times to confirm the amount because she did not want to owe the defendant anything if an error was made. However, the defendant made a calculation error and for nearly a decade, the defendant miscalculated the plaintiff’s benefit amount.

Finally, when the defendant discovered the error, the defendant informed the plaintiff of the error and began to reduce her monthly benefit payments to recoup the overpayment. Consequently, the plaintiff appealed the defendant’s decision to reduce her long-term disability benefits based on the miscalculation. The defendant denied the plaintiff’s appeal, and the plaintiff ultimately sued the defendant, alleging breach of fiduciary duty. The district court found in favor of the defendant, holding that precedent case law forecloses the plaintiff’s fiduciary breach claim. The plaintiff appealed.  

On appeal, the plaintiff argues that the district court incorrectly concluded that precedent case law forecloses the plaintiff’s fiduciary breach claim and that the district court erred in its analysis of her potential remedies. To bring a successful claim for breach of fiduciary duty under ERISA, the plaintiff must establish (1) the defendant was a fiduciary; (2) the defendant breached a fiduciary duty and (3) the plaintiff suffered damages. Moreover, the alleged wrong must occur in connection with the performance of a fiduciary function to be cognizable as a breach of fiduciary duty. Thus, the threshold question in cases involving fiduciary breaches is whether the fiduciary was performing a fiduciary function when taking the action subject to complaint.

The court has previously held that a third-party administrator calculating a benefit within the framework of a policy set by another entity does not involve the requisite discretion or control to constitute a fiduciary function. The court has also previously held that the mailed, auto-generated statements that the third-party administrator sends to plaintiffs are not discretionary acts comparable to other well-established fiduciary functions, such as issuing written plan materials like summary plan descriptions or providing individualized consultations with benefits counselors.

The defendant argues that the action subject to the complaint was a miscalculation, which is not a fiduciary function under precedent case law. However, the court finds this interpretation misreads the precedent case law holding. Even assuming the defendant’s initial mathematical calculation is not discretionary, its subsequent actions, which were central to the plaintiff’s injury, were discretionary.

The court further finds that if the defendant’s representatives had taken steps to verify the validity of the benefits amount the defendant repeatedly communicated to the plaintiff, the defendant could have avoided any overpayment. Instead, the defendant repeatedly affirmed the erroneous benefit amount directly to the plaintiff and her lenders for almost a decade, permitting the plaintiff to take out mortgages, obtain mortgage refinancing, negotiate a divorce settlement and pay taxes, all on the basis that she was entitled to a higher income. The court finds that much more than a clerical employee typing an erroneous code onto a computer screen, the extent of the defendant’s involvement in the plaintiff’s financial life distinguishes her case from the ministerial calculation error addressed in other precedent cases. Therefore, the court finds the defendant was performing a fiduciary function in its communications with and representations to the plaintiff.

In addition, the court finds that the defendant’s actions as the plaintiff’s named fiduciary lie well within the category of well-established fiduciary functions. The defendant provided the plaintiff with individualized consultations with benefits counselors. In contrast to the precedent case where an online mechanism was used to calculate benefits, the defendant’s specialists, team leaders and customer service representatives consulted with the plaintiff by phone about her benefit amount numerous times; the defendant’s long-term disability benefit manager sent letters that the defendant knew the plaintiff would share with lenders as proof of her benefits; and the defendant communicated with the plaintiff’s financial institutions to verify her benefit amount. The court finds that such actions, which constitute conveying information about the likely future of plan benefits through benefits counselors, amount to a fiduciary act.

Further, the defendant exercised discretion when it gathered the plaintiffs’ earnings information and interpreted the plan’s terms to determine which benefits and deductions applied. And the defendant exercised discretion when it decided, despite having knowledge that the plaintiff had relied on the stated benefit amount to make important financial decisions, to immediately and aggressively collect the overpayment amount after nine years had passed, going as far as to entirely suspend the plaintiff’s benefits. Although the terms of the plan permit the defendant to collect any overpayment amount, the defendant was not required to recoup the overpayment at all, much less in the manner it did, which put the plaintiff in dire financial straits.

Accordingly, the court finds that the district court erred in concluding that the precedent case law forecloses the plaintiff’s claim for fiduciary breach, and, consequently, reverses and remands the district court judgment denying the plaintiff’s claim that the defendant breached its fiduciary duty under ERISA.

Morris v. Aetna Life Insurance, No. 21-56169 (Ninth Cir., June 2, 2023).

Tim Hennessy

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