An agent of the insurer

An important distinction between individual and group insurance policies is that enrollment and claims for benefits under group policies are often administered by an employer rather than by the insurer. For example, in a group policy, the employer is often the plan administrator, responsible for enrolling new members, collecting premiums and for submitting claims on their behalf for policy benefits.

Under California law, an employer of a group policy is treated as the agent of the insurer, rather than of the group members. Therefore, the insurer may be bound by the employer's mistakes and misrepresentations in handling premiums and claims. This is because the employer administers an insurance policy for the insurer, and acts as an agent, and its conduct is attributable to the insurer. See McCormick v. Sentinel Life Ins. Co., 153 Cal. App. 3d 1030 (1984); Elfstrom v. New York Life Ins. Co., 67 Cal. 2d 503 (1967). But what rule applies to group policies governed by federal law under the Employee Retirement Income Security Act of 1974?

In UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358 (1999), the U.S. Supreme Court held that ERISA preempts state laws that deem a policyholder-employer an agent of the insurer in administering group policies. The court noted that automatically applying state agency rules in the ERISA context would force an employer to "assume a role ... that it has not undertaken voluntarily" and affect "not merely the plan's bookkeeping obligations," but also "the basic services that a plan may or must provide to its participants and beneficiaries." However, the court's holding left open the opportunity for federal courts to apply agency law in the ERISA context as a matter of federal common law.

On Sept. 20, the 9th U.S. Circuit Court of Appeals in Salyers v. Metro. Life Ins. Co., 2017 DJDAR 9291, created a rule of federal common law in ERISA cases that follows California's employee-friendly rule. The court said that in certain cases, the employer is the agent of the insurer and its actions are imputed to the insurer. In doing so, the court found an insurer liable for $250,000 in death benefits, despite a failure by the employee to provide evidence of insurability. The court found the insurer waived the right to assert lack of coverage although the insurer lacked actual knowledge of the employee's failure to meet the evidence of insurability requirement. Recognizing that ERISA's purpose is to protect the interests of employees and to increase the likelihood that employees receive plan benefits, the court imputed the knowledge and conduct of the employer to the insured. In so doing, the court applied a theory of waiver based on agent-principal liability.

Salyers may have broad implications, allowing for more circumstances in which an employer's knowledge or conduct regarding insurability may be imputed to the insurer under ERISA.

Susan Salyers worked as a nurse at Providence Health & Services. Providence provided life insurance to its employees through a plan sponsored by Metropolitan Life Insurance Company. MetLife's plan provided that, for a dependent to be eligible for life insurance coverage, the dependent must submit evidence of insurability in the form of a "Statement of Health" for elected coverage over $50,000. Salyers elected a total of $50,000 in coverage, $25,000 for herself and $25,000 for her husband, Gary Wolk, as a dependent. Because the total coverage amounted to $50,000, the plan did not require evidence of insurability and so Salyers did not provide a Statement of Health.

As the result of an administrative error, Providence entered Salyers and Wolk into the system with coverage of $500,000 instead of just $50,000. Neither MetLife nor Providence corrected the error or requested evidence of insurability, and Providence deducted premiums as if Salyers elected $500,000 in coverage. In the next open enrollment period, Salyers actually elected $250,000 in coverage for her husband and, again, neither Providence nor MetLife requested evidence of insurability in the form of a Statement of Health.

After Wolk passed away, Providence wrote to Salyers confirming $250,000 in life insurance coverage. MetLife processed the claim, but issued only $30,000 in death benefits to Salyers because there was no Statement of Health on file. MetLife said Salyers failed to provide proper evidence of insurability as dictated by the ERISA-governed plan. On appeal, MetLife continued in its denial of coverage, asserting that "its receipt of premiums did not create coverage" under the plan.

Salyers sued arguing estoppel and waiver of MetLife's enforcement of the evidence of insurability requirement. The district court found in favor of MetLife, asserting that Salyers failed to meet the burden of establishing coverage via evidence of insurability. The 9th Circuit reversed. The court said the case was not a "straightforward waiver case" because the insurer did not have actual knowledge and fail to act; instead, the court found MetLife liable on an agency theory under federal common law. It attributed Providence's knowledge and conduct to MetLife based upon a rule that, in certain situations, the employer in a group insurance plan is the agent of the insurer. Specifically, the court found MetLife liable based on Providence's apparent authority to collect evidence of insurability through MetLife's Statement of Health form and on MetLife's behalf. Because Providence failed to properly collect evidence of insurability for Wolk, MetLife waived the right to enforce the evidence of insurability requirement when it nevertheless accepted premiums.

The 9th Circuit attempted to allay MetLife's concerns for broader applicability of this agency rule in noting that its holding "does not mean that a policy-holder employer is always an agent of the insurer in every aspect of plan administration in which it participates" and the nature of the relationship must be considered on a case-by-case basis.

Salyers has broad implications for ERISA waiver and estoppel, bringing in at least some situations where the insurer may not have "actual knowledge" of all aspects of an employee's coverage, but is still going to be held responsible for coverage based on an employer's actions. ERISA plan participants and beneficiaries will now be better equipped to vigorously attack ERISA coverage denials using theories of estoppel, waiver and breach of fiduciary duty.