Ruling demonstrates when employers are agents of insurers

People are often drawn to job opportunities because of the employee benefits offered to them and their families. A generous benefit package that includes several types of insurance such as medical, short-term and long-term disability, and life coverage could be the deciding factor for a prospective employee. They are not experts in the enrollment process. They often rely on their employer's human resources department to help them understand their coverage options, pay their premiums, understand what forms they must submit, and help them solve any problems that may arise. However, if the employer fails to accurately explain coverage requirements, and if the forms are not correctly completed to an insurer's satisfaction, insurers can and will deny claims, blaming the employees or their employers. California law protects employees in some circumstances. For example, under an agency theory, an employee can impute legal responsibility to the insurer for the employer's errors in administering an employee benefit plan, thus rendering the insurer liable for the employer's mistakes or negligence under equitable remedies of waiver and estoppel.

The recent case of Dones v. Life Ins. Co. of N. Am., 2020 DJDAR 10896 (Oct. 7, 2020) further expands protection for employees and their beneficiaries. In Dones, an employee of Alameda County, Trina Johnson, enrolled in supplemental life insurance coverage with the Life Insurance Company of North America (LINA). She was a county employee but on a medical leave of absence. While on her medical leave, she received information regarding her benefit eligibility for the supplemental life insurance. She made her election online, selecting $230,000 in supplemental life coverage and naming Michael Dones as her primary beneficiary.

The master policy stated, "If an Employee is not actively at work due to Injury or Sickness, coverage will not become effective for an Employee on the date his or her coverage would otherwise become effective under this Policy. [¶] Coverage will become effective on the date the Employee returns to Active Service." The master policy defined "Active Service" as follows: "An Employee will be considered in Active Service with the Employer on a day which is one of the Employer's scheduled work days if either of the following conditions are met: [¶] 1. He or she is actively at work. This means the Employee is performing his or her regular occupation for the Employer on a full-time basis, either at one of the Employer's usual places of business or at some location to which the Employer's business requires the Employee to travel. [¶] 2. The day is a scheduled holiday, vacation day or period of Employer approved paid leave of absence, other than disability or sick leave after 7 days."

After her cancer diagnosis, Johnson received confirmation that she had successfully elected her benefits and that her coverage would become effective on Jan. 1, 2017. The county deducted premiums for her benefits which were sent to and accepted by LINA. Johnson remained on leave and died six months later without having returned to work.

After Johnson's death, a county employee informed Dones that Johnson's life insurance coverage never became effective because she had not returned to "active service."

Dones sued both LINA and the county. In his second amended complaint, he asserted causes of action for breach of contract, breach of implied contract, and breach of the implied covenant of good faith and fair dealing (against LINA only). Dones asserted that both defendants waived and were estopped from asserting the active service requirement. The second amended complaint alleged that if an employee who elected the supplemental insurance benefit while on leave returned to work for even one day after the Jan. 1, 2017, effective date, the supplemental benefit would become active. But Johnson did not understand the requirement and reasonably believed that the policy covered her automatically after the effective date.

Defendants filed demurrers to Dones' amended complaint. The trial court sustained the demurrers without leave to amend. It rejected Dones' argument that LINA and the county waived, or were estopped from enforcing, the active service requirement. The trial court relied on case law holding that waiver and estoppel arguments cannot be used to create insurance coverage that does not exist in the plan documents. Dones appealed.

In reversing the trial court's order, the California Court of Appeal considered several cases, including most importantly the 9th U.S. Circuit Court of Appeals decision in Salyers v. Met. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), a case involving employee benefits subject to the Employee Retirement Income Security Act of 1974. The Salyers court found a waiver where the insurer accepted premium payments but later denied a death benefit because the plan participant failed to provide a "Statement of Health" as required for eligibility. The court held, "The deductions of premiums, [the insurer] and [employer's] failure to ask for a statement of health over a period of months, and [the employer's] representation to Salyers that she had $250,000 in coverage were collectively 'so inconsistent with an intent to enforce' the evidence of insurability requirement as to 'induce a reasonable belief that [it] ha[d] been relinquished.'"

While insurers and plan administrators often argue that waiver cannot be used to create coverage beyond that actually provided in an employee benefit plan, Salyers noted the distinction created by the acceptance of premiums. The Salyers court held that where premium payments have been accepted despite the plan participant's alleged noncompliance with policy terms, giving effect to the waiver does not expand the scope of the plan, but rather, provides the plaintiff with an available benefit for which he paid.

The Dones court noted further that waiver and estoppel are normally questions of fact. It declined to hold that these principles cannot establish the existence of an effective contract of insurance as a matter of law.

It then turned to whether the county's conduct could support causes of action for breach of contract against LINA. The court considered the California Supreme Court's decision in Elfstrom v. New York Life Ins. Co., 67 Cal. 2d 503, 512 (1967), which held as a matter of law that the employer is the agent of the insurer in performing the duties of administering group insurance policies. The California Supreme Court based its reasoning on the fact that the employee has no knowledge or control over the employer's actions in handling the policy or its administration. The Dones court found that Dones' allegations (that the county was acting as an agent for LINA in the administration of the life insurance policy as well as informing Johnson of available benefit options, communicating with her about and confirming her selections, deducting premium payments and transmitting them to LINA) were sufficient to allege agency under Elfstrom. It determined that the county acted as LINA's agent in administering the life insurance policy (for purposes of determining LINA's liability). But it held that the county could not be held responsible, relying on law that makes it difficult to pin liability on governmental entities.

This decision affirms that in the context of employer-sponsored benefits, the employer is the agent of the insurer with regard to the administration of the policy. This can be very important to tie an employer's errors in administration to the insurer and thus provide an avenue of recourse for a beneficiary such as Dones who would otherwise be without recourse.

Plan administrators must carefully and accurately communicate coverage options and policy terms to employees like Johnson. If they do not, they and the insurer may be exposed to litigation and potential liability for their misconduct. As was the case with Salyers, this often occurs with a "proof of good health" requirement that the plan administrator and insurer fails to enforce, leading the unsuspecting employees to believe they are fully covered. Recent expansion of breach of fiduciary duty liability, waiver, estoppel and agency theories in federal ERISA cases have been a welcome development for employees who obtain insurance coverage from their employers. While the Dones case did not find liability against the county, when read in conjunction with Salyers, it will surely be read to further expand liability against non-governmental employers and insurers outside of the ERISA context and will thus assist employees and plan beneficiaries to secure their much needed plan benefits. 