Fiduciary duty applies to employee retirement benefit plans

Most employee benefits are governed by a federal law called the Employee Retirement Income Security Act of 1974 (ERISA), including disability insurance, life insurance, accidental death insurance, health insurance, pensions, and other benefits offered by employers to their employees through their employee benefit plans. Sometimes the plan’s administrator or an insurance company (if the plan’s benefits are funded by an insurance policy), miscalculates the employee’s monthly benefit and misrepresents to him the amount due, which in turn can lead to dire financial results if the employee relies to his detriment on the insurer’s misrepresentation. Is an ERISA insurer liable to an employee for such wrong calculations and misrepresentations?

That is a complicated question under ERISA fiduciary duty law. Until the very recent decision from the Ninth Circuit Court of Appeals in Irina Morris v. Aetna Life Insurance Company, No. 21-56169, 2023 WL 3773656 (9th Cir. Jun. 2, 2023), the answer was unclear. The courts had found that when an administrator made a mistake in calculating plan benefits while following the procedures set by another entity, it engaged in a “ministerial” function, not a fiduciary one, because no discretion or judgment was required. So held the Ninth Circuit of Appeals in Bafford v. Northrup Grumman Corp., 994 F.3d 1020 (9th Cir. 2021). But, going forward, the answer is a resounding yes. Insurers, plan administrators, and their third-party administrators who make “calculation” errors are performing a fiduciary function when those calculation errors are accompanied by other actions, thanks to the Morris decision.

Morris is significant because it changed the landscape of ERISA fiduciary duty law on these types of issues in a favorable way for ERISA plan participants. In doing so, the court strictly limited its landmark Bafford decision. In Bafford, the court held that a third-party administrator that incorrectly calculated a pension plan benefit amount within the framework of a policy and procedure set by another entity did not have to exercise any discretion, and so its error did not constitute a fiduciary function but rather was just a ministerial calculation error that could not be a fiduciary duty breach. The third-party administrator selected the wrong salary data for its online calculator, which caused it to overstate the employees’ monthly pension amounts on which they relied to retire. ERISA insurers and administrators had successfully relied on Bafford to avoid liability for breach of fiduciary duties (when they miscalculated a plan participant’s benefits), on the ground that they did not exercise any discretion or judgment, the prerequisite of a fiduciary function. However, Morris drastically expanded the scope of fiduciary duty liability for ERISA plan insurers and administrators when they engage in wrongful conduct at the time of or subsequent to such a calculation error. And, Morris even implied that some benefit miscalculations made by named or functional fiduciaries similar to the mistake in Bafford are not ministerial but fiduciary since they are in fact ERISA plan fiduciaries.

In Morris, Aetna Life Insurance Company, the group insurer and named fiduciary of the employer’s long-term disability plan, negligently miscalculated the employee plaintiff Morris’ monthly long-term disability benefit, overstating it by hundreds of dollars per month. In collecting data to calculate Morris’ benefit, Aetna made a mistake about the amount of Morris’ salary, that she was paid 26 times per year when she was really paid 24 times per year. Since her monthly LTD benefit was a percentage of her pre-disability salary, Aetna’s mistake caused it to overstate her benefit. Aetna paid Morris the wrong monthly benefit amount, and misrepresented the amount to her and her lenders, for nine years. Aetna did not verify that its initial calculation was correct for almost a decade, even in response to Morris’ several phone calls and letters to Aetna’s benefit counselors asking the amount of her benefit because she wanted to apply for a mortgage and later refinance based on her disability income. Aetna then attempted to recover the “overpaid” amounts from Morris and when she refused to repay the sum, Aetna deducted the overpayment from her disability benefits, causing Morris substantial hardship. She sued Aetna for breach of fiduciary duties under ERISA. The district court ruled against Morris and held that all of Aetna’s subsequent misconduct and misrepresentations were inextricably entwined with its initial ministerial benefit calculation error and, therefore, were not fiduciary functions under Bafford.

The Ninth reversed. In a key part of the opinion, the Morris court rejected Aetna’s contention that Bafford controlled because Aetna performed a ministerial benefit calculation error and, therefore, because all subsequent actions arose from this calculation error, it did not perform any fiduciary functions. The court found that this argument “misreads Bafford’s holding.” It held that, “Even assuming Aetna’s initial mathematical calculation is not discretionary, its subsequent actions – which were central to Morris’ injury – were” discretionary. Thus, the appellate court reversed.

The Morris Ninth Circuit Court found that Aetna performed fiduciary functions in several respects after its calculation error (even if Aetna’s initial long-term disability plan benefit calculation error was not a fiduciary act under Bafford because it did not exercise discretion). Specifically, Morris found the following conduct by Aetna were fiduciary functions that involved discretion (and thus subjected Aetna to liability to its insured Morris for breach of fiduciary duty):

After Aetna miscalculated Morris’ monthly LTD plan benefit amount, Aetna provided Morris with “individualized consultations with benefit counselors” about the incorrect amount of her monthly plan benefit.

In contrast to Bafford’s use of an online mechanism to calculate benefits and mail auto-generated statements to the plan participants: (1) Aetna’s employee ability specialists, team leaders, and customer service representatives consulted with Morris by phone about her benefit amount numerous times; (2) Aetna’s Long Term Disability Benefit Manager sent letters Aetna knew Morris would share with lenders as proof of her benefits; and (3) Aetna communicated with Morris’ financial institutions to verify her benefit amount.

Morris cited Bafford and other cases that, “‘[C]onveying information about the likely future of plan benefits’ through benefit counselors amounts to a fiduciary act.”

Aetna communicated with Morris and her lenders, and represented to them the incorrect monthly benefit amount, which was a fiduciary function, unlike Bafford, because of the extent of Aetna’s involvement in her financial life.

After Morris phoned Aetna and asked whether Aetna made a benefit calculation error, Aetna did not verify the accuracy of its benefit calculations. Instead, Aetna repeatedly affirmed the erroneous benefit amount directly to Morris and her lenders for almost a decade, which higher income misrepresentations allowed Morris to take out a mortgage, refinance, enter a divorce settlement, and pay taxes on the basis that she was entitled to a higher income, to her financial detriment.

Aetna exercised discretion when it decided to aggressively collect its $56,000 overpayment of disability benefits back from Morris, even suspending her monthly benefit to recoup the money, which put her in dire financial straits, despite its knowledge that Morris had relied on Aetna’s incorrect statements about her monthly benefit amount to make important financial decisions.

In addition, the Morris court held that Aetna exercised discretion and thus performed a fiduciary function when it gathered Morris’ salary information and interpreted the Plan’s terms to determine which benefits and deductions or offsets applied in order to determine Morris’ monthly benefit amount, which was different than the ministerial calculations in Bafford where a third-party administrator calculated benefits within the framework of a preset online formula set by another entity and did not have to exercise discretion. Though the court did not explicitly say so, this implies that Aetna’s benefit calculation error was fiduciary in nature, not ministerial. The Morris Court also reiterated established Ninth Circuit ERISA fiduciary duty law that: (1) The “alleged wrong must occur in connection with the performance of a fiduciary function to be cognizable as a breach of fiduciary duty;” and (2) “Thus, the ‘threshold question’ in cases involving fiduciary breach is whether the fiduciary ‘was performing a fiduciary function[] when taking the action subject to complaint.’ ”

In the wake of Bafford, the Ninth’s Morris decision swung the pendulum back toward plan participants. The case expanded what constitutes a fiduciary function. The Morris case clarified that, in relation to even a ministerial benefit calculation error, an ERISA insurer still can perform fiduciary functions in many respects. Thus, Morris clarified and drastically expanded the scope of an ERISA insurer’s fiduciary duty liability for miscalculating and misrepresenting plan benefits. That is a fair result because ERISA insurers and administrators are fiduciaries of plan participants and their beneficiaries. As fiduciaries, they have a duty to act solely in the interest of the plan’s participants and beneficiaries for the exclusive purpose of providing them their benefits, and with care, skill, prudence, and diligence. See 29 U.S.C. § 1104(a)(1). This welcome decision will make it easier for ERISA plan participants and their beneficiaries to protect their hard-earned employee benefits.