Broken promises, lost benefits: holding employers to their word.

Holding Employers to Their Word

Employees make decisions about health care, retirement, and life insurance depending on how an employer represents the benefits it provides. Decisions about hospital admissions and treatment and choices about pension or severance plans hinge on these representations. But what happens if a misrepresentation is made, and employees, relying on it, act to their detriment? Can the employer or insurer be held liable?

Several recent court decisions have created confusion in this area, and the availability of a remedy is in doubt. This article explores these questions and presents a basis for recovery.

Historically, employers and insurers who have made misrepresentations about benefits have been held liable.(1) However, this principle has come into question because a 1987 U.S. Supreme Court ruling gave wide-ranging preemptive powers to the Employee Retirement Income Security Act of 1974 (ERISA).(2) In Pilot Life v. Dedeaux, the Court interpreted ERISA broadly, holding that the act preempts all common law causes of action related to employee benefit plans.(3)

From rulings issued after Pilot Life, it is clear that "ERISA's preemptive power remains virtually undefeated."(4) For example, ERISA preempts claims for reimbursement of medical expenses as well as other claims for pension or welfare medical and life insurance) benefits.

The basis for such broad preemption is found in the ERISA statute, which states that the act "shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan."(5) This language has been interpreted to mean "this knocks out any effort to use state law, including state common law, to obtain benefits under such a plan."(6) Generally, as a result, ERISA preemption defeats misrepresentation or estoppel claims brought against employers or insurers by participants in or beneficiaries of employee benefit plans.

For example, in Nachwalter v. Christie, the Eleventh Circuit ruled that an alleged oral agreement could not prevent the enforcement of the written provisions of a pension plan.(7) The court reasoned that [section] 1102 requires that ERISA plans be in writing, with provisions specifying amendment procedures. Estoppel cannot be used to amend the plan because it would disturb ERISA's policy of protecting employees' rights. According to the court, no one would be able to rely on the written plan provisions if they could be modified orally and funds disbursed according to private changes.(8)

The Eleventh Circuit later clarified Nachwalter in National Companies Health Benefit Plan v. St. Joseph's Hospital.(9) The court allowed a plan participant to use estoppel to establish his right to participate in continued health coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) amendments to ERISA.(10)

A California district court threw out an estoppel claim in St. Mary Medical Center v. Cristiano. The judge held that an employer's misrepresentation about enrolling a newborn in a health insurance plan is not actionable because "common law principles of estoppel are not applicable to ERISA claims."(11)

The Seventh Circuit court reached the opposite conclusion in Black v. TIC Investment Corp., in which the employer misled the employee about severance payments.(12) The plaintiff alleged that the employer, its chairman, and its vice president of finance were fiduciaries and that they could not deny the severance claim the employee made based on the employer's representations.

The Seventh Circuit ruled that estoppel was available in ERISA cases to prevent "a party from benefitting from its own misrepresentations." The court said,

There is no reason for the employee

who reasonably relied to his detriment

on his employer's false representations

to suffer. There is no reason for the

employer [that] misled its employee

to be allowed to profit from the misrepresentation.

We hold, therefore,

that estoppel principles are applicable

to claims for benefits under unfunded

single-employer welfare benefit plans

under ERISA.(13)

The Seventh Circuit modified its position on the applicability of estoppel in Pohl v. National Benefits Consultants, Inc. There the court held that employees who were misled by their employer about the amount of health benefits available had no remedy.(14) After determining that the plaintiffs' claim was preempted by ERISA, the court stated,

One of ERISA's purposes is to protect

the financial integrity of pension and

welfare plans by confining benefits to

the terms of the plans as written, thus

ruling out oral modifications. This

purpose would be thwarted if participants

could maintain suits under state

law against a plan administrator that

were based on oral representations of

coverage. It is true that the Pohls are

not seeking to enlarge coverage as such;

but any money they obtained from

this suit would be functionally a benefit

to which the written terms of their

plan do not entitle them.(15)

Recently, the Seventh Circuit seemed to return to its reasoning in Black. In Thomason v. Aetna Life Insurance Co., the court reaffirmed that estoppel claims are actionable under ERISA, but it refused to allow claims based on waiver principles.(16) As a result, the court upheld the insurance company's refusal to pay life insurance benefits to the widow of a disabled employee.

Aetna had advised the employee in writing that he was not required to pay premiums while he was disabled. However, the written plan documents stated to the contrary, and Aetna refused to pay life insurance benefits to his wife after his death because the premiums had not been paid. Mrs. Thomason argued that Aetna had waived its right to insist on payment when it gave her husband incorrect information.

Although the court rejected the waiver argument, it reaffirmed that Black was still valid--that estoppel could be used in cases where employees rely on employers' or insurers' interpretations of benefit plans. However, the court left open the question of whether oral or written representations may modify--rather than interpret--a plan.

Both Pohl and Thomason appear unduly harsh. In both cases, the plaintiffs relied to their detriment on the incorrect advice they were given. Had the correct information been given, the harm could have been avoided. Although it is generally acknowledged that an insured is obligated to know the terms of an insurance policy, that obligation is diminished when the insured has been misled. In Pohl and Thomason, the employees had no reason to verify what they were told.

This point is illustrated in Eddy v. Colonial Life Insurance Co. of America.(17) The court held that an insurer owed a duty to provide accurate information to an employee who inquired about his right to convert group insurance coverage to individual coverage when he left his job. The court in that case ruled that the employee "did not have a duty to try and try again until he received correct and complete information."(18)

Although Eddy involved the insurance company's duties, the same principle should apply to employers who supply advice. Both act as fiduciaries. Under the common law of trusts, as well as under specific provisions of ERISA,(19) "the duty to disclose material information is the core of a fiduciary's responsibility, animating the common law of trusts long before the enactment of ERISA."(20)

Thus, the Eddy court ruled, "a fiduciary has a duty not only to inform a beneficiary of new and relevant information as it arises, but also to advise him of circumstances that threaten interests relevant to the relationship."(21)

Retiree Health Benefits

Health benefits for retirees are perhaps the most significant battleground in this area. As the cost of providing this coverage has increased, employers have sought to withdraw promises they made to maintain retiree health insurance at little or no cost to former employees. For the most part, the employers have been successful.

One example is Musto v. American General Corp.(22) The court ruled that the employer could change the terms of its health coverage for retirees because it had reserved the right to do so. Therefore, the employer's promise to provide lifetime coverage was conditional. The court recognized that the promise of retiree benefits was an inducement for employees to work for the defendant. Nonetheless, it held that ERISA did not provide employees with a permanent, vested right to their health insurance benefits.(23)

The court did not accept the plaintiffs' claim that oral promises of lifetime health care created rights greater than those stated in the plan. Nor did the court find the employer subject to fiduciary liability, since the decision to amend benefits was not deemed a fiduciary one. The court ruled, "There is a world of difference between administering a welfare plan in accordance with its terms and deciding what those terms are to be. A company acts as a fiduciary in performing the first task, but not the second."(24)

Similarly, in Moore v. Metropolitan Life Insurance Co.,(25) retirees unsuccessfully tried to stop Metropolitan from changing its promised lifetime health benefits. As in Musto, the court relied strongly on Metropolitan's reservation of the right to change or discontinue the plan. The court held that despite the company's communications with employees describing benefits as "lifetime" or "at no cost," the dear reservation of rights precluded the plaintiffs' recovery.

Although courts have expressed great sympathy for retirees, this has not benefited them. For example, in Senn v. United Dominion Industries, Inc., the court held that retired union employees had no claim to vested lifetime health benefits because the collective bargaining agreement between the employer and the union reserved the right to amend the plan.(26)

The court relied heavily on its earlier decision in Ryan v. Chromalloy American Corp.(27) for the proposition that ERISA does not provide for vesting of employee welfare benefits. The court also found that the company was not obligated to continue benefits after the collective bargaining agreement expired. Finally, it held that the company had no fiduciary duty to provide retirees with lifetime benefits.(28) Although the court concluded by expressing its sympathy for the retirees, it denied a remedy.

A more recent decision has apparently overturned Senn. In Bidlack v. Wheelabrator Corp., another union case, the issue was whether Wheelabrator's promises of lifetime health benefits established vested rights that outlasted the expiration of the collective bargaining agreement.(29) The court determined that the language in the agreement was inconclusive.

The court allowed the parties to submit evidence to clarify the contract and determine the parties' true intent. A concurring opinion suggested that the presumption should be in favor of an intent to vest lifetime benefits. Although the court did not go this far, it did make clear that it would not bail out the employer just because health costs had risen faster than anticipated.

Several other decisions are equally encouraging. Beginning with the seminal case of UAW v. Yard-Man, Inc.,(30) several courts have inferred that promised retiree health benefits are a vested right to which workers are entitled.

Like Bidlack, Yard-Man involved a dispute over retiree health benefits under an expired collective bargaining agreement. The Sixth Circuit disagreed with the employer's argument that the right to benefits ended when the contract expired. The court held that it could examine the context of the contract negotiations to deterrmine the parties' intent.

Later, in Armistead v. Vernitron Corp., the Sixth Circuit ruled that unionized employees who elected to retire when their plant was closed were entitled to lifetime benefits promised in their collective bargaining agreement.(31) The court determined that although the agreement had expired, evidence established that the parties had intended to maintain the benefits.

The court rejected the defendant's argument that it had reserved the unqualified right to amend or terminate the benefits to retirees. The court said the reservation "would render illusory Vernitron's promise to provide these benefits."(32) The court viewed the promise of retiree benefits as "a form of deferred compensation."(33)

The court also held that the plaintiffs could use estoppel to prevent the defendant from denying health benefits. The court distinguished welfare benefits from pension benefits, which cannot be obtained by estoppel. The court found that the rule against estoppel in pension plans is grounded in the need to maintain the actuarial soundness of the funds. However,

this is not necessarily the case with insurance

benefit plans. Typically, the

employer pays policy premiums out

of its own assets, perhaps with a contribution

from the employee. The actuarial

soundness of a fund, which

might be depleted if strict vesting and

accrual requirements were not observed,

is not an issue where a plan of this

description is involved.(34)

In a similar case, Alexander v. Primerica Holdings, Inc., the court held that a summary plan description offering retiree health insurance benefits did not clearly reserve the right to reduce benefits.(35) Because of this ambiguity, the court opened the door to consideration of evidence concerning the parties' intent, the beneficiaries' understanding of the benefits, and the company's past practices.

The most recently reported decision on a retiree health benefits dispute came from the Third Circuit at the end of 1993. In Schoonejongen v. Curtiss-Wright Corp., the court held that although the employer's plan contained a qualification allowing changes, the employer could not discontinue benefits because the plan lacked an amendment procedure as mandated by ERISA.(36) The court held that the act required formal amendment procedures so that participants' expectations about coverage would be met. However, the court refused to find that the plaintiffs had a vested right to benefits.

Finally, a slightly different fact pattern and approach to this issue is found in Sprague v. General Motors Corp.37 GM moved for summary judgment, seeking to avoid its obligation to pay retirement benefits to salaried employees who had elected early retirement. The employees' early retirement package contained a benefit summary, which included a promise of lifetime health insurance. Significantly, many of the retirees accepted early retirement in exchange for releasing the company from potential age discrimination claims.

Noting that "medical insurance benefits do not vest automatically under ERISA," the district court in Michigan said that "such benefits may vest by agreement between the parties."(38) The court nonetheless rejected the plaintiffs' claim that the language of their plan created a vested right, because the same page of the document expressly warned that the plan was subject to change.

However, because the employees had surrendered valuable rights in exchange for early retirement, the court determined that they had a special status that might make it possible to enforce the promise of lifetime health benefits. According to the court, "These early retirement agreements may be enforceable under ERISA as independent bilateral contracts or as modifications of GM's health care benefit plan."(39) On that basis, the employees' claim was allowed to go forward.

The Spirit of the Law

These cases all illustrate the same point: Employees' expectations about welfare benefits may not be fulfilled, and workers may be denied needed benefits without remedy. Although some courts have used common law trust principles to find for employees in ERISA cases, many others have held to the contrary.

ERISA expresses a policy of

protect[ing] interstate commerce and

the interests of participants in employee

benefit plans and their beneficiaries,

by requiring the disclosure and reporting

to participants and beneficiaries of

financial and other information with

respect thereto, by establishing standards

of conduct, responsibility, and

obligation for fiduciaries of employee

benefit plans, and by providing for

appropriate remedies, sanctions, and

ready access to the federal courts.(40)

Given this policy and the trust principles that permeate ERISA, many case findings that misrepresentations are not actionable appear unjust. Eddy and Sprague particularly contrast with Thomason's refusal to apply waiver principles and Pohl's implied duty of self-protection. There can be no such duty when an employer's conduct has misled employees into believing that benefits are available and into acting to their detriment.

The results in these cases appear to run contrary to ERISA's policy of protecting the interests of benefit plan participants. Employees should not have to accept advice from insurers or employers at their peril. Nor should insurers or employers be free to furnish erroneous advice or make false promises without facing the consequences. While the courts are following the letter of the law in their careful reading of the language of ERISA welfare plans, the spirit of the law is being abandoned.(41)

Perhaps a uniform system of national health insurance will address these concerns, but that is a question for the future. Until Congress acts, these cases require careful examination. When the employee has suffered damage as a result of erroneous, misleading, or incomplete advice from the employer or insurer, there should be a remedy. This result is consistent with precedent and trust law and is mandated by the policy behind ERISA.

Governors Ask Congress for Power to Regulate ERISA Health Plans

Calling the 1984 federal Employee Retirement Income Security Act (ERISA) "one of the greatest barriers" to state health care reforms, the National Governor's Association (NGA) recently asked Congress to amend it or waive certain parts. According to the governors, ERISA preemption is a significant issue that must be addressed in the current national debate over health care policy. Courts have interpreted ERISA as barring all state regulation and taxation of employers' self-insured health plans.

The NGA urged Congress to make health insurance universal this year and called for insurance reforms like coverage portability, guaranteed renewability, limits on exclusions, and limits on rate variability.

The group also asked Congress to make health care premiums tax deductible, establish a core package of benefits for everyone, subsidize health insurance for low-income people, and either permit states to organize purchasing cooperatives for Medicaid beneficiaries or enroll them in health maintenance organizations.

The governors also asked Congress to establish federal outcome and quality standards for health care and to permit administrative simplifications like standardized claim forms. (See Robert Pear, Governors Ask for Power Over Self-Insurance Plans, N.Y. Times, Jan. 30, 1994, [sub-section] at 20.)

However, recognizing that Congress may find it difficult to arrive at consensus on health care reform this year, the governors also asked for interim legislation modifying ERISA to remove barriers to certain state reforms. Courts have held that ERISA preempts all state and common law, so states cannot regulate claims procedures or set standard benefits packages. This poses problems for victims of torts like bad faith in connection to ERISA plans. Employees have little recourse if employers deny them coverage or unilaterally rewrite health or pension plans. (See Cuts in Benefits Lead to Surge in ERISA Suits, TRIAL, May 1992, at 97.)

Notes

(1) See, e.g., Sur v. Glidden-Durkee, 681 F.2d 490 (7th Cir. 1982); McGinnis v. Bankers Life Co., 334 N.Y.S. 2d 270 (App. Div. 1972); Credeur v. Continental Assurance Co., 502 So. 2d 214 (La. Ct. App. 1987); 1 JOHN A. APPLEMAN & JEAN APPLEMAN, INSURANCE LAW & PRACTICE [section] 43.25 (1981). (2) 29 U.S.C. [subsection] 1001-1461 (1988). (3) 481 U.S. 41 1987). (4) Maciosek v. Blue Cross & Blue Shield, 930 F.2d 536, 539 (7th Cir. 1991). (5) 29 U.S.C. [section] 1144(a) (1988). (6) Pohl v. National Benefits Consultants, Inc., 956 F.2d 126, 127 (7th Cir. 1992). (7) 805 F.2d 956 (11th Cir. 1986). (8) Id. at 960-61. (9) 929 F.2d 1558 (11th Cir. 1991). (10) Pub. L. No. 99-272, 100 Stat. 82 (codified at 29 U.S.C. [section] 1162 (1988)), (11) 724 F. Supp. 732, 743 (C.D. Cal. 1989). (12) 900 F.2d 112 (7th Cir. 1990). (13) Id. at 115. (14) 956 F.2d 126. (15) Id. at 128. (16) 9 F.3d 645 (7th Cir. 1993). (17) 919 F.2d 747 (D.C. Cir. 1990). (18) Id. at 752. (19) See 29 U.S.C. [section] 1022 (1988). (20) 919 F.2d 747, 750. (21) Id. (22) 861 F.2d 897 (6th Cir. 1988), cert. denied, 490 U.S. 1020 (1989). See also Boyer v. Douglas Components Corp., 986 F.2d 999, 1005 (6th Cir. 1993). (23) 861 F.2d 897, 908. (24) Id. at 911. (25) 856 F.2d 488 (2d Cir. 1988). (26) 951 F.2d 806, 815 (7th Cir. 1992). (27) 877 F.2d 598, 602 (7th Cir. 1989). (28) 951 F.2d 806, 816. (29) 993 F.2d 603, 609 (7th Cir. 1993). This case was decided under [section] 301 of the Taft-Hartley Act (29 U.S.C. [section] 185 (1988)), which gives a private right of action to enforce collective bargaining agreements, but it could have been decided under ERISA. (30) 716 F.2d 1476 (6th Cir. 1983), cert. denied, 465 U.S. 1007 (1984). See also Keffer v. H. K. Porter Co., 872 F.2d 60, 64 (4th Cir. 1989). (31) 944 F.2d 1287 (6th Cir. 1991). (32) Id. at 1296. (33) Id. at 1297. (34) Id. at 1300. (35) 967 F.2d 90, 93-94 (3d Cir. 1992). (36) 1993 WL 533734 (3d Cir. Dec. 28, 1993). (37) 768 F. Supp 605, 606 (E.D. Mich. 1991). (38) Id. at 610 citing In re White Farm Equip. Co., 788 F.2d 1186 (6th Cir. 1986)). (39) 768 F. Supp. 605, 612. (40) 29 U.S.C. [section] 1001(b) (1988). (41) William K. Carr & Robert L. Liebross, Wrongs Without Rights: The Need for a Strong Federal Common Law of ERISA, STAN. L. & POL'Y REV, Winter 1992-1993, at 221-23.