4th Circuit Uses High Court Decision to Allow for Surcharge

July 16, 2012 (PLANSPONSOR.com) – A federal appellate court has found a life insurance and accidental death & dismemberment plan participant can recover more than just premiums withheld for her ineligible daughter.

Debbie McCravy argued that a district court committed a legal error by limiting her damages to premiums wrongfully withheld by MetLife because the remedy of surcharge is available to her under Section 1132(a)(3). Specifically, McCravy contends that she, as “the beneficiary of a trust,” is rightfully “seeking to ‘surcharge’ the trustee [MetLife] in the amount of life insurance proceeds lost because of that trustee’s breach of fiduciary duty.”   

The 4th U.S. Circuit Court of Appeals said it must agree with McCravy’s arguments in light of the U.S. Supreme Court decision in CIGNA Corp. v. Amara, as the Supreme Court pronounced in that case that a “surcharge,” i.e., “make-whole relief,” constitutes “appropriate equitable relief” under Section 1132(a)(3). In its opinion, the high court said “[e]quity courts possessed the power to provide relief in the form of monetary ‘compensation’ for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment. . . . [P]rior to the merger of law and equity this kind of monetary remedy against a trustee, sometimes called a ‘surcharge,’ was ‘exclusively equitable.’”   

The 4th Circuit reversed the district court’s opinion and remanded the case for further proceedings.  

McCravy was employed with Bank of America, which offered a dependent life insurance and accidental death & dismemberment welfare benefit plan that was insured and administered by Metropolitan Life Insurance Company (MetLife). McCravy was the named beneficiary under a policy that covered her now deceased daughter, Leslie.    

Although McCravy paid and MetLife accepted premiums for coverage for Leslie until the time of Leslie’s death in July 2007, Leslie was not eligible to participate in the plan because she was over the age of 19 at the time of her death, although she was younger than 19 when plaintiff first elected coverage.

After MetLife denied her claim for life insurance benefits, McCravy filed suit in district court alleging that MetLife breached its fiduciary duty in administering the plan, and seeking equitable relief pursuant to Employee Retirement Income Security Act (ERISA) section 502(a)(3). She argued that under a provision of the policy, she was entitled to convert the coverage on her daughter from the group insurance which funded the ERISA plan to an individual policy, and that she would have done so if she had been told she needed to do so.    

Because it was a breach for MetLife to have failed to inform McCravy of this, especially considering it accepted premium payments from her for years and allegedly led her to believe that this coverage was in place, she argued both that she was entitled to the proceeds under either a waiver/equitable estoppel theory or under a make-whole theory of equitable relief.   

The district court held that McCravy was not entitled to the full amount of the life insurance benefits, but that her sole available remedy was a return of the premiums she had paid for coverage on the life of her daughter. The court rejected her estoppel claim, reasoning that it would conflict with 4th Circuit precedent holding that ERISA does not allow an oral modification to the clear written terms of a plan, as well as with 4th Circuit cases holding that principles of waiver and estoppel are not part of the common law of ERISA.  Similarly, the court rejected McCravy's argument that it should surcharge MetLife for the amount of the life insurance benefits.   

In an amicus curiae brief filed with the 4th Circuit, Secretary of Labor Hilda Solis argued that ERISA Section 502(a)(3) permits the court to surcharge MetLife for the insurance proceeds that McCravy would have received but for the alleged breaches of fiduciary duty (see “Solis Files Brief in Support of Surcharge for Fiduciary Breaches”). She also said the relief sought is equitable because both the basis for the claim and the remedy sought are equitable.   

Solis filed another brief following the Supreme Court ruling in CIGNA Corp. v. Amara (see “Solis Files Brief with U.S. Court of Appeals in McCravy Case”).  

The 4th Circuit’s opinion is here.