The Sanctity of Plan Documents
The cases interpreting ERISA over the last 30+ years make clear that the terms of the plan documents govern the rights and duties of the administrators and beneficiaries of a plan. Often that works to the disadvantage of beneficiaries who are given erroneous or incomplete information and who rely on that information to their detriment.
But a case from the U.S. Court of Appeals for the Fourth Circuit last Friday, Blackshear v. Reliance Standard Life Ins. Co., ___ F.3d ___, 2007 U.S. App. LEXIS 28330 (4th Cir. 2007), illustrates that this type of rigid enforcement of ERISA plan documents sometimes works to the advantage of beneficiaries. The trial court ruled in favor of Reliance Standard that Blackshear had no life insurance coverage but the Fourth Circuit reversed that denial and awarded benefits.
Verdie Blackshear went to work at Duplin General Hospital as a nurse. She elected to receive life insurance through the group policy the hospital provided to its employees. Unfortunately for her, she passed away about six months after that. When her designated beneficiary under the policy submitted a claim, Reliance Standard, the insurer, contacted the hospital to get confirmation that Verdie was covered. At that point, the hospital gave Reliance Standard some bad news. It indicated that, contrary to the language in the Reliance Standard policy, no employees should have been covered until six months after their first full month of employment. Verdie passed away just a few days short of that threshold.
Reliance Standarad wrote the claimant and indicated that due to a clerical error, the insurance policy issued to Verdie mistakenly stated that she was covered at the time of her death when, in fact, the employer indicated she was not covered. Reliance Standard denied Blackshear's claim and then issued a new policy, purportedly effective on the same date the old policy went into effect, stating that the six month waiting period was in place for all employees.
Reliance Standard had language in its policy granting itself discretion to interpret that document. It argued that its decision was not completely unreasonable and, consequently, that the court should defer to its interpretation and uphold its denial of coverage. The Fourth Circuit disagreed, stating that where the terms of the policy were unambiguous, a grant of discretion did not give an insurer the power to ignore those policy terms. Reliance Standard tried another argument. Pointing to language in the policy that indicated "clerical errors" would not decrease or increase coverage that would otherwise be in effect, the insurer asked that its mistake in how the policy was initially drafted be excused. The court also rejected that argument.
The second, corrected, policy that Reliance Standard issued may have been effective to deal with most employees. But for Verdie Blackshears, the event insured against, her death, occurred when the first policy, the one with the immediate coverage language, was in place. It may not have stated what the employer wanted or intended, but it was the only ERISA plan document that she knew about. Once she passed away, the rights of her designated beneficiary vested under that policy, not the new corrected one. The fact that the policy contained a scrivener's error didn't change the entitlement that beneficiary had to insurance proceeds on Verdie's life.