The Fourth Circuit Court of Appeals has rejected a retroactive change to a deceased employee’s group life insurance benefits, holding the benefits vested at the time of the employee’s death and, thus, payable to the beneficiary.
In this case, Blackshear v. Reliance Standard Life Insurance Company, the group life insurance policy and the summary plan description initially stated that nonexempt employees had no waiting period before being covered whereas exempt employees had a 6-month waiting period. The employee whose coverage was at issue was nonexempt. She started work on June 10, 2003 and died on Dec. 14, 2003. An amended group life policy was issued by the insurance company (also the plan administrator) on Jan. 26, 2004 and was made retroactive to Jan. 1, 2003. Under the amended policy, both exempt and nonexempt employees would be subject to a 6-month waiting period before coverage would take effect. The insurer then denied the beneficiary’s claim for failure to satisfy the waiting period and the district court ruled in favor of the insurer.
Reversing the district court’s decision, the appeals court initially noted that a group policy that is part of an employee welfare benefit plan is generally exempt from the statutory vesting requirements imposed by ERISA on pension benefits. But, the court noted, the terms of a plan may create vested rights in welfare benefits even though the employer is under no obligation to do so. Furthermore, the court stated, once an employer or plan sponsor grants vested rights under a welfare benefit plan, it may not retroactively amend the plan to deprive a beneficiary of a vested benefit.
With respect to whether the beneficiary’s right to the life insurance proceeds vested before the insurer issued the amended policy in the current case, the appeals court reiterated its ruling in a prior case: under general principles of contract law, benefits vest when performance is due under the contract. In the case of a group life insurance policy, the court continued, the right to benefits vests (i.e., performance becomes due) at the time of the plan participant’s death.
With that in mind, the appeals court determined that in the current case, the beneficiary’s rights under the plan vested at the moment the employee died–which was prior to the issuance of the amended policy containing the service waiting period. Accordingly, the insertion of a waiting period had the effect of dispossessing the beneficiary of rights that were already vested and, therefore, was impermissible.
The court concluded that the insurance company could not deprive the beneficiary of vested benefits based on the waiting period in the amended policy. (The court further concluded that the insurer’s application of the “clerical errors” provision to arrive at such a result was an abuse of discretion.)
Accordingly, the appeals court reversed the decision of the district court and remanded the case back to that court for summary judgment to be entered in favor of the beneficiary.
Sonya E. King, J.D., LL.M. is an Associate Editor of Tax Facts, a publication of the National Underwriter Company. She can be reached via e-mail at .