In Hannan v. Hartford Financial Services, Inc., (2d Cir., April 25, 2017), the Second Circuit Court of Appeals affirmed dismissal of a potential ERISA class action against Family Dollar Stores, its employee benefits plan, and the plan’s group life insurance provider (Hartford), rejecting allegations by plan participants that the plan defendants had engaged in a so-called “cross-subsidization” scheme in violation of federal law. The Second Circuit confirmed that neither the negotiation of premium rates nor any alleged subsidization component between different types of life insurance provided under the plan constituted a breach of fiduciary duty or prohibited transaction under ERISA.
The background facts, as alleged in the complaint and summarized in the court decisions, are as follows. Family Dollar contracted with Hartford to provide group life insurance coverage to employees under the Family Dollar Stores, Inc. Group Insurance Plan (the “Plan”). All employees were automatically enrolled in basic life insurance under the Plan at no cost to them. They also were offered the option (but were not obligated) to purchase supplemental life insurance coverage for which they would pay the premiums.
In March 2015, the plaintiffs filed a proposed class action, alleging that Hartford and Family Dollar acted improperly when they negotiated the premiums for both the basic and the supplemental life insurance coverage for the Plan. Specifically, plaintiffs alleged that Family Dollar negotiated a discount on the basic life insurance premium it paid, and that the Hartford offset some of this discount by increasing the supplemental life insurance premium charged to the employees who purchased supplemental coverage. Plaintiffs characterized this arrangement as an inappropriate “cross-subsidization and kickback scheme” that resulted in “overcharging” the employees who purchased supplemental coverage” with premiums that were “higher than called for” by “underwriting and actuarial pricing projections.” Plaintiffs alleged that defendants thereby violated ERISA, asserting claims for breach of fiduciary duty, co-fiduciary liability (arising from the failure to remedy each other’s breaches), prohibited transactions, and also “federal common law unjust enrichment under ERISA.”
The defendants moved to dismiss, and by decision dated March 29, 2016, the district court granted the motion as to all counts, on the grounds that the plaintiffs did not identify a misrepresentation or false statement made to them, there was no fiduciary duty to disclose the allocation of supplemental life insurance premiums, the insurance rate structure did not violate ERISA or any fiduciary duties, and the selection of the rate structure did not constitute self-dealing.
On appeal, through a summary order, the Second Circuit affirmed the district court’s decision, concluding that the district court had correctly dismissed all of the claims. Noting that the complaint identified only Hartford’s negotiation conduct as the basis for fiduciary liability, the Second Circuit agreed that the complaint did not sufficiently allege that Hartford had or exercised any discretionary authority over the Plan or its assets with respect to the setting of the contract terms governing the Plan, and thus was not subject to fiduciary duty. As to Family Dollar, while recognizing that ERISA imposes a fiduciary duty on plan administrators to avoid intentional material misrepresentations in communications with plan beneficiaries about plan contents, the Second Circuit likewise agreed that the complaint did not identify any material misrepresentations or omissions on the part of Family Dollar. Although plaintiffs had pointed to alleged representations about the basic life insurance benefit being non-contributory and the supplemental benefit being contributory, these statements were in fact accurate. Further, the Court found that Family Dollar had no obligation to reveal how it would apply premium proceeds.
Finally, the Second Circuit rejected plaintiffs’ arguments that the purported “cross-subsidization scheme” violated ERISA’s ban on self-dealing. The Court determined that Family Dollar used plaintiffs’ premiums for the sole purpose of covering insurance costs under the Plan, and that its use of cost-reduction strategies to minimize its cost of providing employees with basic and supplemental life insurance did not constitute a transfer for its own benefit or self-dealing in its own interest. As a result, the Court found there were no breaches of fiduciary duty nor any knowing participation in prohibited transactions, and affirmed the dismissal of all of the claims.
The decision is one of several recent cases where courts have declined to find fiduciary status or liability for third-party providers based solely on contract negotiations, where the providers do not otherwise exercise control or discretion over plan assets. It supports the position that insurers and other providers do not become fiduciaries simply by negotiating the terms and prices of services with a plan sponsor at arms’ length, an area that is typically deemed to be a “settlor” function (and not a fiduciary function) on the part of the employer/plan sponsor.