:: Equitable Surcharge and Reformation – New Remedies Add Bite to Bungled Insurance Benefits Administration

Plaintiff claims that Defendants’ alleged mishandling of Guy Barnette’s request to port his life insurance and failure to inform him of his other options under the Policy constitute breaches of fiduciary duty.  She has alleged a claim solely pursuant to § 502(a)(3), 29 U.S.C. § 1132(a)(3), of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq. Barnette v. Sun Life Assurance Co. of Canada, No. CV 4:15-3720, 2016 WL 1384688, at *2 (S.D. Tex. Apr. 7, 2016)

This case illustrates the possible use of surcharge and reformation as a solution for fiduciary malfeasance in the communication and handling of a life insurance benefits.
The facts were as follows:
Guy Barnette was employed by KenMor Electric Co., LP (“KenMor”) for almost 28 years.  KenMor is a subsidiary of Defendant Heico Holding, Inc.. During Guy Barnette’s employment, he maintained life insurance coverage through the Plan.
The policy, which was provided by Defendant Sun Life, included “Basic Life Insurance coverage in the amount of $92,000, and Employee Optional Voluntary Life or Supplemental Life insurance coverage in the amount of $122,000.” Guy Barnette’s employment was terminated on January 1, 2013, because his deteriorating health prevented him from performing his job duties. Guy Barnette subsequently died on October 29, 2013.
Carolene Barnette alleges that Defendants improperly impeded Guy Barnette from shifting his employer-based life insurance policy under the Plan to an individual policy following the termination of his employment.
Defendants allegedly also failed to inform the Barnettes of three additional options available under the Policy: the Accelerated Benefit provision, the Continuation of Life Insurance Coverage provision, and the Conversion Privilege.
Claim for Relief
The plaintiff alleged a claim solely pursuant to § 502(a)(3), 29 U.S.C. § 1132(a)(3), seeking the following equitable relief:

(1) an equitable surcharge for unjust enrichment to recover the benefits loss [sic] or withheld and to make the ERISA beneficiary whole, (2) reformation of the Plan to the extent needed to equitably address and pay her claim for the entirety of the life insurance benefits that she should be entitled to, and (3) waiver or equitable estoppel preventing Sun Life, Heico, and the Plan from relying on the misinformation or the failure to give correct and accurate information to the Barnettes as grounds for denial [of] her claim for life benefits.

Recast Claim For Benefits?

The defendants argued that plaintiff has recast a claim for benefits as a claim for equitable relief to avoid the exhaustion of administrative remedies requirement.  The Court noted that a plaintiff cannot recover on a claim under § 502(a)(3) where relief is available under § 502(a)(1)(B), but did agree with the defendants’ argument.

Plaintiff does not allege that any term of the Plan entitles her to benefits. To the contrary, she acknowledges that, under the written Plan documents, her husband was not covered by a Sun Life insurance policy at the time of his death. See Amended Complaint [Doc. # 9], at 5, ¶ 18. She instead seeks redress because of alleged failures by Defendants’ employees in dealing with her requests to exercise rights under the Plan to obtain post-employment coverage for her husband.4 Her only option is resort to § 502(a)(3).


Citing CIGNA Corporation v. Amara, the Court agreed with the plaintiff that  traditional principles of equity allow for monetary relief pursuant to § 502(a)(3)  as a remedy for breach of fiduciary duty by a trustee. “A surcharge is an imposition of personal liability on a fiduciary for wilful or negligent misconduct in the administration of fiduciary duties.” (citing 76 AM. JUR. 2d Trusts § 334 n.1 (2016)).
Relying upon Amara, the Court also agreed with the plaintiff that a request for reformation of the terms of the Plan is properly sought through a § 502(a)(3) claim. “Where a plaintiff pleads a § 502(a)(3) claim, reformation is a possible form of relief.”
On the other hand, the plaintiff ran into trouble on her estoppel claim. The elements of an ERISA estoppel claim are “(1) a material misrepresentation; (2) reasonable and detrimental reliance upon the representation; and (3) extraordinary circumstances.”

The Fifth Circuit has made clear that a party may not rely on an oral modification of a written plan’s terms.  Such reliance is, as a matter of law, not “reasonable and detrimental reliance” for purposes of ERISA estoppel.

Since the plaintiff’s complaints were based on provisions written in the policy that was available to the Barnettes, the plaintiff’s estoppel argument failed.

Note:  For purposes of the motion before the Court, the defendants did not argue that they were not fiduciaries.  The availability of the surcharge remedy turns on this important point.

Ultimately, among other issues, the Court must address whether Defendants through their employees acted as fiduciaries against whom equitable monetary relief may be available or as non-fiduciaries who are subject to legal monetary damages. This distinction is crucial.

 Estoppel and Surcharge Distinguished – ERISA estoppel and equitable surcharge are distinct theories and forms of relief. Detrimental reliance is not essential to a claim for equitable surcharge for breach of fiduciary duty by a trustee.

Effect of Amara  CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) has significantly changed the outcomes in available relief in cases of alleged fiduciary breach.  Contrast the outcome in the case analyzed in this post versus that discussed here.