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The U.S. Court of Appeals for the Second Circuit (CT, NY, VT) has affirmed a district court’s dismissal of a class action lawsuit that alleged a group-term life insurance “cross subsidization and kickback scheme” was a violation of the insurer’s and the employer’s fiduciary duties. The lawsuit alleged the employer negotiated a discount on the company-paid basic life insurance by increasing the rates charged to employees who purchase supplemental coverage.

Lockton comment: As we discussed in our prior blog post, a federal district court in Connecticut had dismissed the suit against the employer and its life insurer alleging that the rates charged employees who purchased supplemental group-term life insurance subsidized the noncontributory, basic coverage provided by the employer.

First, the appellate court agreed that ERISA fiduciary duties are not implicated where an employer makes a decision about plan structure, who is entitled to benefits and in what amounts or how such benefits are calculated. Second, the insurer was not a fiduciary with respect to the negotiation of plan premiums under its own contract.

Also, the court agreed there were no allegations the company misrepresented the structure of the life insurance program. Even if that were alleged, the plaintiffs would need to demonstrate the misstatements would have affected their decision about whether or not to purchase supplemental insurance. The company indicated in its open enrollment guide the basic coverage was provided “at no cost to the Team member.” The employer never communicated it paid the entire cost of basic coverage out of its own non-plan revenues. And, the premiums charged to participants for the supplemental coverage were not higher than the amounts quoted by the insurer.

Lockton comment: It’s not clear if other courts would view the issues in the same manner and whether the U.S. Department of Labor agrees with the result of the case. Employers who want to avoid this issue should ask the life insurance carrier to provide basic and supplemental rates that are each self-supporting.