Courts of Appeal Consider Disclosure Duties to Participants or Beneficiaries

Summary: Several recent regulatory and litigation developments related to plan administration are summarized in capsule form in the following article.

In two completely different types of cases, the 3rd and the 6th Circuit recently held that plan administrators may breach their fiduciary duty under ERISA by failing to provide ERISA participants or beneficiaries with accurate information regarding plan benefits. This is particularly true when the participant does not know the proper questions to ask and/or the plan administrator knows that his or her silence on a particular issue could be harmful.

In Palen v. Kmart Corp,2000 U.S. App. LEXIS 10780 (6th Cir., unpublished opinion), Andrew Danieli was an employee of Kmart and a participant in the Kmart welfare plans. When Danieli terminated employment, his girlfriend, Cecilia Palen, called Kmart on his behalf to ask about continuing "all his benefits." Kmart told her they would send her a COBRA package, which addressed only continued health plan coverage. Ms. Palen did not specifically inquire about converting any group life insurance coverage into an individual policy. Shortly after the deadline passed for converting the group life insurance coverage into a single life insurance policy, Mr. Danieli died, and Ms. Palen sued Kmart.

Although there was evidence that the conversion process was described in the life insurance plan's summary plan description (SPD) and that Mr. Danieli understood the procedures for converting his life insurance coverage (based upon both his own exit interview and exit interviews he had previously conducted for other employees), the 6th Circuit concluded that Kmart had breached its fiduciary duties to Ms. Palen. According to the court, one of the duties owed is the duty to respond completely and accurately to requests for information about the plan. This obligation also imposes an affirmative duty to inform when the fiduciary knows that silence may be harmful. The fact that full disclosure had already been made to Mr. Danieli did not relieve Kmart's duties to respond fully and accurately to Ms. Palen.

The Kmart case addresses a situation where the participant (or beneficiary) was not aware of the particular question he or she needed to ask (such as, "What about the life insurance?"). However, the 3rd Circuit recently ruled that there may also be fiduciary duty to provide complete and accurate information to clarify any ambiguous information already provided. The case is Harte v. Bethlehem Steel Corp., 2000 U.S. App. LEXIS 12001 (3rd Cir.).

Bethlehem Steel's pension plan provided an enhanced retirement benefit to any participant who completed at least 15 years of continuous service. The plan stated that continuous service would terminate two years after the participant leaves employment due to a layoff or disability, but it would not terminate if the participant left employment due to a "compensable disability."

The plaintiff, Robert J. Harte, had ceased active employment due to a heart condition, but had been receiving payments from the employer's long-term disability plan. Thus, Mr. Harte believed that he did have a "compensable disability," and was continuing to accrue continuous service under the plan. However, the plan administrator had consistently interpreted "compensable disability" to mean that the participant was receiving state workers' compensation. Because Mr. Harte was not receiving state workers' compensation, the plan administrator concluded that his continuous service ended after a two-year absence. At that time, Mr. Harte was just 19 days away from completing 15 years of continuous service. Due to an alleged clerical error, Mr. Harte did not learn that his continuous service had been terminated until almost eight years later.

The court found that although the plan administrator has properly reserved the right to interpret the phrase "compensable disability," (1) participants need to receive adequate and accurate information to make well-informed retirement and employment decisions; (2) the plan document is an affirmative representation about the plan, and participants and beneficiaries may reasonably expect that it provides complete and accurate information; and (3) fiduciaries must provide employees with relevant information when they have know or should know their silence may be harmful. The court held the plan administrator may have breached its fiduciary duty by not notifying Mr. Harte that his service had broken "when he might predictably and reasonably presume, after reading the pertinent part of the plan, that he is still [accruing such service]."

Both the Kmart case and the Harte case involve unusual, sympathetic facts. However, they support the broader position that courts frequently find that a plan administrator's duties go beyond simply answering questions accurately. Instead, the plan administrator may have a duty to offer additional information that the participant or beneficiary would find helpful, particularly where the plan administrator's silence on the issue would be harmful.

In another case, Bins v. Exxon (1999 U.S. App. LEXIS 20779), the 9th Circuit concluded that not only does a plan sponsor have a duty to accurately answer participant's questions about possible early retirement windows to be offered in the future, but the fiduciary also has an affirmative duty to disclose material plan changes under consideration. Recently the 9th Circuit agreed to rehear the case en banc (2000 U.S. App. LEXIS 218). The fact that the full 9th Circuit is reviewing the divided opinion of the original three-judge panel suggests that the court may want to impose limits on a fiduciary's affirmative duty to disclose.

Reprinted with permission from the August 2000 supplement to The Pension Plan Fix-It Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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