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Guest Article

Fiduciary Status Based on Duties Performed, Not Solely Plan Document Designation, Court Rules

Summary: An insurer who was not a named fiduciary could be sued for breach of fiduciary duty because it had the discretionary authority to manage plan assets, which is a fiduciary duty.

An employer's breach of fiduciary duty claims against an insurer under an administrative services only (ASO) contract were not dismissed -- even though the insurer was not named as a fiduciary in the plan documents -- because the insurer exercised discretion in managing plan assets and maintaining plan records, a federal district court ruled on a summary judgment motion. Therefore, the insurer was liable under ERISA as a "functional fiduciary" for violating the terms of the ASO contract with the employer. The case is Guardsmark Inc. v. Blue Cross and Blue Shield of Tennessee, 2001 WL 1352231 (W.D. Tenn., Oct. 19, 2001).

The insurer, in providing claims services, acted as a fiduciary since it approved and denied claims, wrote checks against plan assets to pay claims it approved, and denied the employer a chance to review the decisions.

Facts of the Case

Guardsmark Inc. was a corporation that acted as the plan administrator, plan sponsor and fiduciary of its group health plan, which was funded by a trust fund that was overseen by a board of trustees. Guardsmark had an ASO contract with Blue Cross and Blue Shield of Tennessee which terminated after less than five years. During this period, Guardsmark alleged that Blue Cross served as a fiduciary and breached that duty by:

  1. exercising discretionary authority to approve or deny claims but wrongfully approving and losing claims for payment; and
  2. controlling plan assets in disbursing checks but overpaying claims and overcharging for its services.

Other fiduciary duty breaches allegedly committed by Blue Cross include failing to: (1) provide the plan with a complete history of claims paid over a two-year period; (2) accurately report reinsurance claims; and (3) maintain accurate records of the plan's annual and lifetime benefits. Based upon these allegations, Guardsmark and its board of trustees sued Blue Cross for breach of fiduciary duty. They also said that Blue Cross violated ERISA's prohibited transaction rules by using plan assets to secure unreasonable compensation for its services. They also filed state-law breach of contract claims against Blue Cross regarding these violations.

Blue Cross Was 'Functional Fiduciary'

Blue Cross argued that it was not a fiduciary and, accordingly, the plaintiffs' ERISA claims should be dismissed. The court, however, found that Blue Cross was a fiduciary for the purposes of this claim, even though the ASO contract did not name Blue Cross as a fiduciary. The court noted that ERISA reserved fiduciary liability for "named fiduciaries" -- those individuals who are either listed in the plan documents or who are identified as fiduciaries through another plan-specific procedure.

However, ERISA also extended fiduciary liability to "functional fiduciaries" -- those individuals who serve as fiduciaries by performing at least one of several specified functions in plan administration. According to the court, the 7th Circuit has held that the key determinant of functional fiduciary status is if an individual exercises discretionary authority regarding plan management, disposition of plan assets or plan administration. As such, the court noted, ERISA's definition of fiduciary is based on the individual's actual control and authority over the plan, without regard for an individual's job title or the use of "magic words" such as "purely ministerial." The court also noted that the 1st, 6th and 9th Circuits have followed similar reasoning.

The court found that Blue Cross functioned as a fiduciary because it exercised discretionary authority in approving or denying claims and writing checks to pay claims. Therefore, based upon existing evidence and the stage of the case, the court declined to dismiss the plaintiffs' breach of fiduciary duty claim, finding that they may have evidence to support their claims.

The court also found that Blue Cross breached its fiduciary duties under ERISA, adding that as a fiduciary, Blue Cross could be held liable under ERISA for improper management, administration and investment of plan assets and failure to maintain proper records and disclose specified information.

The court also denied Blue Cross' motion to dismiss the plaintiffs' prohibited transactions claim, finding that Blue Cross engaged in a prohibited transaction when it overcharged for administrative fees and overpaid claims. The court found that the plaintiffs had stated a valid ERISA claim, provided that they only seek equitable relief.

State-Law Breach of Contract Claims Not Dismissed

The plaintiffs then argued that Blue Cross violated the terms of the ASO contract, thereby committing state-law breach of contract violations. Blue Cross argued that the state-law breach of contract claims were preempted by ERISA and should be dismissed.

The court noted that the plaintiffs' state-law claims were virtually identical to their ERISA breach of fiduciary duty claims and would be preempted. However, ERISA confers different rights on the plan than it does on the other plaintiffs -- the fund and its trustee board.

Specifically, ERISA does not preempt state-law claims that address Blue Cross' role as a non-fiduciary. In this case, certain services or functions within the ASO contract fell outside of ERISA's scope, and as a result, state-law breach of contract claims may exist. These claims do not "refer to" or "relate to" ERISA, but only to Blue Cross' performance of certain obligations under the ASO contract. As such, they were not preempted, the court held.

Therefore, the court noted that the plan may allege that Blue Cross is liable both as a fiduciary for some functions and a non-fiduciary for other functions. Accordingly, the court denied Blue Cross' motion to dismiss the state-law claims against it as a non-fiduciary, but granted Blue Cross' motion to dismiss the remaining claims.


Some functions commonly performed by claims administrators and thought of as "ministerial" are in a gray area as to whether they qualify as discretionary acts. Decisions have to be made when claims are not automatically adjudicated. Ultimately, any decision requires some judgment. While the decisionmaking here appears to go further into the realm of discretion -- particularly when the plan sponsor is denied the opportunity to review -- other daily administrative functions are less clear.

Similar issues are raised regarding check writing. Does the TPA write the check but only after or with plans sponsors approval? Or does the TPA write checks to a certain limit, then send a report to the plan sponsor with a request to replenish funds in a trust account?

This case -- and the cases it refers to -- suggests that TPAs review their practices to determine whether they inadvertently are performing functional fiduciary acts and, thus, exposing themselves to unanticipated risk.

Excerpted from the January 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc., 2002. All rights reserved.

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