Participant's Heirs Can Pursue Claim Under ERISA, Court Says

From Employer's Handbook: Complying with IRS Employee Benefits Rules, ©Thompson Publishing Group, Inc.

The U.S. District Court for the Southern District of New York decided that an employee's beneficiaries are entitled to pursue a claim under the Employee Retirement Security Act of 1974 (ERISA) for interest on benefits the employer delayed paying. The case is Gustafson v. Kennametal, Inc. (No. 00 CIV. 7396 RWS) (Jan. 10, 2001).

Facts of the Case
Kennametal, Inc. established a business travel accident plan which provided insurance to employees through Reliance Standard Life Insurance Company (RSL). Hugo Freudenberg's policy provided for payment of $500,000 to a beneficiary if he died in an accident that occurred while he was travelling on Kennametal business. The policy also provided for an additional $50,000 payment to the beneficiary if Freudenberg was wearing a seatbelt when such an accident took place. Freudenberg named his wife, Gisela, as his beneficiary. While travelling from his home to a facility where he could make arrangements for upcoming Kennametal meetings, Freudenberg and his wife were involved in a fatal car crash.

Beate Freudenberg Gustafson and Susanne Freudenberg Burick are Gisela and Hugo's daughters and the heirs to Gisela's estate. Gustafson is the estate's executrix. Gustafson and Burick communicated with Kennametal shortly after the accident about submitting a claim under the plan, and provided documents and information regarding the circumstances of the crash showing that the trip had been undertaken for Kennemetal business purposes. Kennametal did not follow up on this information, and did not handle the claim in a manner that established the business purpose of the trip when the crash took place. RSL denied the claim, arguing that there was insufficient evidence that Freudenberg had been traveling on company business.

Kennametal advised Gustafson and Burick that it was their obligation to appeal the denial of benefits, and suggested they assemble specific information to support such an appeal. They did so, and RSL reversed its earlier denial and granted full benefits under the plan.

The Parties Go to Court
Gustafson and Burick filed suit to obtain approximately $30,000 in interest that had accumulated on the benefits during the eight-month delay allegedly caused by Kennametal's treatment of the claim, as well as $70,000 for attorneys' fees incurred in making the appeal of RSL's original denial. The complaint alleges that Kennemetal violated ERISA and the common law governing contract and fiduciary duty.

Gustafson and Burick charged that Kennemetal violated its duties as plan administrator and fiduciary by failing to pursue a claim for benefits diligently and effectively, and that as a result payment was delayed. Gustafson and Burick also charged that even though they submitted relevant documents, Kennemetal did not incorporate them into the initial application and failed to:

1. diligently, zealously and thoroughly investigate the circumstances surrounding Freudenberg's accident;
   
2. effectively and persuasively assemble and present to RSL the facts establishing that the accident was covered under the plan;
   
3. preserve e-mail archives and other corporate records which could have aided in establishing the validity of the claim;
   
4. properly inform RSL that it could determine facts necessary for it to conclude the claim was covered by the plan; and
   
5. formally take the position that the claim was covered.

Kennemetal argued that the claim for interest concerned damage that took place outside the insurance contract and is not recoverable under ERISA. Kennametal filed a motion to dismiss the claims.

The Court Weighs in
The court said that Gustafson and Burick had standing to bring an ERISA claim for interest on the delayed benefits. It said that under ERISA, an insurance company should not be allowed to deny health benefits merely because the participant and the beneficiary of the health plan have died. The court said that the interpretation of ERISA Kennemetal proposed would unduly restrict recovery of benefits due under employee welfare benefit plans, for to deny standing to the sole heirs or executrix would be to deny any recovery at all. The court said that although ERISA does not specifically authorize the executrix and/or sole heirs of participants and beneficiaries to bring suit under its civil enforcement provisions, other courts have recognized that inferring such a rule is consistent with congressional intent in establishing ERISA.

The court also said that Gustafson and Burick's complaint that Kennemetal's failures lead to the denial of benefits and forced an appeal process that delayed payments fairly alleged a breach of the implied covenant of good faith and fair dealing. Because Gustafson and Burick had stated the requisite elements of a claim for interest accrued on unjustifiably delayed benefit payments, the court denied Kennemetal's motion to dismiss this element of the suit.

The court ruled in Kennemetal's favor, however, regarding the attorneys' fees Gustafson and Burick incurred in making their appeal of the initial denial of benefits. The court said that the fees do not qualify as equitable relief and are not recoverable.

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