Conversion is an important feature in employer-sponsored life insurance plans that can allow an employee to maintain coverage after experiencing a loss of eligibility by converting group coverage to an individual policy. Critically, though, the responsibility to adequately inform the employee about the conversion option falls upon the employer rather than the insurer. This duty is underscored in a recent decision by a U.S. District Court, Erwood v. Life Insurance Company of North America (Erwood).
The Employer's Obligation
In Erwood, the employer provided group life insurance coverage to its employees. One employee, Erwood, was covered under the life insurance plan at the time he commenced a medical leave of absence and, sometime thereafter, was terminated from employment. During discussions with Erwood and his spouse, the employer failed to provide the necessary information and forms that would allow Erwood to convert his life insurance policy. As a result, he died without the life insurance coverage both he and his spouse believed he had.
The Court found the employer liable for its failure to adequately inform Erwood about his rights to convert the group life insurance policy. In its decision, the Court made clear that the employer breached its fiduciary duty by not providing Erwood with sufficient information about his conversion rights, and the employer was ordered to pay Erwood's surviving spouse the full amount of benefits that would have been provided under the life insurance policy had it been converted - a sum of $750,000.
Next Steps for Employers
While insurance carriers, brokers, and third party administrators provide valuable assistance to employers, the responsibility to ensure that employees receive accurate and timely information about their coverage ultimately rests with the employer. To avoid a scenario like that in Erwood, employers should:
- Confirm whether a conversion feature is included in the group life insurance policy by checking the Evidence of Coverage or consulting with the insurer;
- Ask whether the insurer supplies conversion forms that the employer is to provide its employees or whether the employer must create its own;
- Determine the length of time an employee has to exercise his/her conversion rights;
- Make conversion rights a topic that is included in the employment termination and leaves commencement processes, as well as any other process that involves an employee's loss of eligibility to continue participation in the group life plan.