A recent court case, By Referral Only, Inc. v. Travelers Prop. Cas. Co. of Am. 2019 is a case study on why every business that offers benefits should carry sufficient fiduciary liability insurance. Here are the facts.
By Referral Only, a small company in California with a double-handful of employees employed Teresa McGee until her terminal breast cancer diagnosis meant she could no longer work. Referral’s director tried to do the right thing by McGee, continuing to pay her life insurance premiums so that her beneficiary would be able to collect after her death.
The director didn’t take into account that the life insurance was only available to active employees. When her beneficiary tried to collect on her life insurance policy the claim was denied.
The beneficiary was forced to turn to Referral for payment on her policy. The beneficiary claimed that Referral didn’t notify McGee about her rights to convert her policy. Referral felt that their employee benefits liability insurance through Travelers should have paid on this claim and turned to them for relief. Travelers denied the claim because it was not covered under the fiduciary responsibility clause of ERISA.
The beneficiary was entitled to the benefits promised by Referral but the court found Referral was not covered because of the ERISA carve out. Referral had to pay the entire claim, over $140,000, out of its own pocket.
You can see that even with the best intentions, mistakes can be costly. Fiduciary liability insurance would have protected Referral.