Eddy v. Colonial Life Ins. Co. of America

• Decision Date: 23 November 1990
• Docket Number: No. 89-7206,89-7206
• Citation: 919 F.2d 747,287 U.S. App. D.C. 76
• Parties: , 59 USLW 2335, 12 Employee Benefits Ca 2743 Joan EDDY, Executor of the Estate of James Peter Eddy, Appellant, v. COLONIAL LIFE INSURANCE COMPANY OF AMERICA, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 747

919 F.2d 747

287 U.S.App.D.C. 76, 59 USLW 2335,

12 Employee Benefits Ca 2743

Joan EDDY, Executor of the Estate of James Peter Eddy, Appellant, v. COLONIAL LIFE INSURANCE COMPANY OF AMERICA, Appellee.

No. 89-7206.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 25, 1990.

Decided Nov. 23, 1990.

Patricia A. Smith, with whom Dale Edwin Sanders, Alexandria, Va., was on the brief, for appellant.

Frank J. Martell, Washington, D.C., for appellee.

Before WALD, Chief Judge, MIKVA and RUTH B. GINSBURG, Circuit Judges.

WALD, Chief Judge:

Joan Eddy appeals from a district court ruling that the Colonial Life Insurance Company ("Colonial Life" or "Chubb") did not breach its fiduciary duty to her son, James Peter Eddy, despite Eddy's claim that he received misleading information which resulted in the termination of his health and life insurance coverage. We hold that the district court erroneously construed Chubb's fiduciary duty to Eddy; accordingly, we reverse the district court's decision and remand for further proceedings.

I. BACKGROUND

In May 1986, James Peter Eddy was diagnosed as "HIV-positive," that is, as infected with the virus that causes Acquired Immune Deficiency Syndrome (AIDS). Eddy's doctors told him that he had one year to live. Undaunted, Eddy continued to work at Unitag, a Washington, D.C. travel agency, where he served as office manager. In the summer of 1987, his condition worsened. He developed symptoms often associated with AIDS--fevers, vomiting, weight loss; he underwent medical treatment for those symptoms; and, at his doctor's direction, he scheduled exploratory surgery for Monday, September 14. Trial Transcript ("Tr.") at 13-14.

At his office on September 10, Eddy received a memorandum. Its brevity belied its gravity:

Unitag's group health insurance policy [offered by Colonial Life] will terminate September 14, 1987. Any health costs you have incurred prior to September 14, 1987 will be covered by our present policy. However, no expenses incurred on or after September 14, 1987 will be covered[; they will instead] be your responsibility.

Four Seas has not made it clear whether they will cover you immediately or not. So for your convenience, Nabil [Mounla, Finance Director] has found a company willing to cover individuals for short temporary periods. An information booklet and application are enclosed.

Joint Appendix ("J.A.") at 199 (emphasis supplied). Unitag, it seems, had come upon hard times and was being sold to Four Seas, another travel agency. Accordingly, Unitag was canceling its group insurance coverage, ostensibly leaving Eddy and its other employees uninsured.

Understandably concerned--surgery was scheduled for the coming Monday--Eddy reviewed the booklet attached to the memo; he found, unfortunately, that the new coverage described was not available in Washington, D.C. See J.A. at 200. He then called Mounla, who was responsible for Unitag's insurance coverage, but Mounla offered little help. Finally, Eddy telephoned Colonial Life directly; he told the agent that he was a Unitag employee and that his group policy benefits were being terminated. Eddy v. Unitag World Travel Service, Inc. et al., No. 88-1038, Memorandum Opinion ("Mem. op.") (D.D.C. July 31, 1989) at 4, reprinted in J.A. at 11, 15.

What happened next is disputed. At trial, Eddy testified that the Chubb agent then consulted Unitag's policy and transferred the call to a man who identified himself as a supervisor. Eddy testified that he explained his situation to the supervisor and asked "about conversion rights underneath my policy"; the supervisor "said that [Eddy] did not have the right to convert [his employment-based coverage] to an individual policy." Tr. at 20. Witnesses for Chubb testified that they had no record of Eddy's call, but admitted that the company did not keep complete records of such calls. They also testified that, contrary to Eddy's testimony, none of the agents in the department to which Eddy's call should have been directed were men. Mem. op. at 9, J.A. at 20.

Eddy did not "convert" his insurance coverage and at midnight on September 13-14, his coverage ended. Now uninsured, Eddy postponed his surgery. On September 14, instead of going to the hospital, Eddy went to his new job at Four Seas Travel.

As witnesses for Chubb would later testify, Eddy did in fact have a right to convert his insurance coverage, a right to extend his coverage even though Unitag's group policy had been terminated. See J.A. at 180, 194-95. Had he so converted his coverage and kept current his premium payments, Eddy would have retained his health and life insurance benefits. In April 1988, Eddy filed suit in the District Court for the District of Columbia, contending inter alia ¹ that, in its dealings with Eddy, Chubb had violated the Employee Retirement Income Security Act (ERISA), 29 U.S.C. Sec. 1001 et seq.

Eddy did not stay long at Four Seas, in part because he had been demoted from office manager to reservationist. After a few days, he resigned. His health deteriorated, and several months later, James Eddy moved to Florida to be closer to his mother. Tr. at 25-26.

At a bench trial in July 1989, Eddy testified about his telephone conversations with Mounla and Chubb. His testimony was supported by that of Edward Ryan, Eddy's coworker, who shared an office with Eddy and overheard his telephone conversations with Mounla and Chubb. Mem. op. at 8, J.A. at 19. Mounla, Unitag's financial director, also testified and offered indirect support for Eddy's claim by explaining how he, too, had been told by Chubb that "existing benefits could not be converted to individual policies." Mem. op. at 6, J.A. at 17. Witnesses for Chubb discussed the absence of any record of Eddy's call and the general procedures for handling such inquiries.

In a memorandum opinion, the district court ruled for the insurance company, reasoning that Eddy's claims hinged on whether "he asked about his conversion rights and not about his ability to continue his coverage." Mem. op. at 10 (emphasis supplied), J.A. at 21. An employee's insurance coverage may be "continued" when his employment is terminated (or he otherwise becomes ineligible) but the employer's group policy remains in effect. An employee's coverage may be "converted" from a group to an individual policy when an employee is terminated or becomes ineligible or when, as in this case, the underlying group plan is itself terminated. Continuation rights are governed by state and federal laws; conversion privileges are established by the provisions of the particular policy. In this case, although Eddy did have the right to convert his coverage, he did not have the right to continue that coverage, because Unitag had cancelled its group plan. Refusing to credit the testimony of Eddy and Ryan to the contrary, the district court found that Eddy had not "demonstrated ... that he used the word 'convert' or otherwise properly communicated to Chubb his desire to convert" his coverage. Mem. op. at 10, J.A. at 21.

Eddy subsequently developed Kaposi's Sarcoma, a form of cancer associated with the later stages of AIDS. He started a new job in Florida, but his new insurance coverage did not extend to pre-existing conditions. By July 1989, Eddy's medical expenses totalled several thousand dollars. Tr. at 14, 22.

In August, Eddy appealed the district court's decision. Before his case could be argued in this court, James Peter Eddy died. His mother, the executor of his estate, now carries on this appeal.

II. ANALYSIS

This case centrally concerns the scope of an insurance company's duty to one of its insured. We find that the standard of care articulated by the trial court was too narrow and hold that a fiduciary in Chubb's position has a duty upon inquiry to convey to a lay beneficiary like Eddy correct and complete material information about his status and options when a group policy is cancelled--a duty that, in this case, Chubb apparently failed to fulfill.

Chubb concedes that it is a fiduciary within the meaning of Sec. 1104 of ERISA, 29 U.S.C. Sec. 1104. Mem. op. at 12, J.A. at 23. As such, Chubb is obligated to

discharge [its] duties with respect to a plan ...

(B) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims....

29 U.S.C. Sec. 1104(a)(1). As this section suggests, the duties of an ERISA fiduciary are not limited by that statute's express provisions but instead include duties derived from common law trust principles. "[R]ather than explicitly enumerat[e] all of the ... duties [of ERISA fiduciaries], Congress invoked the common law of trusts to define the general scope of their ... responsibility." Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570, 105 S.Ct. 2833, 2840, 86 L.Ed.2d 447 (1985) (citation omitted); see also H.Rep. No. 93-533, 93d Cong., 2d Sess. at 11-12, reprinted in 1974 U.S.CODE CONG. & ADMIN.NEWS 4639, 4649.

The duty to disclose material information is the core of a fiduciary's responsibility, animating the common law of trusts long before the enactment of ERISA. At the request of a beneficiary (and in some circumstances upon his own initiative), a fiduciary must convey complete and correct material information to a beneficiary. As the Restatement (Second) of Trusts states:

[The trustee] is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person....

Restatement (Second) of Trusts Sec. 173, comment d (1959). This fundamental common-law duty informs many of the statutory requirements of ERISA itself. Under ERISA, a...