Recent news of Spitzer shaking up the insurance industry has filled the news over the past week. However, yesterday’s article in the Wall Street Journal (subscription required) entitled “Class-Action Threat Added to Challenges Facing the Insurers” discusses the impact of the probe on the employee benefits arena. (See also today’s New York Times article entitled “States Increase Their Scrutiny of Insurance Brokers” mentioned by Benefitslink.com.) The WSJ article states that “the insurance probe started by New York Attorney General Eliot Spitzer into kickbacks and other improper incentives in the insurance industry is widening into other states and moving toward the employee-benefits arena.” Excerpt:
In California, insurance regulators are hiring San Diego class-action law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP, home of high-profile trial lawyer William Lerach. The firm is expected to lead a legal fight against insurance brokers and insurers who the firm may accuse of cheating workers and other consumers by placing insurance and other benefits packages in the hands of insurers paying the biggest commissions, not providing the best prices and terms, a person close to the matter said.The potential alleged victims include individual employees, who typically pay some or all of the cost of benefits sponsored by their employers. That would contrast with the picture so far painted by Mr. Spitzer, of insurance brokers cheating corporations as they bought sophisticated liability-insurance packages. Mr. Spitzer, too, has indicated that the employee-benefits sector is a coming front.
The New York Times article states that “[i]n Connecticut, Richard Blumenthal, the attorney general, stepped up his investigation into health insurance companies and those that sell employee benefits like group life and disability coverage” and that yesterday “regulators from 46 of the states huddled in a closed telephone conference and said in a cautious statement afterward that they were ‘assessing the adequacy of current laws or regulations.”’
Whether or not ERISA will be involved in the lawsuits spawned by the probe will depend upon whether or not the plans offering these types of benefits to employees are ERISA plans. (Read a previous post here on the subject of when a plan for voluntary benefits becomes an ERISA plan.) For those plans that are ERISA plans, I would think that fiduciaries for such plans should be taking a hard look at the insurance carriers and brokers through which the insurance has been offered and purchased, and have in place “prudent processes” for dealing with the recent investigations and lawsuits (similar to the types of processes utilized by 401(k) plan fiduciaries in the recent mutual fund scandals.) For starters, one could read again this guidance here issued by the DOL pertaining to the mutual fund investigations, and tailor it to the ERISA plan in question. For instance, fiduciaries will want to assess the impact of the investigations on their plans, conduct a review, and engage in a “deliberative process.” In cases where specific insurance carriers are implicated, fiduciaries will want to take an “appropriate course of action which will depend on the particular facts and circumstances” relating to the plan. Fiduciaries will also want to contact specific insurance carriers directly if information is needed and document their actions accordingly. Above all, fiduciaries will need to “act reasonably, prudently and solely in the interests of participants and beneficiaries.”
Unfortunately, many employers are already not up-to-speed in this area of compliance with ERISA when it comes to benefits such as life, health, and disability policies. Many do not even know that they have an ERISA plan, let alone think that there might be any fiduciary liability involved in the offering of such plans. (Post here contains information on this widespread lack of compliance, and the post here discusses a case where the employer didn’t know it had an ERISA plan, and an executive was held personally liable as a fiduciary.)
In this other WSJ op-ed entitled “Spitzer Investigation May Be Just the Start For Insurance Industry“, the author predicts that “the carnage has just begun” and that by the time “Mr. Spitzer is finished with the insurance industry, the mutual-fund scandal will look like child’s play.”