Appeals Court Finds Pru Had Some Fiduciary Duty Over Group LTC Plan Rates

A federal court has ruled that an insurer that manages an employer-sponsored long-term care insurance plan and implies in the plan documents that it's a plan fiduciary owes the participants a "fiduciary duty to manage the plan in accordance with the documents governing the plan."

A three-judge panel at the U.S. Court of Appeals for the First Circuit gave that interpretation Wednesday in an opinion on a suit filed by Barbara Parmenter, a retired Tufts University urban planning faculty member who lives in Massachusetts, over Tufts LTCI plan premium increases.

Parmenter asserts that Tufts and Prudential Financial's Prudential Insurance Company of America subsidiary, the LTCI plan's administrator, breached their fiduciary duty to her and other plan participants under the Employee Retirement Income Security Act of 1974 when they failed to get Massachusetts insurance commissioner approval for the premium increases.

Prudential declined to comment on the ruling. Tufts was not immediately available to comment.

Members of Parmenter's legal team welcomed the ruling.

What it means: The new ruling could affect how federal courts interpret situations in which state long-term care insurance regulatory mechanisms and other state regulatory mechanisms interact with ERISA.

In theory, the ruling could influence how federal courts handle interactions between the ERISA fiduciary rule and the state laws and regulations governing life insurance agents, annuity agents and securities brokers.

Long-term care insurance: LTCI coverage pays for nursing home care and other types of care for elderly people and others who cannot handle the activities of daily living.

Issuers sold many policies from the early 1980s through around 2010, but many began pulling out of the market starting around 2000, when they discovered that many of their assumptions about how LTCI would work were incorrect and that they had underpriced the policies.

Prudential ended new LTCI sales in 2013.

The policy: The original Parmenter complaint and the opinion do not indicate when Parmenter signed up for Tufts LTCI coverage.

Plan documents included with an amended complaint filed at the U.S. District Court for Massachusetts show that Parmenter bought coverage with a 90-day waiting period and lifetime maximum benefit options ranging from $109,500 to $328,000.

Prudential notified Parmenter of a 40% increase in the premiums in 2019 and a 19% increase in 2020.

Plan documents say LTCI plan rate increases were "subject to approval" by the Massachusetts insurance commissioner.

Parmenter sued over the increases in 2022.

The suit: ERISA normally blocks states from regulating large employee benefit plans.

The Massachusetts commissioner has the statutory authority to regulate group LTCI rate increases, but the commissioner has adopted regulations that exempt employer-sponsored LTCI plans from state regulation.

Parmenter argues that the state does have authority to regulate rates at employer-sponsored LTCI plans, and that Tufts and Prudential breached their fiduciary duty to her under ERISA when they increased her LTCI premiums without waiting for the Massachusetts insurance commissioner to begin reviewing employer LTCI plan rate increase requests.

She is seeking to represent a class consisting of all Prudential-administered group LTCI plan participants in plans with "subject to insurance commissioner approval" language in states where commissioners were not reviewing employer LTCI plan premium increase requests.

Prudential maintains that it is not a named Tufts LTCI plan fiduciary, that plan provisions granted it full discretion to increase the plan's premiums, and that the "subject to" phrase was simply an "acknowledgment of the possibility that the commissioner may, at some future point in time, institute an approval process for group long term care policy premiums."

The opinion: In an opinion written by senior U.S. Circuit Judge O. Rogeriee Thompson, the court found that Tufts LTCI plan documents gave participants the impression that Prudential was acting as fiduciary.

"In the plan documents, Prudential held itself out to the plan participants as owing them a fiduciary duty of prudence," Thompson wrote in an opinion explaining the ruling. "In our view, Prudential's decision to exercise its discretion and increase premiums is part of the overall management of the welfare benefit plan."

The three-judge panel also found that Parmenter and Prudential are interpreting the "subject to commissioner approval" provision in different ways.

"Because we cannot resolve the meaning of the 'subject to' clause on the current record, we reverse the judgment as to Prudential and remand for further proceedings," according to the opinion.

The panel approved a district court move to drop Tufts as a plaintiff, agreeing with the district court that Tuft's failure to interfere with Prudential's actions was different from the kind of active steps that could support breach-of-fiduciary-duty allegations.

Reactions: Jonathan Feigenbaum, one member of Parmenter's team said in an email that he believes the new decision is an important ERISA decision, because the 1st Circuit determined that, when Prudential increased the premiums, that was a fiduciary act under ERISA.

"Prudential argued, without success, that raising premiums was a 'business decision,' and not a fiduciary act," Feigenbaum said.

Sean Collins, another member of Parmenter's legal team, said he believes the decision is an important LTCI decision.

"Long-term care insurance carriers tend to operate under the assumption that they can raise premiums however they see fit, but it is the policy language that governs their ability to raise rates, and policy language can vary widely across policy forms and carriers," Collins said.

"The specific policy language concerning rate increases is a critical detail that is often overlooked," Collins added. "The 1st Circuit paid close attention to the Massachusetts-specific policy language at issue here before arriving at its decision."

Feigenbaum said that he tends to see far more individual LTCI cases than group LTCI cases, partly because ERISA provisions tend to favor the employers and group coverage issuers.

"ERISA was created to protect employees and participants, but, through court decisions, ERISA has been turned on its head," Feigenbaum said.

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