Estoppel in ERISA: Simple Mistakes Can Lead to Costly Litigation

Plan administrators need to take steps to ensure that the information they provide to plan participants is accurate. Otherwise, plan participants may use this misinformation to bring an estoppel claim.

In civil litigation, defendants have long relied on equitable estoppel as an affirmative defense. The basic elements of an equitable estoppel defense are:

  • a definite misrepresentation of fact made to another person with the expectation that they will rely on it; and
  • reasonable and detrimental reliance on the misrepresentation

See, e.g., Heckler v. Community Health Servs. of Crawford County. The rationale behind this defense is that a party who unfairly misrepresents facts should not then be permitted to benefit by means of such misrepresentation.

What began as an affirmative defense has been transformed into a confusing and evolving cause of action in ERISA litigation. In a common fact scenario, a pension plan participant will claim that he received some misinformation regarding the amount of his benefit (e.g., an inflated benefit estimate). The participant will then claim that he detrimentally relied on the inaccurate estimate by, for example, terminating employment or failing to bargain for a more generous severance package.

Another common fact pattern involves a participant who is given misinformation regarding his eligibility or coverage for some medical benefit. The plan administrator might mistakenly inform the participant that a particular procedure is covered. Relying on this misinformation, the participant goes ahead with the procedure and is then told that the service is not covered under the health plan. The participant then brings an estoppel claim against the plan alleging that he detrimentally relied on the misinformation by going forward with the procedure and, therefore, the plan should pay for the service. See, e.g., Lutheran Medical Center of Omaha v. Contractors, Laborers, Teamsters & Engineers Health & Welfare Plan.

While the fact patterns are often similar, the circuit courts are all over the map in analyzing these claims. The circuits generally disagree over the following issues:

  • Whether estoppel applies to claims for pension as opposed to welfare benefits.
  • Whether the funding status of the plan is pertinent.
  • Whether this cause of action is based in promissory estoppel or equitable estoppel.
  • Whether the misrepresentation must be intentional, or whether a claim can also be brought based on mistaken misrepresentations.
  • Whether a participant can base an estoppel claim on an oral misrepresentation, or whether the misrepresentation must be in writing.
  • Whether estoppel can be used to modify the terms of an unambiguous plan document.

A comparison of the Sixth and Seventh Circuits’ illustrates these rifts. A plaintiff asserting an estoppel claim in the Sixth Circuit must show:

  1. conduct or language amounting to a representation of material fact,
  2. the party to be estopped knows the true facts,
  3. the party to be estopped intends that the representation will be relied on or the party asserting the claim believes the party to be estopped so intends,
  4. the party asserting the claim is unaware of the true facts, and
  5. the party asserting estoppel reasonably or justifiably relies on the representation to his detriment.

See, e.g., Sprague v. General Motors Corp. Further, in the Sixth Circuit, a plaintiff cannot rely on estoppel to modify the terms of an unambiguous plan document.

In contrast, the Seventh Circuit requires a showing of the following elements:

  1. a knowing misrepresentation,
  2. made in writing,
  3. with reasonable reliance on that misrepresentation by the party asserting the claim,
  4. to his detriment, and
  5. extraordinary circumstances.

See, e.g., Pearson v. Voith Paper Rolls, Inc.

The good news for plan administrators is that plaintiffs have not had great success in asserting these claims. Courts commonly reject these claims based on the plaintiff’s inability to prove that the alleged misrepresentation was knowing or intentional. This was part of the reason the Seventh Circuit rejected the plaintiff’s estoppel claim in the Pearson case noted above. Merely showing that a misrepresentation occurred is generally not sufficient. Plaintiffs must provide concrete evidence that the other party knew the information was inaccurate (e.g., that the other party had some incentive to present false information).

Further, where the claim is against the plan, claimants must show that someone acting on behalf of the plan—rather than on behalf the employer, which is a legally separate entity—had a motive for presenting the false information. So, even where a plaintiff proves that a misrepresentation is knowing or intentional, the claim may still fail if the party making the misrepresentation was acting on the employer’s behalf, rather than on the plan’s behalf (e.g., the party who made the misrepresentation was acting in the capacity of a human resources manager).

Even where there is a knowing misrepresentation, claimants face the additional hurdle of showing that they relied on the misrepresentation. Mere assertions that the plaintiff “would have done things differently” are often not sufficient. This is particularly true when the plaintiff possesses a document that contains accurate information regarding the benefits at issue. See, e.g., Weir v. Federal Asset Deposit Ass’n.

If participants successfully clear both the knowing misrepresentation hurdle and the reliance hurdle, they still must show some type of harm. For example, in the Pearson case, the plaintiff asserted that he would have negotiated a better severance package had he known that his pension estimate was mistakenly inflated. However, the plaintiff was unable to show that he had any realistic chance of negotiating a better severance package than the one he received. Accordingly, any harm was merely speculative.

Despite the inherent difficulties in establishing a cognizable cause of action and proving the elements of an estoppel claim, ERISA benefit plan participants are asserting these types of claims more frequently. And, while courts are reluctant to reform the terms of official plan documents based on false or misleading communications, the Supreme Court has opened the door for participants to assert estoppel claims. In CIGNA Corp. v. Amara, the U.S. Supreme Court observed that estoppel may be a viable alternative under these types of circumstances.

Even if the participant ultimately fails in proving the elements of estoppel, defending against such claims is costly and time-consuming. Accordingly, employers and plan administrators should take the following steps to protect themselves from these types of claims:

  • Make sure that those acting on behalf of the plan who communicate with plan participants (e.g., plan administrators) are fully informed as to the terms of the plans. This will help ensure that participants receive accurate information.
  • Make sure participant communications are accurate, especially summary plan descriptions and benefit estimates. To this end, plans should develop formal procedures for reviewing participant communications.

When changes occur to ERISA benefit plans, make sure these changes are communicated both to plan participants and to employees responsible for administering the plan. This will help ensure that participants do not continue to rely on outdated, inaccurate information.