It’s among the worst nightmares a benefits administrator can have: an online enrollment glitch arbitrarily changes some eligibility rules that cannot be altered.

The case of Malbrough v. Kanawha Insurance Co. showed that an employee had a benefit that was $400,000 greater than the benefit to which he was entitled. The benefit was a new group term insurance policy that covered life and accidental death. Employees could elect up to five times their annual earnings. One employee, whose earnings were about $30,000, was eligible to elect up to $150,000 each for life insurance and accidental death insurance, a total of $300,000 in coverage. The enrollment system allowed him to elect $350,000 each, a total of $700,000 in coverage.

To make matters worse, the employer did not discover the error until after the employee died in a work-related accident less than two years later. The insurance carrier refused to honor the $700,000 election, paying out only $135,000 each, a total of $270,000. The beneficiaries sued for detrimental reliance and contract ratification. The insurance carrier removed the lawsuit to federal court and tried to have the case dismissed under ERISA preemption.

Read full article here.