On May 21, 2025, in Tiara Yachts v. Blue Cross Blue Shield of Michigan, the Sixth Circuit Court of Appeals determined that the defendant carrier acted as a fiduciary for a plan governed by ERISA and violated its fiduciary duty to the plan by overpaying providers for services rendered to plan participants.
Background
The plaintiff is a company that offered its employees a self-insured benefits plan and hired the defendant carrier to administer it. According to the contract between the parties, the defendant was responsible for interpreting the plan’s terms, calculating benefits, deciding whether to grant or deny claims on the plaintiff’s behalf, and ultimately paying providers. The plaintiff had some oversight of the defendant, such as the authority to contest paid claims within 60 days and to request an audit of claims from the preceding 24 months.
The plaintiff terminated the relationship with the defendant and filed this federal lawsuit, alleging that the defendant overpaid providers and then profited by clawing back those overpayments (a scheme referred to as “flip logic”). The plaintiff asserted that the defendant acted as a fiduciary to the benefits plan and that this behavior was a violation of the defendant’s fiduciary duty to act in the interest of the plan. This duty prohibited the defendant from “self-dealing” and engaging in transactions that benefit the defendant at the expense of the plan. Allegedly, “flip logic” allowed the defendant to use plan assets to enrich itself instead of preserving those assets and using them for the benefit of participants.
At the district court level, the defendant argued that the plaintiff failed to establish that the defendant acted as a fiduciary and, therefore, could not claim that it violated any fiduciary duty. The district court agreed with the defendant, determining that the claim payment process at the heart of the “flip logic” arrangement was a matter of contract rather than a fiduciary issue. In addition, the district court determined that the defendant had similar arrangements in other plans that it administered and that the practice was a way of doing business rather than a specific practice that applied only in this case (and, therefore, could not form the basis of a violation of a duty to this specific plan). Accordingly, the district court granted the defendant’s motion to dismiss the case.
Sixth Circuit’s Opinion
The Sixth Circuit took the case on appeal and made several determinations. First, the appellate court determined that a fiduciary relationship existed between the parties, since the defendant had control over the plan assets. The contractual relationship did not trump this fiduciary relationship. Indeed, the appellate court noted that the contract supported the case that the defendant was a fiduciary by establishing the defendant’s control over the plan’s assets. The Sixth Circuit reasoned that potential violations of the contract could also mean that the defendant violated its fiduciary duty.
In addition, the Sixth Circuit ruled that the fact that the defendant had similar arrangements elsewhere, as part of a “business practice,” was not enough to avoid any allegation of a breach of fiduciary duty. Although the appellate court had ruled in a previous case (that also involved the defendant) that such a practice was not a violation of fiduciary duty because the defendant was not acting as a fiduciary in that case, in this instance, the court determined that the defendant was acting as a fiduciary for the reasons discussed above. The court also noted that the fact that this practice was widespread did not mean that it was immune to breach of fiduciary duty claims.
The Sixth Circuit reversed the district court’s decision, sending the matter back to the district court for further proceedings.
Employer Takeaway
This case highlights the importance of ERISA’s fiduciary obligations when determining the relationship between the employer and a third-party claims administrator. Although there is a contractual relationship between the parties, that contract does not act as a shield against claims of violations of fiduciary duties against a TPA when that fiduciary relationship exists. It is important for TPAs to take their delegated duties seriously and not assume that they do not apply simply because other legal relationships exist. Employers should monitor the behavior of TPAs and consult with their attorneys if they have questions concerning the applicability of ERISA’s fiduciary obligations to any issue with their own plans. For further information concerning fiduciary governance, please ask your broker or consultant for a copy of the NFP publication ERISA Fiduciary Governance: A Guide for Employers.