Those readers who have followed my blog regularly will be familiar with my prior posts regarding class actions involving life insurers’ use of “retained asset” or “checkbook” accounts. Under this arrangement, the insurer pays the proceeds of a life insurance policy to a beneficiary by providing a checkbook for an interest-bearing account from which the funds can be drawn at any time, rather than paying the benefits by a check for the lump sum. (For prior posts on this, see my December 12, 2011 post and earlier posts cited in that one.) On February 3, federal judges in the District of Maine and Eastern District of Pennsylvania issued significant new summary judgment rulings in these cases. The Maine court granted partial summary judgment in favor of the plaintiffs and certified a class, while the Pennsylvania court granted summary judgment in favor of the insurer. The inconsistent results here demonstrate that further appellate guidance will be necessary (to further that end, the Maine court certified its decision for interlocutory appeal to the First Circuit).
District of Maine Decision
In Merrimon v. UNUM Life Ins. Co., Docket No. 1:10-CV-447-NT, 2012 U.S. Dist. LEXIS 15516 (D. Me. Feb. 3, 2012), the Group Insurance Summaries of Benefits (GISB) explained in detail that life insurance benefits over $10,000 would be paid using a retained asset account, which would be an interest bearing account with an intermediary bank, from which the entire proceeds could be withdrawn at any time. The GISB did not explain how the interest rate would be determined. In fact, UNUM established the interest rate in its discretion, which it could change from time to time, and no money was transferred to the bank until a draft was presented to the bank for payment. Cross-motions for summary judgment were filed regarding whether UNUM was acting as a fiduciary under ERISA in connection with the retained asset accounts, and whether it breached a fiduciary duty. The issues were whether UNUM was a fiduciary under ERISA because it had: (a) discretionary authority or control of plan assets; or (b) discretionary authority or responsibility in the administration of the plan. The court held that the funds backing the retained asset accounts were not “plan assets,” relying on a Second Circuit opinion and Department of Labor advisory opinion, and distinguishing a First Circuit decision. The court also held, however, that UMUM had a fiduciary duty in administration of the plans and it breached that duty by not ensuring that the interest rate it was paying was the best available on the market:
The plans provide that payment will be by RAAs, which are defined as interest-bearing accounts established through an intermediary bank in the name of the beneficiary. When Unum chose to award itself the business of administering the Plaintiffs’ RAAs and chose to retain the assets backing these accounts, Unum was exercising its discretionary authority and responsibility in the administration of the Peabody and St. Joseph’s Plans.
In doing so, Unum chose to maximize its own profits by setting the RAAs’ interest rate just high enough to forestall mass withdrawal of the funds backing these accounts. The Court is unaware of whether there are banks or other institutions which would have bid on Unum’s book of RAA business, offering no-fee demand accounts on better terms than those offered by Unum. What is clear, however, is that Unum managed the RAAs to optimize its own earnings and not to optimize the beneficiaries’ earnings. Unum is not required to place its pool of funds with a third party. However, Unum-the-fiduciary is under an obligation to look at Unum-the-RAA-service-provider with a critical eye. If Unum wished to retain the RAA business for itself, as a fiduciary it was under an obligation to offer terms comparable to the best terms available on the market. Unum’s own research revealed that the 1% rate it provided was low compared to its competitors, which offered an average rate of about 2%, with some as high as 4%. Although further factual development would be required to determine the reasonableness of the interest rate at any particularly point in time, this evidence of competitors’ rates suggests that Unum was acting in its own self-interest, not solely in the interest of the beneficiaries, in setting the interest rate. Accordingly, Unum has breached its fiduciary duty to the Plaintiffs under ERISA Section 404(a), and the Plaintiffs are entitled to partial summary judgment as to liability on this claim.
Id. at *23-25 (emphasis added). Judge Torresen further explained that the plans would pass muster, in her view, if the plan documents had explained how the interest rate would be calculated, such as by tying the interest rate to a specific index. Id. at *26 & n.3.
The court also granted certification of a class of beneficiaries under ERISA plans administered by UNUM with the same contract language. It concluded that UNUM’s decision to set the interest rate in a manner that would serve its own interest “affected all of the beneficiaries in a similar manner,” and thus “the Plaintiffs’ varying motivations for leaving money in these accounts are not relevant to Unum’s liability or to the calculation of damages.” Id. at *40. The court further concluded that the viability of individualized statute of limitations defenses would require additional discovery, and might result in subclasses. The court certified its entire order for interlocutory appeal to the First Circuit under 28 U.S.C. § 1292(b).
Eastern District of Pennsylvania Decision
In Edmonson v. Lincoln National Life Insurance Company, Civ. A. No. 10-4919, 2012 U.S. Dist. LEXIS 14142 (E.D. Pa. Feb. 3, 2012), the retained asset accounts operated in essentially the same fashion as in Merrimon – no funds were transferred to the bank until a check was drawn on the account, and until that happened the funds would be kept in the insurer’s general asset account. The Lincoln National policy in this case was silent with respect to the use of a retained asset account. The policy provided for payment of death benefits “immediately” upon receipt of satisfactory proof of claim. The court rejected the plaintiff’s argument that “immediately” meant in a lump sum, concluding that “[f]or the Court to construe the term ‘immediately’ as the equivalent of ‘lump sum’ would not only be a stretch; it would essentially be a reformation of the Policy.” Id. at *38. The court granted summary judgment in favor of Lincoln National, concluding that, because plaintiff could withdraw the full benefits from the account at any time after it was opened, “by shifting practical control over Plaintiff’s death benefits to her directly, Lincoln discharged its fiduciary obligations under ERISA.” Id. at *42. The court further concluded that the funds that backed the retained asset accounts were not “plan assets” because the employee benefit plan did not have any interest in them when they were placed into the retained asset accounts. Id. at *54.
The bottom line I see here is that, given the disparate results courts have reached thus far, until there is more appellate guidance, life insurers are going to have difficulty structuring their plans in a manner that they can be confident will pass muster throughout the country. The approach Judge Torresen of the District of Maine suggests – laying everything out in the policy and using an indexed interest rate – may make some sense, but even if that method is used there is of course no guarantee it will satisfy every court.