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account, which would be an interest bearing account with an intermediary bank, from which the entire proceeds could be withdrawn at any time.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.

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Photo of Wystan Ackerman Wystan Ackerman

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you…

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you have something to say.  For those looking for my detailed law firm bio, click here.  If you want a more light-hearted and hopefully more interesting summary, read on:

People often ask about my unusual first name, Wystan.  It’s pronounced WISS-ten.  It’s not Winston.  There is no “n” in the middle.  It comes from my father’s favorite poet, W.H. (Wystan Hugh) Auden.  I’ve grown to like the fact that because my name is unusual people tend to remember it better, even if they don’t pronounce it right (and there is no need for anyone to use my last name because I’m always the only Wystan).

I grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state.  I’ve always had strong interests in history, politics and baseball.  My heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox).  I think it was my early fascination with Lincoln that drove me to practice law.  I went to high school at The Williams School in New London, Connecticut, where I edited the school newspaper, played baseball, and was primarily responsible for the installation of a flag pole near the school entrance (it seemed like every other school had one but until my class raised the money and bought one at my urging, Williams had no flag pole).  As a high school senior, my interest in history and politics led me to score high enough on a test of those subjects to be chosen as one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified my interest in law and government.  One of my mentors at Williams was of the view that there were far too many lawyers and I should find something more useful to do, but if I really had to be a lawyer there was always room for one more.  I eventually decided to be that “one more.”  I went on to Bowdoin College, where I wrote for the Bowdoin Orient and majored in government, but took a lot of math classes because I found college math interesting and challenging.  I then went to Columbia Law School, where I was lucky enough to be selected as one of the minions who spent their time fastidiously cite-checking and Blue booking hundred-plus-page articles in the Columbia Law Review.  I also interned in the chambers of then-Judge Sonia Sotomayor when she was a relatively new judge on the Second Circuit, my only connection to someone who now has one-ninth of the last word on what constitutes the law of our land.  I graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole, one of the largest Connecticut-based law firms.  At the end of 2008, I was elected a partner at Robinson+Cole.

I’ve worked on class actions since the start of my career at Skadden.  Being in the insurance capital of Hartford, we have a national insurance litigation practice and I was fortunate to have the opportunity to work on some prominent class actions arising from the 2004 hurricanes in Florida and later Hurricane Katrina, including cases involving the applicability of the flood exclusion, statutes known as valued policy laws, and various other issues.  My interest and experience in class actions gradually led me to focus on that area.

In Connecticut courts I’ve defended various kinds of class actions that go beyond insurance, including cases involving products liability, securities, financial services and consumer contracts.

My insurance class action practice usually takes me outside of Connecticut.  I’ve had the pleasure of working on cases in various federal and state courts and collaborating with great lawyers across the country.  While class actions are an increasingly large part of my practice, I don’t do exclusively class action work.  The rest of my practice involves litigating insurance coverage cases, often at the appellate level.  That also frequently takes me outside of Connecticut.  A highlight of my career thus far was working on Standard Fire Ins. Co. v. Knowles, the U.S. Supreme Court’s first Class Action Fairness Act case.  I was Counsel of Record for Standard Fire on the cert petition, and had the pleasure of working with Ted Boutrous on the merits briefing and oral argument.

I started this blog because writing is one of my favorite things to do and I enjoy following developments in class action law, writing about them and engaging in discussion with others who have an in interest in this area.  It’s a welcome break from day-to-day practice, keeps me current, broadens my network and results in some new business.

When I’m not at my desk or flying around the country trying to save insurance companies from the plaintiffs’ bar, or attending a conference on class actions or insurance litigation (for more on those, see the Seminars/Programs page of this blog), I often can be found playing or reading with my young daughter, helping my wife with her real estate and mortgage businesses, reading a book about history or politics, or watching the Boston Red Sox (I managed to find bleacher seats for Game 2 of the 2004 World Series when Curt Schilling pitched with the bloody sock).  When the weather is good I also love to take the ferry to Block Island, Rhode Island and ride a bike or walk the trails there. If you go, I highly recommend the Clay Head Trail.