One of the hot areas of class action litigation against life insurers over the last few years has been the use of retained asset accounts, whereby the insurer pays life insurance proceeds not by a lump sum but instead by providing beneficiaries with access to an interest-bearing account from which the funds can be drawn.  One of the cases in which the plaintiffs’ bar had success was in the District of Maine, where the district court found a breach of fiduciary duty under ERISA (see my February 22, 2012 blog post).  This case ultimately resulted in a $12 million judgment in favor of the plaintiff class, but that judgment was recently overturned by the First Circuit.  The First Circuit found no ERISA violation where the use of the retained asset account was expressly authorized by the ERISA plan, and the insurer complied with the plan.  The First Circuit’s decision closely followed decisions by the Second and Third Circuits reaching similar conclusions.

In Merrimon v. UNUM Life Insurance Company of America, Nos. 13-2128, 13-2168, 2014 U.S. App. LEXIS 12540 (1st Cir. July 2, 2014), the plaintiffs asserted that the use of the retained asset accounts to pay benefits: (1) constituted self-dealing in plan assets, in violation of section 406(b) of ERISA; and (2) violated a duty of loyalty under section 404(a) of ERISA.  The court of appeals initially addressed standing, concluding that the plaintiffs had standing because the claimed wrongful retention and misuse of assets “[i]f proven, would constitute a tangible harm, even if no economic loss results.”  Id. at *10.  The court also found that the Department of Labor’s conclusion that the use of a retained asset account does not violate ERISA where it is consistent with the plan terms, as expressed in an amicus brief, was entitled to deference because it was well-reasoned (not because the court agreed with it, but because the analysis itself was thorough).  Id. at *13-17. 

On the first issue, the First Circuit agreed with the district court that there was no violation of section 406(b), which prohibits self-dealing in plan assets, because the assets in retained asset accounts were not plan assets.  The court explained that “[i]t is the beneficiary, not he plan itself, who has acquired an ownership interest in the assets backing the RAA,” and “a beneficiary’s assets are not plan assets.”  Id. at *20.  The First Circuit distinguished its prior decision in Mogel v. Unum Life Ins. Co., 547 F.3d 23 (1st Cir. 2008), often relied upon by the plaintiffs’ bar, on the grounds that Mogel involved a plan that specifically mandated that benefits be paid in a lump sum, and the insurer in that case failed to comply with the plan documents.  Merrimon, at *20.

On the second issue, the First Circuit found no violation of section 404(a), which requires a fiduciary to discharge its duties solely in the interests of participants and beneficiaries.  The court relied on the Department of Labor’s amicus brief, and explained that once the insurer paid the benefits into the retained asset accounts, its fiduciary duties ceased and the subsequent relationship was a debtor-creditor relationship governed only by state law.  Id. at *26-27.  The setting of interest rates on the accounts was thus governed only by state law.  Id. at *31.

Based on these rulings, the First Circuit overturned a $12 million judgment in favor of the certified class, and instructed the district court to enter judgment in favor of the insurer.  Will this be the nail in the coffin of retained asset account class action litigation?  Perhaps, but stay tuned.