Life Insurance Retained Asset Accounts: New District of Massachusetts Decision
Life insurers’ use of retained asset accounts (in which checkbooks are provided to beneficiaries of life policies) have given rise to a rash of class action lawsuits in which courts have reached disparate results. I have blogged about these cases on a number of occasions. In my February 22, 2012 post, I discussed decisions by federal district courts in Maine and Pennsylvania focusing on whether insurers owed fiduciary duties under ERISA in connection with group life policies included in employee benefit plans, and whether there was a viable claim for breach of fiduciary duty. Judge Saylor of the District of Massachusetts has now weighed in on this issue, granting partial summary judgment in favor of an insurer but leaving some significant issues open for further litigation.
In Vander Luitgaren v. Sun Life Assurance Co. of Canada, Civ. A. No. 09-11410-FDS, 2012 U.S. Dist. LEXIS 164983 (D. Mass. Nov. 19, 2012), the group life policy provided that “[t]he Death Benefit may be payable by a method other than a lump sum. The available methods of payment will be based on the benefit options offered by Sun Life at the time of election.” Id. at *4. The policy (and apparently other plan documents, although that is not clear from the opinion) did not explain the retained asset account option or what interest rate would be credited on such an account. The named plaintiff received death benefits in the form of a retained asset account, promptly thereafter withdrew the full benefits, and was paid a small amount of interest. The parties proceeded with summary judgment motions prior to briefing on class certification. On cross-motions for summary judgment, the issues in dispute were whether the insurer was acting as a fiduciary under ERISA when it established and maintained a retained-asset account for the named plaintiff, and whether there was a breach of fiduciary duty.
The court held that when the plaintiff’s retained asset account was created, the assets in that account were not “plan assets,” and therefore granted partial summary judgment for the insurer on the claim based on ERISA Section 406(b). In reaching this result, the court distinguished First Circuit authority, and relied upon decisions by the Second Circuit and the Maine and Pennsylvania federal courts:
Given that the Perini [employer group] policy did not promise a lump-sum payment, this case presents a different factual scenario than that addressed in Mogel [v. UNUM Life Ins. Co., 547 F.3d 23 (1st Cir. 2008)]. In that case, the plan at issue specifically called for payment by lump sum. The insurer failed to comply with the terms of the plan when it provided the benefits in the form of a retained-asset account, and the court found that the creation of the retained-asset account did not discharge the insurer's fiduciary obligations. In contrast, the policy at issue here did not specify a particular method by which death benefits were to be paid. Indeed, it explicitly stated that payment might be made in a form other than a lump sum, and that the method of payment would be determined based on benefit options offered by Sun Life. There is no dispute that, at all relevant times, retained-asset accounts were one of the benefit options offered by Sun Life. Thus, when defendant set up and credited a retained asset account, the insurer provided all the benefits promised in the policy in a form that complied with the terms of the policy. At that time, all fiduciary duties involving the management and disposition of plan assets were discharged. Defendant remained obligated to honor plaintiff's drafts, but its responsibility was no longer that of a fiduciary. Rather, "this arrangement constituted a straightforward creditor-debtor relationship governed by the [policy documents] and state law, not ERISA." Faber [v. Metropolitan Life Ins. Co., 648 F.3d 98, 105 (2d Cir. 2011)].
Further, as was true in Faber, Merrimon, and Edmonson, the assets at issue here are not "plan assets." The Perini policy did not grant plan participants or beneficiaries any ownership interest in Sun Life's assets. Nothing in the plan descriptions or policy agreements suggests that Sun Life's funds would become "plan assets" once Sun Life gave a beneficiary access to his benefits. Applying ordinary notions of property rights, the funds remained Sun Life's assets, subject to the insurer's obligations under the policy to honor plaintiff's drafts against his retained-asset account.
Id. at *23-25.
Judge Saylor concluded, however, that the insurer acted as a fiduciary in other respects: “plaintiff has set forth two ways in which defendant exercised discretionary authority in the administration of the plans, and thus acted as a fiduciary: (1) in selecting to pay benefits through retained-asset accounts; and (2) in determining the interest rates to be credited to the retained-asset accounts. Because defendant retained discretion with respect to these two elements of plan administration, defendant was acting as a fiduciary under ERISA when taking these actions.” Id. at *31. The court, however, denied the plaintiff’s motion for summary judgment on this claim because “At this stage in the litigation, there is not sufficient uncontested evidence to support the conclusion that defendant breached its fiduciary duty by creating a retained-asset account and providing a 2% interest rate.” Id. at *32-33. That issue will require further factual development and perhaps lead to further motion practice.
While it remains to be seen how this case will turn out, structuring these retained asset account programs in a manner that attempts to avoid litigation will remain a challenge for insurers in light of the disparate court opinions that have been issued in these cases, many of which have tended to turn on subtle distinctions in the policy and plan documents.