Alert September 29, 2011

Second Circuit Affirms Dismissal of Suit Challenging Insurer’s Use of Retained Asset Account to Settle Life Insurance Benefits

On August 5, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of the complaint in Faber, et al. v. Metropolitan Life Insurance Company. 

The litigation was brought by current and former beneficiaries of employee welfare benefit plans whose sponsors had purchased group life insurance contracts from the insurer defendant.  The insurer paid benefit claims through interest-bearing accounts backed by assets that the insurer retained until the account holders wrote checks or drafts against the account.  The plaintiffs challenged the practice, which they claimed constituted a breach of fiduciary duty and a prohibited transaction under ERISA.  The plaintiffs purported to sue on behalf of a class of beneficiaries under contracts issued by the insurer defendant who had received their benefits through such a retained asset account. 

The Faber case is one of several suits that have been filed against insurance companies in the last few years challenging retained asset accounts, which are widely used in the life insurance industry. 

In 2009, the district court dismissed the Faber complaint for failure to state a claim on the ground that the insurer discharged its fiduciary obligations under ERISA when it established the retained asset accounts in accordance with the terms of the plans at issue.  The summary plan descriptions for the named plaintiffs’ plans had expressly provided that benefits would be paid through the insurer’s retained asset account program. 

During the appeal, the Second Circuit invited the Department of Labor (“DOL”) to submit an amicus brief addressing certain legal issues in the case.  On February 17, 2011, the DOL submitted a letter brief in which it argued that the insurer had discharged its ERISA fiduciary duties by furnishing beneficiaries with retained asset accounts in accordance with the plan documents and that the insurer did not retain plan assets by holding and managing the assets that backed the retained asset accounts.  In the DOL’s view, given the specific facts of the case, once the insurer creates and credits a beneficiary’s retained asset account and provides a checkbook, the beneficiary “has effectively received a distribution of all the benefits that the Plan promised,” and “ERISA no longer governs the relationship between [the insurer] and the . . . account holders.” 

The Second Circuit agreed with the DOL and affirmed dismissal on the grounds that (i) the insurer discharged its fiduciary obligations as a claims administrator and ceased to be an ERISA fiduciary when, in accordance with the summary plan description, it created the plaintiffs' retained asset accounts, credited the accounts with the amount of benefits due, and issued checkbooks enabling plaintiffs to withdraw their proceeds at any time; and (ii) ERISA no longer governs the relationship between the insurer and a beneficiary once a retained asset account is established in accordance with the plan.