Alert September 29, 2014

First Circuit Rules for Insurers in Two Retained Asset Account Cases; An Insurer Does not Need “to Don the Commercial Equivalent of Sackcloth and Ashes”

Summary

In two recent decisions, the First Circuit joined the Second and Third Circuits in rejecting ERISA breach of fiduciary duty and prohibited transaction claims challenging the wide-spread insurance industry practice of paying benefits under group life insurance plans by establishing a retained asset account in the beneficiary’s name.

The First Circuit recently decided two ERISA cases challenging the use of retained asset accounts in favor of the insurer-defendants. The decisions are Merrimon v. Unum Life Ins. Co. of Am., 758 F.3d 46, 50 (1st Cir. 2014) and Vander Luitgaren v. Sun Life Assurance Co., --- F.3d ---, 2014 WL 4197947, at *3 (1st Cir. Aug. 26, 2014).

Both suits were brought by beneficiaries of group life insurance plans whose sponsors had purchased group life insurance contracts from the insurer-defendants. In both cases, the insurers paid benefit claims under the group contracts through interest-bearing accounts backed by funds that the insurers 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 all beneficiaries under contracts issued by the insurer-defendant with respect to ERISA-covered benefit plans, where the beneficiary-putative class members had received their benefits through a retained asset account.

In Merrimon, the plaintiffs received their benefits under an insurance contract that specifically authorized the use of retained asset accounts. After a number of lower court rulings and a trial on limited issues, the First Circuit ultimately ruled for the insurer. The appellate court affirmed the granting of partial summary judgment for the insurer on the prohibited transaction claim under ERISA § 406(b), and reversed the trial court’s decision to grant summary judgment for plaintiffs on their breach of fiduciary duty claims under ERISA § 404(a). In its decision, the Court held that assets in the insurer’s general account that back the insurer’s liability on retained asset accounts are not ERISA-governed plan assets, and are not “somehow transmogrified into plan assets when they are credited to a beneficiary's account.” Moreover, the court held that even if ERISA fiduciary duties applied to the decision whether to establish retained asset accounts, there was no breach of duty because the insurer fully discharged any such duty when it established the accounts.

In Vander Luitgaren, the plaintiffs received their benefits under an insurance contract that did not specifically authorize the use of retained asset accounts, but provided instead that benefits “may be payable by a method other than a lump sum.” Notwithstanding this factual distinction, the First Circuit found that the case presented “essentially the same legal question” as Merrimon, and affirmed judgment for the insurer. Building on its Merrimon analysis, the court rejected the plaintiffs’ assertion that “a mode other than lump sum [is permissible] only as long as the choice of an alternative does not benefit [the insurer].” The court concluded that the insurer “can discharge its obligations to the beneficiary by paying the promised benefit through any one of a range of recognized payment modalities” so long as “the chosen modality does not unfairly diminish, impair, restrict, or burden the beneficiary’s rights. . . .” With respect to the plaintiffs’ assertion that the insurer’s receipt of investment earnings on retained assets violated ERISA, the Court stated that “ERISA section 404(a) does not require a fiduciary to don the commercial equivalent of sackcloth and ashes.” Accordingly, “[the insurer’s] choice to pay by means of [retained asset accounts] did not violate its fiduciary duties.”

These First Circuit decisions are consistent with decisions of the Second and Third Circuits that have rejected similar ERISA claims. See Faber v. Metropolitan Life Insurance Company, 648 F.3d 98 (2d Cir. 2011) (discussed in the September 29, 2011 ERISA Litigation Update) and Edmonson v. Lincoln National Life Insurance Company, 725 F.3d 406 (3d Cir. 2013) (discussed in the September 26, 2013 ERISA Litigation Update).