Dismissal of Retained Asset Account Putative Class Action Upheld by Third Circuit


The U.S. Court of Appeals for the Third Circuit has affirmed summary judgment in favor of The Lincoln National Life Insurance Company in a putative class action. In Edmonson v. Lincoln National Life Ins. Co. the plaintiff challenged Lincoln’s use of retained asset accounts as a method for payment of life insurance benefits. Significantly, both the majority’s precedential opinion and the lone dissent found in favor of Lincoln, which was represented by Ballard Spahr.

In an opinion issued on August 7, 2013, the majority held that Lincoln did not breach its fiduciary duties under ERISA when it chose to pay the plaintiff with a retained asset account and then invested the retained assets for its own profit. The majority also held that the retained assets were not plan assets as defined by ERISA. The dissent agreed that Lincoln should win this case, but argued that the case should be remanded for dismissal of the complaint because plaintiff lacked constitutional and statutory standing.

Retained asset accounts are interest-bearing accounts with draft writing privileges that allow the policyholder or beneficiary to access all or part of the account balance by writing one or more drafts. These accounts are routinely used in the insurance industry because they provide policyholders/beneficiaries flexibility and time in deciding how they will use their life insurance proceeds following the loss of a loved one. Unlike a check, these accounts continue to earn interest for the policyholder/beneficiary until the proceeds are withdrawn.

Despite the benefits of these accounts, several class action lawsuits have been filed against insurance companies challenging the use of retained asset accounts under ERISA and consumer protection laws, as well as under common law breach of fiduciary duty and breach of contract theories. The plaintiffs’ bar asserts that insurance companies are improperly profiting from retained asset accounts because the companies typically retain the funds backing the accounts in their general accounts and invest the funds for profit until the policyholder/beneficiary withdraws the death benefit proceeds from his or her retained asset account.

Edmonson is the second federal appeals court opinion holding that an insurance company’s use of retained asset accounts is not a breach of fiduciary duty under ERISA. In Faber v. Metropolitan Life Ins. Co., the U.S. Court of Appeals for the Second Circuit held in 2011 that MetLife was not acting in a fiduciary capacity when it invested the funds backing a retained asset account. In its analysis, the court noted that the ERISA relationship ceased to exist once the retained asset account was created, leaving only a straightforward creditor-debtor relationship.

With Edmonson, the tide appears to be shifting away from Mogel v. UNUM Life Ins. Co., the first opinion on this issue in 2008. There, the First Circuit held that UNUM was acting as an ERISA fiduciary and that it breached its fiduciary duty when it paid life insurance benefits through a retained asset account. The Second and Third Circuits have distinguished Mogel on the ground that, unlike the policies involved in Faber and Edmonson, the policy in Mogel specifically provided that payment of the life insurance benefit would be made in one lump sum.

For more information, please contact David H. Pittinsky at 215.864.8117 or pittinsky@ballardspahr.com, Joel E. Tasca at 215.864.8188 or tasca@ballardspahr.com, or Ruth S. Uselton at 215.864.8633 or useltonr@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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