The Latest on the Use of Retained Asset Accounts to Pay Life Insurance Benefits

by BakerHostetler
Contact

In Merrimon v. Unum Life Insurance Co. of America, 2014 WL 2960024 (1st Cir. July 2, 2014), the U.S. Court of Appeals for the First Circuit became the third circuit court to approve an insurance company’s use of a retained asset account (RAA) to pay life insurance benefits where the use of an RAA was expressly provided for under the ERISA plan. In so doing, it reversed a $12 million judgment in a class action alleging that the use of RAAs to pay such proceeds violated certain self-dealing and fiduciary duty provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

Background

Plaintiffs Denise Merrimon and Bobby S. Mowrey represented a class of beneficiaries of ERISA-regulated employee welfare benefit plans funded by group life insurance policies issued by Unum. Plaintiffs alleged that Unum violated certain provisions of ERISA in the way it paid life insurance benefits. Instead of paying the benefits in a lump sum, Unum established RAAs for the plaintiffs. Plaintiffs could withdraw all or part of the funds in the account. The accounts were managed by Unum, and Unum paid 1 percent interest on the funds reflected in the account. Plaintiffs alleged that Unum did not place the entirety of the funds in the account. Instead, Unum allegedly kept excess funds in its general account and continued to invest for its own benefit. When a draft was presented to a bank, Unum transferred the funds needed to pay the draft to the RAA account. Plaintiffs liquidated their RAAs, and the accounts were closed.

Plaintiffs claimed that Unum’s method of paying claims violated ERISA’s prohibition against self-dealing in plan assets and that Unum had violated its fiduciary duties under ERISA. Following discovery in the district court, both parties moved for summary judgment and plaintiffs moved for class certification. The District Court of Maine granted partial summary judgment for plaintiffs on their fiduciary duty claims, but granted partial summary judgment in favor of Unum regarding the self-dealing claims. The district court certified the class and subsequently held a bench trial to determine the damages to which plaintiffs were entitled on their fiduciary duty claims. The district court awarded plaintiffs $12,000,000. Both plaintiffs and defendant appealed to the First Circuit.

Standing

As an initial matter, Unum argued that plaintiffs lacked the requisite constitutional standing to bring their claims because they suffered no financial loss as a result of Unum’s use of the RAAs. The First Circuit concluded that plaintiffs did have standing because Congress granted ERISA beneficiaries the right to sue for violations of ERISA, thereby creating standing. Although the court found that plaintiffs had a legally cognizable right, plaintiffs still had to show that they suffered a personal harm. The court found that if plaintiffs were able to prove their claims that Unum wrongfully retained and misused their assets, then there would be a tangible harm even if the plaintiffs did not suffer an economic loss. The court based its conclusion on the fact that ERISA was founded on the common law of trusts, where courts have traditionally permitted claims against trustees even where there was no economic loss to the trust.

Self-Dealing

The First Circuit upheld the district court’s dismissal of plaintiffs’ claims that Unum engaged in self-dealing in plan assets. Section 406(b) of ERISA states that a plan fiduciary must refrain from “deal[ing] with the assets of the plan in [its] own interest or for [its] own account.” See 29 U.S.C. §1106(b)(1). Plaintiffs claimed that the self-dealing occurred when Unum retained the RAA funds in its general account for its own enrichment. The First Circuit held that the RAA funds were not plan assets and so there could be no self-dealing, relying heavily on the Department of Labor (DOL) definition of “plan assets.” In its amicus brief, the DOL argued that it considered a “plan asset” to be “generally . . . identified on the basis of ordinary notions of property rights under non-ERISA law.” Accordingly, the First Circuit found that under applicable property law, it is the beneficiary who owns the interest in the money in the RAA accounts, not the plan itself. Therefore, the First Circuit held that the beneficiaries’ assets were not plan assets. Further, the First Circuit relied on 29 U.S.C. §1101(b)(2), which states that funds held in an insurer’s general account prior to the establishment of an RAA are not considered “plan assets.” The First Circuit held that it would not make sense if the funds became “plan assets” simply because they became credited to a specific RAA account, even though the funds remained in the general account. Significantly, the court distinguished its decision in Mogel v. Unum Life Insurance Co., 547 F.3d 23 (1st Cir. 2008), on the facts. In Mogel, the plan at issue specified that benefits were to be paid in a lump sum and the insurer had not complied with the plan. Not so in Merrimon.

Fiduciary Duty

Under Section 404(a) of ERISA, “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries.” 29 U.S.C. §1104(a)(1). Plaintiffs’ core argument was that Unum did not set the interest rate on the RAA to solely benefit participants and beneficiaries, and thus was in breach of its fiduciary duties.

The First Circuit rejected this argument. The court reasoned that Unum relinquished its fiduciary duties once it established an RAA account because Unum followed the precise protocol laid out in the plan. The court stated “once the insurer fulfilled these requirements, its duties as an ERISA fiduciary ceased.” Unum’s continuing relationship with the beneficiary thus constituted a mere debtor-creditor relationship. The DOL had similarly reasoned in its amicus brief that once a life insurer establishes an RAA to redeem a claim, the fiduciary duties of that insurer are discharged. Accordingly, the setting of the interest rate had nothing to do with plan or asset management. The court held that “when the insurer redeems a death benefit that is due a beneficiary by establishing an RAA, no other or further ERISA-related fiduciary duties attach.”

Conclusion

The Second and Third Circuit Courts of Appeal, facing similar facts, have come to substantially the same conclusion as the Merrimon Court in Faber v. Metropolitan Life Ins. Co, 648 F.3d 98 (2d Cir. 2010) and in Edmonson v. Lincoln Nat. Life Ins. Co, 725 F.3d 406 (3d Cir. 2013), cert. denied, 134 S. Ct. 2291 (2014). Merrimon thus adds to a growing body of case law that declines to find that ERISA is violated when an insurer delivers an RAA, rather than a check, to pay a death benefit due under an ERISA plan, so long as the insurer is permitted to do so under the terms of the ERISA plan.

Are there broader lessons to be learned from the decision? Quite possibly, there are. Conventional wisdom holds that ERISA’s protections, and ERISA’s daunting fiduciary and conflict of interest requirements, all cease to apply at the point at which the promised “benefit” gets delivered. When the promised benefit takes the form of cash, the delivery point can be easily identified, but when something other than cash is promised – here, control over an RAA – the delivery point becomes harder to pin down. Merrimon adds support to the view that, so long as the benefit being promised clearly can consist of an account (rather than cash or its equivalent), delivery is complete when control over the account is delivered. That principle may well crop up in other contexts involving other types of ERISA plans, such as when employer stock (or perhaps an annuity contract) come to be distributed from a 401(k) plan or a similar savings plan. There, too, courts could well be confronted with the same basic question: what is the promised benefit and at what point can it be shown to have been delivered? Whether Merrimon and this emerging line of authority gets extended to such situations, though, remains to be seen.

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.

© BakerHostetler | Attorney Advertising

Written by:

BakerHostetler
Contact
more
less

BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.