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May 19 --The U.S. Supreme Court announced that it won't weigh in on the fiduciary implications of a life insurance company's decision to pay benefits through a retained asset account that allows it to invest the retained assets for its own profit.
Retained asset accounts typically come in the form of checkbooks that earn limited interest and that can be used to withdraw funds, with the issuing insurer retaining control of the benefits--and often investing those benefits for profit--until they are drawn on by the beneficiary.
Circuit courts are split on the viability of this practice, with the U.S. Courts of Appeals for the Second and Third Circuits upholding the practice and the U.S. Court of Appeals for the First Circuit striking it down.
In cases in which courts have struck down the use of retained asset accounts, large judgments are possible. Last year, a federal district court ordered Unum Life Insurance Co. of America to pay more than $13 million in damages and prejudgment interest to a certified class of life insurance beneficiaries who received their benefits through retained asset accounts (Merrimon v. Unum Life Ins. Co. of Am., 2013 BL 242311, 56 EBC 2029 ( D. Me. 9/11/13) (179 PBD, 9/16/13; 40 BPR 2201, 9/17/13)).
Further, a proposed class action filed last month seeks to hold Metropolitan Life Insurance Co. liable for fiduciary breach through its use of retained asset accounts (Owens v. Metro. Life Ins. Co., N.D. Ga., No. 2:14-cv-00074, complaint filed 4/17/14 (81 PBD, 4/28/14; 41 BPR 932, 4/29/14)). The plaintiffs in that case alleged that MetLife earned between $100 million and $300 million annually through the use of retained asset accounts.
In the instant case, a split panel of Third Circuit judges found that Lincoln National Life Insurance Co. didn't breach its Employee Retirement Income Security Act fiduciary duties by paying a life insurance beneficiary through a retained asset account (153 PBD, 8/8/13; 40 BPR 1964, 8/13/13).
The majority found that, although Lincoln was acting as an ERISA fiduciary when it made the decision to use a retained asset account, this decision didn't constitute fiduciary breach because the “increased potential for profit” was insufficient to rise to the level of fiduciary breach.
The dissenting judge, Kent A. Jordan, found that the plaintiff beneficiary lacked both constitutional and statutory standing to pursue her claims.
Through its ruling, the majority aligned itself with the Second Circuit, which previously ruled that the use of retained asset accounts didn't violate ERISA when the relevant insurance policy expressly provided for them (Faber v. Metro. Life Ins. Co., 648 F.3d 98, 51 EBC 2948 ( 2d Cir. 2011) (152 PBD, 8/8/11; 38 BPR 1462, 8/9/11)).
The First Circuit reached the opposite conclusion three years earlier, in a case in which the relevant insurance policy called for a lump sum payment (Mogel v. UNUM Life Ins. Co., 547 F.3d 23, 45 EBC 1289 ( 1st Cir. 2008) (216 PBD, 11/7/08; 35 BPR 2547, 11/11/08)).
Two days after the Third Circuit's ruling in Edmonson, the U.S. District Court for the District of Massachusetts followed the ruling in upholding the retained asset account practices of Sun Life Assurance Co. of Canada (Vander Luitgaren v. Sun Life Assurance Co. of Canada, 2013 BL 217740, 56 EBC 1347 ( D. Mass. 8/9/13) (156 PBD, 8/13/13; 40 BPR 2014, 8/20/13)).
In the petition for Supreme Court review of the Edmonson case, the beneficiary asked the high court whether, when an ERISA plan permits the use retained asset accounts while leaving discretion to the insurer to determine the interest rates and other features of those accounts, the insurer ceases to act as a fiduciary when it creates the account, or whether the insurer's subsequent discretionary acts remain subject to ERISA's protections.
The petition was filed by Deepak Gupta and Jonathan E. Taylor of Gupta Beck PLLC, Washington; Peter K. Stris and Victor O'Connell of Stris & Maher LLP, Gardena, Calif.; Lee W. Brigham and John C. Bell of Bell & Brigham, Augusta, Ga.; Stuart T. Rossman and Arielle Cohen of National Consumer Law Center, Boston; Cary L. Flitter and Andrew M. Milz of Flitter Lorenz PC, Narbeth, Pa.; and M. Scott Barrett of BarrettWylie LLC, Bloomington, Ind.
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Text of the Third Circuit's opinion is at http://www.bloomberglaw.com/public/document/Edmonson_v_Lincoln_Natl_Life_Ins_Co_725_F3d_406_57_EBC_1874_3d_Ci/2.
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