The U.S. Court of Appeals for the First Circuit has reversed a $12 million class action judgment over a life insurer’s establishment of retained asset accounts, which are created by life insurers when they pay proceeds of life insurance policies or annuities to beneficiaries by sending them a checkbook to the accounts.
Circuit Judge Bruce M. Selya, writing for the panel, said a life insurer does not owe a fiduciary duty to accountholders over retained asset accounts because the fiduciary duty is discharged once the accounts are created. (Circuit Judge Juan R. Torruella and U.S. District Senior Judge Steven J. McAuliffe, a New Hampshire district judge sitting by designation, were on the panel.)
Life insurance polices are regulated under the federal Employment Retirement Income Security Act (ERISA). The plaintiffs claimed that Unum Life Insurance Company of America’s retained asset accounts violated ERISA, including because the insurer allegedly did not set the interest rates on the retained asset accounts solely in the interest of the beneficiaries.
Selya disagreed. Once the accounts are created, he said, insurers have discharged their fiduciary duties. State law about debtor-creditor relationships governs instead.
“This case is not about the desirability, fairness, or social utility of retained asset accounts,” Selya said. “It is rather about the boundaries of ERISA. The plaintiffs attempt to invoke ERISA to attack practices that fall outside the compass of the ERISA statute.”
The court reversed the district court’s finding that the insurer’s use of the retained asset accounts breached the duty of loyalty owed by the insurer to the plaintiff class.
The panel upheld the district court’s finding that the use of retained asset accounts did not constitute self-dealing in plan assets in violation of ERISA.
“There is no basis, either in the case law or in common sense, for the proposition that funds held in an insurer’s general account are somehow transmogrified into plan assets when they are credited to a beneficiary’s account,” the panel said.
It is beneficiaries, not the plan, who own the assets in the accounts, Selya added.
Selya noted that the U.S. Department of Labor, which enforces ERISA, has said that “an insurer discharges its fiduciary duties under ERISA by furnishing a beneficiary unfettered access to an RAA in accordance with plan terms and does not retain plan assets by holding and managing the funds that back the RAA.”
Amaris Elliott-Engel contributes to law.com.