A Boston federal judge has provisionally certified two classes in a case against Cigna Corp. subsidiaries that are alleged to have invested employee death benefits for their own profit without properly disclosing the practice or making a full accounting to beneficiaries.


In a June 10 order, Judge Richard Stearns of the District of Massachusetts provisionally certified two sub-classes in Otte v. Life Insurance Co. of North America. The defendants are Cigna underwriting subsidiary Life Insurance Co. of America (LINA), Cigna affiliate Connecticut General Life Insurance Co. and Does 1 through 100 — other Cigna indirect or direct subsidiaries that also engaged in the same conduct.


Named plaintiff Brenda Otte claims the Cigna subsidiaries are violating the Employee Retirement Income Security Act of 1974 (ERISA) by investing death benefits they owe to beneficiaries without making full disclosures or accounting to the beneficiaries. Otte is the administratrix of the estate of her grandmother, Gladys Reynolds. Reynolds was a beneficiary of her son, a participant in a LINA plan bought by his former employer, Cummins Inc.


According to Stearns’ opinion, “LINA paid death benefits by creating a CIGNAssurance account to which the full balance was credited.”


“As of May of 2010,” Stearns wrote,” the value of the Reynolds CIGNAssurance account amounted to $5,075.21, which represented the death benefits with interest accrued at rates ranging from .39% to .74%….Brenda Otte attempted to withdraw most of the funds using one of the provided CIGNAssurance drafts, but payment was refused.” In a footnote, Stearns wrote, “Defendants state that the check bounced because it had not been cashed or deposited within the 180-day period noted on the face of the draft.”


Otte filed her lawsuit on Sept. 15, 2009, claiming that the “[d]efendants’ practice of retaining, commingling, using and investing benefits for [d]efendants’ own account violates ERISA §404(a) (29 U.S.C. § 1104(a)), which requires plan fiduciaries to discharge their duties with respect to ERISA plans ‘solely in the interests of the participants and beneficiaries’ and ‘for the exclusive purpose of providing benefits to participants and their beneficiaries.’” On July 2, 2010, Otte filed a motion for class certification.


The first class provisionally certified by Stearns is for beneficiaries with claims that accrued during the three years before the Sept. 15, 2009, date of Otte’s filing.


The second provisional class is for beneficiaries whose claims accrued during the three years before the start of the first class claim period. The second class could potentially be defeated by an ERISA statute of limitations rule. According to the rule, no case can be started three years after the earliest date a plaintiff had actual knowledge of a violation or six years after the date of the last breach of fiduciary duty action.


Stearns wrote that a short discovery period “should establish whether the second sub-class can survive the commonality test and whether a suitable representative of the sub-class can be identified.”


He relied on a 2008 ruling by the U.S. Court of Appeals for the 1st Circuit in Mogel v. UNUM Life Insurance Co. of America to determine that the Cigna companies’ practice of issuing a checkbook to the beneficiaries for withdrawal purposes meant that they retained a fiduciary duty over the funds.


“As Otte observes, other district courts, including two judges from this district, have followed Mogel without relying on the specific terms of any plans or [summary plan descriptions] in holding that the establishment of a [retained asset account] does not discharge a defendant of its fiduciary obligations,” Stearns wrote.


Stearns also wrote that Otte is qualified to act as a class representative according to 1st Circuit case law. He noted that, although some circuits require that class representatives be “active, well-informed, and able to direct the litigation,” the 1st Circuit “has not adopted so strict a standard.”


“Although Otte’s grasp of the legal claims may be rudimentary, she was voluntarily deposed, knows who the parties are and the role of her attorneys, understands the nature of a class action suit, and is aware of the basic facts that led to the creation of Mrs. Reynolds’ CIGNAssurance account as well as the allegation that defendants diverted to themselves interest that should have been paid to Mrs. Reynolds,” Stearns wrote.


The plaintiff’s co-lead counsel, Jeff Casurella, a solo practitioner in Atlanta, believes the Otte case is the first of its type that has been certified as a class action. Casurella said he’s been involved in litigating seven several similar federal cases, including some that have settled.


Casurella also said the portion of Stearns’ ruling that affirmed the 1st Circuit ruling in Mogel is legally significant. “It gets into an area where if an insurance company like LINA had plan assets and was taking them and using them for their own account, that would be a clear violation of the breach of fiduciary duty under ERISA law,” Casurella said. “When they’re dealing with these kinds of monies, they’re considered plan assets. They have to be very careful. They can’t use them for their own benefit, which is what they’ve been doing.”


Cigna’s lead lawyer on the case, Jeremy Blumenfeld, a labor and employment partner at Morgan, Lewis & Bockius, declined to comment. Cigna spokeswoman Mariann Caprino said the company doesn’t comment on pending litigation.


Sheri Qualters can be contacted at squalters@alm.com.