United States: The Latest On The Use Of Retained Asset Accounts To Pay Life Insurance Benefits

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).


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.


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.


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."


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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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