Midco Int'l, Inc. Emples. Profit Sharing Trust v. Metro. Life Ins. Co., No. 14 CV 9470, 2017 U.S. Dist. LEXIS 103296 (N.D. Ill. Jul. 5, 2017).
An Illinois federal court granted a motion for summary judgment on the ground that the insurer's conduct in selling its retirement administration business through a 100% indemnity reinsurance transaction did not amount to a breach of the duty of good faith. That was because the contract was silent about discretion, assignment and disclosure regarding the responsibility to set a declared rate for retirement plans.
This case involved a fixed investment option contract between an insurer and a retirement trust. The trust administered employee retirement plans and the insurer provided investment options. From 1980 to 1996, the declared rate at which participants received interest each year was set by the performance of the assets in the insurer's general investment account. In 1999, the contract was renegotiated and provided that the insurer would have discretion in determining the declared rate. In 2006, the insurer sold its 401(k) administration business to a third party as a 100% indemnity reinsurance transaction, whereby transferring to the third party 100% of the insurance risk and the assets supporting those liabilities. Administrative control of the assets was also transferred, thereby giving the third party discretion to set the declared rate just as the insurer previously had. Insurer informed the policyholder that the business had been transferred to the third party. The declared rate set by the third party continued to decrease. Each year, the third party generated summary reports that showed the third party now held the insurer's assets, but did not explicitly state the third party was now setting the declared rate. The summaries were reviewed by the trust and distributed to plan participants. The third party attempted to repaper with the trust, but was turned down. The trust filed suit against insurer in November 2014, alleging that the insurer breach the parties' contract for failure to set the declared rate in good faith.
The court found that the parties' contract was silent on whether the insurer could delegate the duty to set the declared rate to a third party. When a contract is silent on an issue it is filled in by the implied duty of good faith and fair dealing. The court stated that the record lacked any evidence from which a jury could conclude that the insurer would never assign its assets or delegate rate-setting responsibility to a third party. The court found no evidence on the record at all of the parties' expectations with respect to rate setting and disclosures of any change in administrative oversight. Further, there was no evidence on the record that the reinsurance transaction was unusual. In conclusion, the court held that the insurer's conduct fell short of the arbitrary and capricious conduct required to prove breach of the duty of good faith and, thus, granted the insurer's motion for summary judgment.