In the face of negative press involving insurers’ use of retained asset accounts (RAAs) for the payout of policy benefits, members of Congress and a newly formed NAIC RAA Working Group are examining insurers’ use of RAAs. While some seek to limit or prohibit RAAs, recent cases and comments from various insurance regulators reflect that if the appropriate language is included in policies and if the RAA program is properly disclosed and administered, RAAs are generally permissible.

MONY Life Insurance Company won summary judgment in a class action asserting breach of contract and tort claims because it paid surrender proceeds through an RAA. Finding that the policies allowed other methods of disbursement and the distinction between an RAA and a check was de minimis, the court concluded that the insurer was not obligated to pay surrender proceeds by check. Additionally, the court found that the RAA paid a “competitive rate” as described in the materials for the RAA and that the insurer did not engage in any misleading practices. The decision was affirmed by the U.S. Court of Appeals for the Second Circuit.

Following the negative press involving a case of its payment of veterans’ death benefits via an RAA, Prudential Insurance Company of America was sued in federal district court in Massachusetts. The class action contests the insurer’s profits on veterans’ death benefits held in the RAA. Claims include breaches of contract, fiduciary duty, and the implied covenant of good faith and fair dealing. It was subsequently reported that the New Jersey Department of Banking and Insurance found Prudential acted appropriately in the case reported negatively in the press.

While some decisions have been favorable, some courts have sided with plaintiffs. Thus, appropriate policy language and disclosure and administration of an RAA is essential. Given the increased scrutiny and some unfavorable litigation outcomes, insurers should review their policies and RAA program. Updates to insurers’ RAA programs are likely to be needed due to legislative and regulatory initiatives. See our client alert on the NAIC RAA Working Group’s August 27, 2010 meeting.