On November 6, 2008, the U.S. Court of Appeals for the First Circuit overturned the dismissal of a complaint against an insurer asserting breaches of fiduciary duties under ERISA where the insurer paid life insurance benefits by means of a retained asset account. In so ruling, the court rejected arguments by the insurer (1) that payment through the retained asset account was the equivalent of a lump sum payment and (2) that the breach of fiduciary duty claim was precluded by ERISA’s guaranteed benefit contract provision.

Plaintiffs were beneficiaries under ERISA-governed life insurance policies issued to employers. When plaintiffs submitted claims for benefits, the insurer set up interest-bearing checking accounts for each plaintiff (often referred to as retained asset accounts) and sent plaintiffs checkbooks on which they could write checks up to the amount of the insurance proceeds. If the beneficiary wanted to transfer the full amount somewhere else, he or she could have done so by writing a check immediately for the full balance. Plaintiffs contended, however, that the policy provision for a “lump sum” payment required that they be paid by means of checks rather than checkbooks; that the insurer breached its fiduciary duties under ERISA § 404(a) and engaged in prohibited transactions in violation of ERISA § 406(b) by allegedly using plan assets to its own benefit; and that the insurer should be required to disgorge the difference between the interest it paid plaintiffs and the insurer’s earnings on the benefit amounts.

Plaintiffs asserted that the retained asset accounts were plan assets within the meaning of ERISA, such that the handling of those accounts gave rise to fiduciary duties allegedly breached by the insurer. The court rejected this contention, however, holding that the accounts were not plan assets in light of ERISA § 401(b)(2), which provides that where an insurer issues a guaranteed benefit contract (such as a typical group life insurance policy) to a plan, the plan’s assets include the contract but do not include the insurer’s general account assets solely by reason of the issuance of the contract. Plaintiffs also argued before the district court that the retained asset accounts should be viewed as separate accounts, not subject to the § 401(b)(2) exemption. The district court found this argument to be self-defeating, however, reasoning that if they were separate accounts, plaintiffs were entitled to no earnings other than the interest credited to the accounts, which they had already received. Accordingly, the district court dismissed the complaint. Mogel v. UNUM Life Insurance Co. of America, No. 07-10955-NMG (D. Mass. Feb. 4, 2008). (Click here for the opinion.) Plaintiffs appealed.

On appeal, the insurer made two primary arguments in support of the dismissal. First, it argued that because payment by means of the retained asset account was the equivalent of a lump sum payment, any ERISA fiduciary function was concluded at that point. Accordingly, the retained asset account was a post-plan arrangement between the insurer and the beneficiary governed by state law rather than by ERISA. Second, the insurer argued that even if ERISA applied, the retained asset accounts were not plan assets in light of the guaranteed benefit contract provision and thus could not give rise to any fiduciary duties or prohibited transaction restrictions.

The First Circuit reversed, holding that plaintiffs had stated a claim for breach of fiduciary duty. Mogel v. UNUM Life Insurance Co. of America, No. 08-1334 (1st Cir. Nov. 6, 2008). (Click here for the opinion.) The appeals court was of the view that while payment by a lump sum check divested the insurer of the funds involved, payment by a checkbook did not, and based on this view, rejected the insurer’s argument that the issuance of the checkbook constituted a lump sum payment. With respect to the insurer’s second argument, the court did not directly address the applicability of the guaranteed benefit contract provision but held that because ERISA’s fiduciary provisions extended to activities beyond investment of assets, such as plan management and administration, “UNUM’s disposition to the beneficiaries of benefits under the plan falls comfortably within the scope of ERISA’s definition of fiduciary duties with respect to plan administration.” Accordingly, the court held that plaintiffs had alleged a claim for breach of fiduciary duty under ERISA.