The Third Circuit recently found that while a life insurance company acts as a fiduciary in choosing to use a retained asset account to distribute benefits, it did not breach its fiduciary duties in making that choice. When an insurer creates a retained asset account as the method by which it will distribute benefits, it does not initially deposit any funds; rather, it credits the account with the benefits. The insurer does not transfer funds into the account until a beneficiary writes a check, at which point the insurer transfers funds to cover the check. Prior to payment, the beneficiary’s balance earns interest at a predetermined rate, but the insurer is free to invest the retained assets for its own benefit.
Plaintiff Connie Edmonson, the recipient of life insurance benefits from her late husband’s policy, filed a class action against Lincoln National Life Insurance Co., arguing that Lincoln breached its fiduciary duties by: (i) using a retained asset account to pay benefits, and (ii) investing the retained assets for its own profit. She sought disgorgement of the difference between what Lincoln earned by investing the retained assets and the interest she received.
In a case of first impression within the Third Circuit, the Court held that while Lincoln was a fiduciary insofar as its choice to use a retained asset account (i) represented a “discretionary act of plan management or administration” and (ii) “involved exercising authority or control over plan assets,” it did not breach its fiduciary duties. Edmonson v. Lincoln Nat’l Life Ins. Co., 2013 WL 4007553 (3d Cir. Aug. 7, 2013). First, the Court rejected Edmonson’s argument that Lincoln’s use of the retained asset account was not entirely in her interests. It reasoned that Lincoln did not directly gain any financial benefit from its decision, since Edmonson could have immediately written a check for the entire balance. Second, the Court found that “Lincoln was not managing or administering the plan when it invested the retained assets,” and concluded that Lincoln completed its duties by establishing the retained asset account. Third, the Court determined that the retained assets were not plan assets. Once it created the retained asset accounts, Lincoln simply remained obligated to honor checks drawn on the accounts and pay interest at the stipulated rate.
Notably, just two days later a Massachusetts federal court relied heavily on Edmonson in finding that (i) an insurer acted as a fiduciary in choosing to use a retained asset account to pay benefits, but (ii) it did not breach its fiduciary duties in making that choice. Vander Luitgaren v. Sun Life Assurance Co. of Canada, 2013 WL 4058916 (D. Mass. Aug. 9, 2013).