Earlier this month, in Phillips v. Prudential Insurance Co. of America, the Seventh Circuit affirmed dismissal of a putative class action challenging a life insurer’s use of “retained asset accounts” for payment of policy benefits.
The plaintiff alleged that Prudential breached its policy, as well as its statutory duty of good faith (the case arose under Illinois law) and fiduciary duties, by not paying policy benefits in a lump sum. The policy in issue the beneficiary the right to choose the way that Prudential would pay out the death benefit. One of the options was a lump-sum payment. According to the court, the other options were:
- Prudential makes installment payments over a fixed period of time of up to twenty-five years;
- Prudential makes monthly payments over the course of the beneficiary’s life, with payments certain for 120 months;
- Prudential holds the proceeds and pays interest to the beneficiary on an annual, semiannual, quarterly, or monthly basis;
- Prudential makes annual, semi-annual, quarterly, or monthly payments for as long as the proceeds allow; or
- Prudential makes payments like those on any annuity that Prudential regularly issues.
Prudential’s claim form informed the plaintiff that Prudential’s preferred method of paying the death benefit was the “Alliance Account settlement option,” which the court described this way:
The Alliance Account is what the insurance industry calls a “retained asset account,” under which the insurer, instead of paying a lump-sum death benefit, creates an interest-bearing account for the beneficiary and sends her a checkbook that can be used to draw down the funds, in part or in whole, at any time. The funds are held in Prudential’s general investment account, which allows Prudential to profit from the spread (if any) between its investment returns and the interest paid to the beneficiary,….
While the claim form permitted the plaintiff to write on the form any other “payment option allowed in the policy,” the plaintiff did not pick a method, so Prudential set up an Alliance account for her. The district court granted Prudential’s Rule 12(b)(6) Motion to Dismiss.
On appeal, the Seventh Circuit affirmed, finding that Prudential did not breach the policy because the policy did not require the insurer to explicitly reference the lump-sum option on its claim form, and a retained asset account was specifically permitted under the policy. The court also rejected the plaintiff’s bad faith claim because there was no delay in her death benefit payment, even though it was paid in the form of a retained asset account. Finally, the insurer did not breach any fiduciary duties because it was acting as a debtor in holding the funds in a retained asset account, not as a fiduciary.
Note that I didn’t title this post “Seventh Circuit Approves Payment of Life Insurance Benefits Through Retained Asset Accounts.” That’s because, perhaps in light of recent regulatory attempts to curb the use of retained asset accounts, the Seventh Circuit concluded its opinion by stating:
Our disposition of this appeal is not intended to suggest any endorsement of the business practice giving rise to this litigation…Whether this practice is disreputable is open to debate—state insurance regulators are entitled to conclude that the practice should be limited or restricted—but for present purposes it suffices to say that the practice did not breach the life insurance policy, did not effect a vexatious and unreasonable delay…,and did not breach any fiduciary duty.
We’ll continue to follow developments in this area, so stay tuned.