Seventh Circuit Permits Payment of Life Insurance Benefits Through Retained Asset Accounts

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:

  1. Prudential makes installment payments over a fixed period of time of up to twenty-five years;
  2. Prudential makes monthly payments over the course of the beneficiary’s life, with payments certain for 120 months;
  3. Prudential holds the proceeds and pays interest to the beneficiary on an annual, semiannual, quarterly, or monthly basis;
  4. Prudential makes annual, semi-annual, quarterly, or monthly payments for as long as the proceeds allow; or
  5. 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.

About Brian Jones

I represent clients in all aspects of business litigation, but focus my practice on complex litigation and arbitration matters concerning insurance and reinsurance, antitrust, class actions, securities, real estate disputes, and contract matters. I am the co-chair of the Bose McKinney & Evans Insurance Group. I was listed in the 2017 and 2016 "Best Lawyers in America" for Insurance Coverage and named a "Rising Star" in Insurance Coverage by Super Lawyers in Indiana in 2014. I was also named a "Rising Star" in Business Litigation by Super Lawyers in Indiana in 2013 and 2012, and a 2010 “Rising Star” in Business Litigation in Texas. I am a member of the State Bars of Indiana and Texas, the Defense Research Institute, a former member of the Pro Bono College of the State Bar of Texas, and I am licensed to practice before all state courts in Indiana and Texas, as well as all federal courts in Indiana, the Northern, Western, and Southern Districts of Texas, the Northern District of Illinois, and the United States Courts of Appeals for the Fifth, Seventh, and Eleventh Circuits. I received my bachelor’s degree, cum laude, in political science and my master’s degree in teaching from Trinity University, where I was elected to Phi Beta Kappa. I received my doctor of jurisprudence degree from the University of Texas School of Law, where I was the Director of Communications for the Legal Research Board and a member of the Phi Delta Phi Honor Society. Before attending law school, I taught high school geography, government and economics in San Antonio, Texas.
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