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Insurers' Death-Benefit Practices Often Backed by Courts

Source: WSJ

Posted on 06 Aug 2010

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Insurance regulators and New York's attorney general lately ramped up reviews of how insurers pay death benefits. But courts have analyzed the issue for years -- largely concluding that the practices haven't harmed consumers.

At issue: Insurers often automatically put policy proceeds in money-market-like accounts and give beneficiaries checkbooks they can use to withdraw funds, rather than sending a check.

Critics paint the accounts as a vehicle for insurers to delay payment so that the industry can earn investment gains on funds.

At least 10 lawsuits have been filed against insurers in courts nationwide since 2006, alleging claims such as breach of fiduciary duty, breach of contract and unjust enrichment.

Several federal judges have rejected the claims, concluding that beneficiaries are in virtually the same position they would be in had the insurer sent them a check, because consumers can immediately withdraw the full proceeds.

"What am I missing here?" one judge asked in court before dismissing a complaint.

In contrast, in another case, a federal court of appeals overturned a district court's favorable ruling for an insurer, saying the accounts failed to comply with the group-life policies' own stated call for payment in one lump sum.

Regarding the favorable court rulings, regulators and insurance executives say that simply meeting the letter of the law isn't the end game in selling policies to individuals and employers. Broader goals are transparency, consumer choice and customer trust.

"Retained-asset accounts" have been in use since the 1980s, promoted by the industry as a useful service for people too bereft to make quick financial decisions and also serving as an income source for insurers.

The accounts were thrust into the spotlight last month when the mother of a solider killed in Afghanistan gave media interviews saying she felt misled.

In response, New York Attorney General Andrew Cuomo's office opened a "major fraud investigation," and state insurance regulators also are now examining the practices. Executives at numerous insurers said they are reviewing their disclosure materials.

Lawyers began targeting the checkbook approach several years ago. Since October, the industry has won favorable rulings from federal judges in New York and New Jersey and the U.S. Second Circuit Court of Appeals.

"The simple fact" is that plaintiffs "received all of the benefits to which they were entitled under the plans," Harold Baer Jr., a federal judge in Manhattan, wrote in October in dismissing a complaint filed against MetLife Inc. in 2008.

In that case, the two plaintiffs were beneficiaries through an employer-sponsored plan. In a set-up that insurers and benefits consultants say has become commonplace, the plan chosen by the employer called for automatic establishment of the retained-asset account as a way of paying a death benefit.

The plaintiffs alleged that the profits MetLife earned on the accounts belong to the beneficiaries. Judge Baer wrote that any profits were "simply not due to plaintiffs," who have appealed.

John Bell, one of the attorneys for the plaintiffs, says federal law requires that insurers working with employee-benefit plans act in the interests of the workers covered by the plan.

In a Dec. 10 hearing in federal court in Newark, N.J., Judge Joseph A. Greenaway Jr. asked a plaintiff's lawyer suing Prudential Financial Inc.: "What am I missing here? Your client has the ability to get all of her money from day one." The judge, who is now on the U.S. Third Circuit Court of Appeals, subsequently dismissed the complaint.

A lawyer for the plaintiff, a Nevada widow, said the suit has been refiled in a Nevada state court.

In a win for plaintiffs, the U.S. First Circuit Court of Appeals in November 2008 ruled against a unit of Unum Corp. Three beneficiaries of an employer-sponsored plan sued after Unum mailed them checkbooks, arguing that their policies with Unum stated they would be paid "in one lump sum." The appellate panel concluded Unum's claim that the funds were paid when the checkbooks were sent "obscures reality."

The plaintiffs lawyers and Unum currently have agreed upon a proposed $5 million settlement that would apply to beneficiaries with similar language in their policies.

A Unum spokesman said that the settlement was "more advantageous to all parties than a protracted legal dispute" and that newer policies issued since those at issue in the lawsuit reference payment via retained-asset accounts.

Ron Parry, a lawyer with cases pending against insurers, said disclosure practices and policy language vary widely, and he expects success with "more misleading" situations.

Life insurers are bracing for more lawsuits after Mr. Cuomo's probe. MetLife was hit with an additional suit last week that it says is without merit. Lawsuits typically "gain traction after regulatory reviews" such as Mr. Cuomo's because of authorities' subpoena power, Philip Bieluch, an actuary in Avon, Conn., who consults for plaintiffs' lawyers, said in an email. "I suspect you will see more complaints, better constructed, in the next year."


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