Regulators in three U.S. states have started or widened examinations of how life insurers pay beneficiaries after a federal judge described MetLife Inc.’s marketing of asset accounts as “inherently deceptive,” even as he dismissed the underlying suit against the company.
The Sept. 10 statement by U.S. District Judge Larry Hicks in Reno, Nevada, may prompt regulators in that state, California and Georgia to use their broad legal powers to impose changes on insurers’ marketing, disclosures and practices.
Hicks said MetLife, the biggest U.S. life insurer, gave consumers the misimpression that its Total Control Account Money Market Option account for death benefits was insured by the Federal Deposit Insurance Corp. Still, he threw out the suit, which claimed the insurer unfairly profited on the policy, saying the beneficiary had not lost money.
“This statement that the accounts are ‘inherently deceptive’ -- that’s something that raises great concern in my mind,” Nevada Insurance Commissioner Brett Barratt said in an interview. “They are strong words.”
The U.S. House Oversight and Reform Committee and New York Attorney General Andrew Cuomo previously started investigations of so-called retained-asset accounts after Bloomberg Markets magazine reported in July that carriers profit by holding and investing $28 billion owed to beneficiaries.
‘Ordinary Reasonable Person’
“An ordinary reasonable person, provided with the contracts at issue, would be under the impression that they were receiving either a money-market account or an account associated with money market protections,” Hicks wrote.
John Calagna, a spokesman for New York-based MetLife, said the company is cooperating with pending investigations and that the ruling dismissing the lawsuit was “completely” in the firm’s favor.
“Insurers have prevailed in almost all of these lawsuits,” Calagna said. “There’s a message there -- that these accounts provide a benefit.”
The account is now called a Total Control Account, without the words “money market,” Calagna said. Curtis Coulter, a lawyer for plaintiff Jamie Clark, said he’s appealing the dismissal.
Clark, a beneficiary of her father’s MetLife policy, claimed in a suit filed in 2008 that the insurer breached a contract when it created a $50,000 retained-asset account for her. MetLife paid her a “relatively insignificant rate of interest, which was less than it earned by keeping the money in its own accounts,” according to the complaint. Clark sought class-action, or group, status for the case.
Hicks found that Clark hadn’t suffered damages because MetLife paid interest above the prevailing money-market rate. In dismissing the case, the judge said MetLife “continually” made reference to money-market accounts throughout its retained-asset account agreement.
The judge also said the name “Total Control Account Money Market Option” was “inherently deceptive because it gives the beneficiary the impression that the account is either a money- market account, or is associated with a money-market account, and contains the same benefits and protections that a money market account offers, namely that the account is insured by the Federal Deposit Insurance Corp. if MetLife was to become insolvent and file for bankruptcy.”
According to its website, the FDIC insures money-market deposit accounts offered by banks. Money-market mutual funds are not insured.
Made $10 Million
MetLife said it made more than $10 million last year in investment earnings for retained-asset accounts paying beneficiaries the contractually set interest rate, the judge said. Bloomberg Markets reported that MetLife makes $100 million to $300 million a year from returns on death benefits it holds.
Peter Kochenburger, executive director of the Insurance Law Center at the University of Connecticut in Hartford, said the judge’s statement, along with comments by other courts reviewing retained-asset accounts, may spur action by state insurance regulators.
“This is certainly an invitation for government entities that have the power to investigate and litigate,” Kochenburger said.
Unlike private plaintiffs, regulators need not prove damages when they sue over deceptive practices, he said. Regulators generally can do anything from warning consumers to ordering changes to insurers’ disclosure language, to possibly even banning retained-asset accounts, he said.
Barratt, the Nevada insurance commissioner, said his department’s review of the accounts will become “a higher priority” because of the statement from Hicks.
Matthew Gaul, deputy superintendent for life insurance in New York, said Hicks’s statement will “of course” factor into his department’s existing probe.
“We will definitely be looking at this issue, in part because of the ruling,” said Ioannis Kazanis, a spokesman for California Insurance Commissioner Steve Poizner.
Georgia Insurance Commissioner John Oxendine said regulators routinely examine whether insurers provide consumers what they’ve promised in policies and whether they are acting “in a proper manner.” He said he had already shown Hicks’s opinion to his examiners.
“This does concern me,” he said in an interview.
Most court rulings on retained-asset accounts have favored the insurance industry. Plaintiffs in these cases have sought to recover the difference between what the insurer made investing the retained-asset funds and the amount paid to the beneficiary.
Future suits are likely to cite Hicks, said Mark Geistfeld, who teaches civil litigation at New York University School of Law. The statement that the account’s name was “inherently deceptive,” while not the last word in other cases, may influence judges, he said.
Beneficiaries are also likely to look to a 2009 decision by a federal appeals court in Boston in a case against Unum Life Insurance Co. of America, a unit of Chattanooga, Tennessee-based Unum Group, Geistfeld said.
In reinstating a case that a lower court had dismissed, the three-judge appeals panel said Unum acted as a fiduciary by retaining and investing death benefits. Unum had provided beneficiaries with a book of drafts that it called a “checkbook.”
“The euphemistically named ‘Security Account,’ accompanied with a checkbook, was no more than an IOU which did not transfer the funds to which the beneficiaries were entitled out of the plan assets and hence Unum remained a fiduciary,” the appeals court wrote. A U.S. district judge in Boston approved a $5 million settlement in that case on Sept. 22.
A finding that the insurer owes a fiduciary or special duty increases the likelihood that cases will succeed, because fiduciaries may not invest beneficiaries’ funds for their own profit, plaintiffs lawyers have argued.
Courts are divided on the question. In the Unum case, the appellate judges said Unum was a fiduciary for funds owed to beneficiaries with retained-asset accounts created by an employee-benefit plan.
In July, a federal appeals court in New York said there was no fiduciary duty for retained-asset accounts created by the purchase of insurance directly from an insurer. The court also said that Mony Life Insurance Co., a unit of AXA SA, France’s largest insurer, hadn’t deceived the beneficiaries by investing the money for its own benefit, as the plaintiffs claimed.
Trial-level federal courts in New Jersey, New York and Nevada have also ruled for insurers.
“The law is well established that there is no fiduciary duty between an insurer and the beneficiary of a life insurance policy,” Phillip Stano, the former chief litigation counsel for the Washington-based American Council of Life Insurers, an industry group, said in an e-mailed comment.
Aetna Life Insurance Co., a unit of Hartford-based Aetna Inc., agreed in March to pay additional interest to current holders of retained-asset accounts, and to provide accidental-death and dismemberment insurance to former holders of such accounts, to settle a Nevada lawsuit by Terence McCreary.
“We are agreeing to settle the McCreary lawsuit to avoid the significant expense that accompanies class-action litigation,” Cynthia Michener, an Aetna spokeswoman, said in an e-mailed statement. Court papers don’t reflect the value of the settlement.
Other suits are pending, including one in Massachusetts that accuses Prudential Financial Inc.’s Prudential Insurance Co. of America of improperly collecting interest on unpaid military veterans’ life-insurance benefits. Prudential hasn’t yet filed a response in court.
“Alliance accounts are an important benefit that have been used for more than a decade to provide a safe, efficient and confidential way for the full payment of benefits to beneficiaries,” Bob DeFillippo, a Prudential spokesman, said in an interview. He declined to comment specifically on the Massachusetts case.
Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas and author of “Stempel on Insurance Contracts,” said the judge’s statement in the Clark case signals a recognition by courts that retained-asset accounts are flawed. He said he expects beneficiaries to file more cases as regulators increase oversight.
“It should be a wake-up call,” he said.
The case is Clark v. Metropolitan Life Insurance Co., 08-cv-158, U.S. District Court, District of Nevada (Reno).