Death benefits flap could trigger lawsuits against insurers

Life insurers may face increased account withdrawals and litigation as beneficiaries become increasingly aware of so-called retained-asset accounts, experts said. “People might be a little more aware that their accounts are set up in this manner; they might be more likely to pull the death benefit rather than keep it,” said Morningstar Inc. insurance analyst Drew Woodbury. In paying out death benefits to survivors, insurance companies place proceeds into retained-asset accounts. They then send beneficiaries a checkbook rather than a check for the full amount of the coverage. Beneficiaries can close out their accounts. Typically, however, insurers tout the merits of the retained-asset accounts, which go under various brand names. The carriers invest the money and then pay out a portion of the earnings to the beneficiary. Though the practice has been around for decades, a Bloomberg story this week brought the accounts to light, triggering a firestorm of controversy. The White House, the Department of Defense, the Veterans Administration and several lawmakers all criticized the industry practice. Meanwhile, New York Attorney General Andrew Cuomo has subpoenaed Prudential Financial Inc. and MetLife Inc., among others, stating he will launch a major investigation into the life insurance industry's practice. Mr. Cuomo's subpoenas could trigger some civil suits. Ron R. Parry, an attorney with Parry Deering Futscher & Sparks PSC, has worked on a number of cases involving retained-asset accounts. He said he's been getting a lot of calls from other attorneys this week. “I'm hearing from lawyers with beneficiaries who received checkbooks, and we're going to evaluate the paperwork and the disclosures [the insurers] sent,” Mr. Parry said. Currently, there are a number of continuing civil cases against carriers involving the use of retained-asset accounts, including a class action against MetLife in the U.S. District Court in Nevada. Jamie Clark, the lead plaintiff and the beneficiary to her deceased father's MetLife policy, claims that the company breached its duty to its beneficiaries by failing to disclose how the death benefits are being invested, the method the insurer used to calculate the interest credited to the death benefits, and the amount of earned interest the insurer kept. Proceeds from Ms. Clark's life insurance policy were placed in a MetLife Total Control Account, according to suit documents. “The problem we find is a lack of disclosure: This is an unregulated investment,” said Mr. Parry, who is working on the Clark case. John Calagna, a MetLife spokesman, said the insurer believes that the lawsuit is without merit. Mr. Parry said that insurers have drawn similarities between these accounts and money market accounts, using terms such as “money market option.” Indeed, in some of the lawsuits, plaintiffs said they thought their death benefit proceeds were placed in a money market account or bank account. In reality, the retained death benefits typically are deposited into an insurer's general corporate account. “When you sign up for a money market account, the law strictly limits what they can invest in,” Mr. Parry said. “But general accounts are invested in derivatives, stocks and bonds — things that are much more risky.” But insurers continued to defend the accounts, with some analysts siding with the carriers. “We find the very sharp and rapid regulatory response to this surprising and apparently unfounded,” Randy Binner, an analyst with FBR Capital Markets, wrote in a report. On an earnings conference call with analysts this morning, C. Robert Henrikson, chief executive of MetLife, blasted recent negative reports on the accounts. “We strongly disagree with the misleading and incorrect statements, certainly the initial statements coming from the press,” he said, adding that analysts have provided a “public service” for putting out reports that show they understand how the accounts work. On the call, Mr. Henrikson added that the account holders “love” the retained-asset accounts. The National Association of Insurance Commissioners is currently “re-reviewing” the disclosure requirements for retained-asset accounts and is developing a consumer alert to help policyholders comprehend the terms, said Jane L. Cline, NAIC's president and insurance commissioner of West Virginia.