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January 30, 2009
Is a Lump Sum Better Than a Checkbook?
A l
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arge insurer provided group life insurance to the employees of a number of large companies. Beneficiaries of some employees who died received a checkbook from the insurer. Checks could be written up to the full amount of the policy, but beneficiaries sued the insurer.

What happened. UNUM Life Insurance Co. of America offered policies through such employers as Xerox Imaging Systems, Sideshow USA, and South Shore Mental Health Center. The policies stated that upon a covered employee’s death, the beneficiary must offer sufficient proof, including a valid death certificate. When a claim had been approved, the policy said, the beneficiary would receive a lump-sum payment by check.

Instead, for coverage of more than $10,000, UNUM sent beneficiaries a checkbook, with instructions that the recipient could write checks of at least $250 and up to the full amount of the coverage. Further, the instructions said, beneficiaries’ death benefits plus applicable interest had been deposited in a UNUM Security Account and that interest would be paid on the accounts at a variable rate.

In court, three plaintiff beneficiaries, suing on behalf of all others in their class, argued that a checkbook is not the promised lump-sum payment, and that UNUM used the policy assets for its own benefit before checkbook holders wrote checks for the full amount of the funds. Essentially, they maintained that, UNUM alleged it paid an agreed amount of interest, while plaintiffs’ essential case was that they had not received the full amount that UNUM earned from investing the beneficiaries’ funds.

A judge in federal district court ruled in favor of UNUM and dismissed plaintiffs’ charges. They appealed to the 1st Circuit, which covers Maine, Massachusetts, New Hampshire, and Rhode Island.

What the court said. Before appellate judges, UNUM argued that once it issued a checkbook to a beneficiary, its fiduciary duty under the Employee Retirement Income Security Act (ERISA), ended. Judges disagreed that UNUM’s task after that was merely clerical. “UNUM’s contention rests on quicksand,” they wrote, stressing that the checkbooks were not lump-sum payments and that UNUM still had the funds and “enjoyed their use.” Pointing to other rulings in the same vein, they sent the case back to the district court for reconsideration based on UNUM’s liability for violating ERISA. Mogel et al., v. UNUM Life, U.S. Court of Appeals for the 1st Circuit, No. 08-1334 (2008).

Point to remember: Clearly, UNUM must change its procedures in light of this ruling. Whether the plaintiffs will receive any damages is not at all clear, though, since they would be hard to calculate.

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