Insurance Company Held Liable for $6 Million and Interest Plus $6 Million in Plaintiff's Counsel Fees for Violating Fiduciary Duties under ERISA. (Recent Court Decisions)

By Stempel, Jeffrey W. | Journal of Risk and Insurance, March 2002 | Go to article overview

Insurance Company Held Liable for $6 Million and Interest Plus $6 Million in Plaintiff's Counsel Fees for Violating Fiduciary Duties under ERISA. (Recent Court Decisions)


Stempel, Jeffrey W., Journal of Risk and Insurance


Harris Trust and Savings Bank v. John Hancock Mutual Life Ins. Co., 122 F. Supp. 2d 444 (U.S. District Court for the Southern District of New York--November 22, 2000) Harris Trust and Savings Bank v. John Hancock Mutual Life Ins. Co., 2001 U.S. Dist. LEXIS 3649 (U.S. District Court for the Southern District of New York--March 31, 2001)

An employer benefits plan begun in 1941 became the subject of a long-running dispute between the plan trustee and an insurance company holding some of its assets. In essence, insurer John Hancock held funds for investment as part of the retirement plan for the Sperry Rand Corporation (SRC), which later became Unisys. For a number of years, the trust was able to obtain funds held in excess of those required to meet plan obligations in what then was referred to as a "rollover procedure."

In 1982, the SRC attempted again to use the rollover procedure to withdraw accumulated free funds, but Hancock refused to let the SRC do so, citing its own cash flow needs. The SRC then attempted to withdraw accumulated free funds to pay nonguaranteed benefits, but Hancock provided notice that it would no longer pay nonguaranteed benefits under the agreement previously applied. As a consequence of Hancock's refusals to permit such access to "free funds," the only mechanism available for the SRC to withdraw free funds was the transfer provisions of GAC 50. Again, however, that was not a viable option because of the pricing scheme (which controlled such transactions based on low interest rate assumptions made decades earlier).

Hancock did not consider its obligations under ERISA to the plan when it decided to terminate the rollover procedure or the payment of nonguaranteed benefits with excess funds. Instead, it used plan assets for its own benefit: to help address its own cash flow problems, as "one more way of limiting cash outflows." In addition, by refusing to permit the withdrawal of free funds, Hancock was able to continue collecting charges on the investment income generated by these funds. There was no question that the free funds belonged to the trust; the issues confronting the parties were how to compute the amount of the excess funds, when Hancock had to give them back, and under what circumstances.

Throughout this period, Hancock assessed the trust risk charges. However, Hancock did not actually face any risk with respect to the free funds during this time period because it was "sufficiently protected" by other provisions of GAC 50 so that it was not at "material risk." Therefore, the excess risk charges collected by Hancock during this time period constituted overcompensation. 122 F.Supp.2d at 452 (citations to trial record omitted).

The court concluded that Hancock "violated its obligations [as a fiduciary] under ERISA by breaching its duty of loyalty and its duty to avoid prohibited transactions." 122 F. Supp. 2d at 459. According to the court:

Hancock refused to return Plan assets to the Trust when the Trust sought to use the rollover procedure in 1982 to withdraw accumulated free funds. The Trust felt it could get a better return by investing the excess funds elsewhere, but Hancock refused to return the Plan assets because of its cash flow problems. Instead, Hancock exercised its discretion to terminate the rollover procedures that had enabled the Trust to withdraw a total of $12 million prior to 1982. Clearly, Hancock put its own interests and cash flow needs ahead of the interests of the Plan and its beneficiaries. By doing so, Hancock violated its obligations under ERISA.

Hancock also refused to revalue the liabilities on a fair and reasonable basis. It repeatedly recognized that because of outdated interest and mortality assumptions, the liabilities [of one group annuity investment contract] were grossly overstated . …

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