John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank: Guaranteed Benefit Policy Exclusion Holds No Guarantee for Insurers from Erisa's Fiduciary Standards - Shane C. Deleon

• Publication year: 1995

John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank: Guaranteed Benefit Policy Exclusion Holds No Guarantee For Insurers From ERISA's Fiduciary Standards

This case came before the Supreme Court of the United States to decide whether the fiduciary obligations of the Employee Retirement Income Security Act of 1974 ("ERISA") apply to an insurance company's annuity contracts, or whether they were within the guaranteed benefit policy exclusion.¹ The defendant-petitioner, John Hancock Mutual Life Insurance Co. and the plaintiff-respondent, Harris Trust & Savings Bank, acting as trustee for a Sperry Rand Corp. Retirement Plan, were parties in a participating group annuity titled Group Annuity Contract No. 50 ("GAC50").² In participating group annuity contracts, deposits made to secure retiree benefits are placed with the insurer's general corporate assets instead of applied to the immediate purchase of annuities.³ The deposits can then be removed from the general account and converted into guaranteed benefits for the policy's retirees.⁴ GAC50's assets were likewise made part of Hancock's general account with assets and liabilities recorded in two accounts for bookkeeping purposes.⁵ In return for this arrangement, Harris received a pro rata portion of the investment gains and losses stemming from Hancock's general account.⁶ Upon request, Hancock would convert GAC50 assets and guarantee all benefits to the specified retiree(s).⁷ The liability would be recorded by adding an amount set by Hancock to the "Liabili- ties of the Fund.⁸ This method of conversion would continue as long as the minimum operating level (105% of the Pension Administration Fund) was maintained.⁹ Funds in excess of the Minimum Operating Level were referred to as "free funds."¹⁰ Heirris had access to the free funds and used them for two purposes¹¹ The primary use of the free funds was to pay additional benefits to retirees with no obligation for Hancock to pay except when free funds existed. The parties specifically referred to these payments as "non-guaranteed benefits."¹³ Hancock also allowed Harris to transfer free funds in rollover procedures without incurring any penalties." When Hancock stopped allowing these functions, Harris, without any access to the free funds, filed suit.¹⁵ In July 1983, in the United States District Court for the Southern District of New York, Harris alleged that Hancock was managing plan assets and was, therefore, subject to fiduciary standards in its administration of GAC50 under ERISA.¹⁶ Hancock countered that ERISA's fiduciary standards did not apply to GAC50 because the contract fell within the guaranteed benefit policy exclusion¹⁷ (29 U.S.C. Sec. 1101(b)(2)(B)) exempting guaranteed benefit policies from plan assets.¹⁸ ERISA defines a guaranteed benefit policy as an insurance policy or contract to the extent it provides for benefits guaranteed by the insurer.¹⁹ In September 1989, the district court granted Hancock's motion for summary judgment on the ERISA claims, holding that Hancock was not a fiduciary with respect to any portion of GAC50.20 Harris appealed, and the United States Court of Appeals for the Second Circuit reversed in part, holding that even though GAC50 provides for guarantees with respect to one portion of the benefits, it does not provide for guarantees to all benefits derived from the free funds portion of the contract.²¹ Consequently, the guaranteed benefit policy exclusion did not cover GACSO's free funds since Hancock did not guarantee any of the benefit payments or fixed rates of return but subjected them to fluctuation based on Hancock's investment performance.²² The Supreme Court granted certiorari to resolve a split among the Courts of Appeals as to the meaning of the guaranteed benefit policy exclusion.²³ The main issue before the Court was whether fiduciary standards in ERISA apply to an insurance company in relation to certain annuity contracts.²⁴ In a six to three decision, Justice Ginsburg wrote for the majority and Justice Thomas, joined by Justice O'Connor and Justice Kennedy, dissented.²⁵ The Supreme Court affirmed the Second Circuit.²⁶ The Court held a group annuity contract did not qualify for ERISA's guaranteed benefit policy exclusion regarding free funds above the amount necessary to provide guaranteed benefits and subject to the insurer's discretionary management.²⁷ Absent the exclusion, this subjects the insurer to ERISA's fiduciary obligations with regard to such funds.²⁸

Under ERISA, the obligations of a fiduciary are to discharge its duties with respect to a plan solely in the interests of the participants and their beneficiaries and for the exclusive purpose of providing benefits to the same.²⁹ A person is a fiduciary with respect to an employee benefit plan "to the extent he exercises any discretionary authority or control respecting management or disposition of such plans or its assets."³⁰ An ERISA guaranteed benefit policy is an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer.³¹ Such term includes any surplus in a separate account but excludes any other portion.³² A definition for guaranteed benefit contract has never been a part of the insurance industry lexicon so the actual meaning must come from ERISA itself This issue is one that has only been discussed a few times with results prior to this Supreme Court decision stemming from four Circuit Court opinions which were all basically in disagreement.³⁴ The four cases are: Peoria Union Stock Yards Co. Retirement Plan v. Penn Mutual Life Insurance Co.,³⁵ Mack Boring & Parts v. Meeker Sharkey Moffitt,³⁶ Associates in Adolescent Psychiatry, S.C. v. Home Life Insurance Co.,³⁷ and the present case of Harris Trust & Savings Bank v. John Hancock Mutual Life Insurance Co.³⁸ In Peoria, the United States Court of Appeals for the Seventh Circuit became the first federal court of appeals to consider whether an insurer's general account activities implicated ERISA's fiduciary obligations as well as the first to consider the scope of the exemption of section 401(b)(2).³⁹ In that case, the insurer sold a defined benefit plan in which they guaranteed the rate of return on the insured's contributions for three years.⁴⁰ The Seventh Circuit determined that, in certain circumstances, general account assets could qualify as plan assets and thus subject an insurer to ERISA's fiduciary obligations.⁴¹ Implicitly relying on analysis of securities law to support their section 401(b)(2) analysis,⁴² the Seventh Circuit held that the Penn Mutual-Peoria contract was not a guaranteed benefit policy because the words "guaranteed benefit" were meant to refer to the rate of return credited by the insurer, and the percentage guaranteed was too small to support the conclusion that the benefits were guaranteed.⁴³ The Seventh Circuit revisited the section 401(b)(2) issue once again in the Associates case in which the purchasers of a defined benefit plan sued their insurer under ERISA.⁴⁴ The insurer in Associates declared the applicable interest rates on its contract in advance of the year.⁴⁵ The court reasoned that by giving advance notice of the applicable rate, the contract provided a sufficient guarantee of return since the contract holder could decide not to transfer new funds to the policy or "take its money and go elsewhere."⁴⁶ By finding the contract to be a guaranteed benefit policy, the court distinguished Peoria.⁴⁷ In both of these decisions, however, despite being the first to confront ERISA's section 401(b)(2), the Seventh Circuit reached its results with only casual consideration of the section's scope.⁴⁸ In Mack Boring, however, not only did the United States Court of Appeals for the Third Circuit take a more extensive look at the scope of 401(b)(2), it rejected the reasoning of Peoria as well.⁴⁹ The court considered the language, legislative history, judicial and administrative interpretations of section 401(b)(2), and the definition of plan assets to conclude that the insurer was not a fiduciary under ERISA.⁵⁰ The court determined that the term "provides for" was to be interpreted as "make available" and since the policy made available fixed payment annuities for all the participants in the underlying plan, it was a guaranteed benefit policy.⁵¹ The critical question according to Mack Boring is whether it is possible to use the policy's accumulated funds to purchase fixed payout annuities.⁵² As long as the contract has provisions which, at some point in the future, allow payment of guaranteed benefits to plan participants, the contract is a guaranteed...