Jackman Financial Corp.. v. Humana Ins. Co.

• Citation: 641 F.3d 860,51 Employee Benefits Cas. 1033
• Decision Date: 31 May 2011
• Docket Number: No. 10–2112.,10–2112.
• Parties: JACKMAN FINANCIAL CORP., Plaintiff–Appellant,v.HUMANA INSURANCE CO., Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

641 F.3d 860

51 Employee Benefits Cas. 1033

JACKMAN FINANCIAL CORP., Plaintiff–Appellant,

v.HUMANA INSURANCE CO., Defendant–Appellee.

No. 10–2112.

United States Court of Appeals, Seventh Circuit.

Argued March 29, 2011.Decided May 31, 2011.

Adam B. Goodman (argued), Attorney, Goodman Law Offices LLC, Chicago, IL, for Plaintiff–Appellant.William A. Chittenden, III, Morgan J. Milner (argued), Attorneys, Chittenden, Murday & Novotny, Chicago, IL, for Defendant–Appellee.Before ROVNER, WILLIAMS, and HAMILTON, Circuit Judges.HAMILTON, Circuit Judge.

When Kunta Torrence was killed in a car accident, he held a life insurance policy through his employer that named his brother as the sole beneficiary. His brother was also in the same car and died at the same time as Torrence. A “facility-of-payment” clause in Torrence's group life insurance plan allowed the insurer, if the named beneficiary was not living, to choose a substitute beneficiary from among a list of relatives and the deceased's estate. The insurer did so, choosing to pay Torrence's children. Long before the insurer had done so, however, the future administrator of Torrence's estate (his mother) separately executed an assignment of the same life insurance proceeds to a financing company that had funded Torrence's funeral. The assignee, plaintiff Jackman Financial Corporation, brought this ERISA case against the insurer to recover the proceeds from the life insurance policy. The district court granted summary judgment to the insurer, defendant Humana Insurance Company, concluding that the insurer properly exercised its right under the policy by selecting a substitute beneficiary under the facility-of-payment clause. We agree with that reasoning and affirm.

I. Facts and Procedural Background

As an employee of a North Carolina company, Kunta Torrence participated in an employee life insurance and welfare benefits plan administered by defendant-appellee Humana Insurance. Torrence's group life insurance plan provided that, in the event of his death, $15,000 would be paid to his named beneficiary. Torrence chose his brother Adair to be the sole beneficiary. The group plan also included a “facility-of-payment” clause, which provided:

if the beneficiary he or she named is not alive at the Employee's death, the payment will be made at Our option, to any one or more of the following:

• Your spouse;

• Your children;

• Your parents;

• Your brothers and sisters; or

• Your estate.

In general, a facility-of-payment clause provides for “payment to a named beneficiary or to a member of a named class or, in the alternative, to any person found by the insurer to be equitably entitled.” Forcier v. Metropolitan Life Ins. Co., 469 F.3d 178, 184 (1st Cir.2006), quoting 4 Couch on Insurance 3d § 61:14 (2005). See also 2A John Alan Appleman & Jean Appleman, Insurance Law & Practice § 1163 (1966) (“facility of payment clauses give the insurer the option of paying to any person possessing the qualifications set forth in the clause”); 166 A.L.R. 10 (1947) (facility-of-payment clause creates “an appointment, by the parties to an insurance contract, of persons or classes of persons who may receive payment of the benefits or proceeds accruing under the contract”).

Torrence and the named beneficiary were killed simultaneously in a car crash on April 1, 2007. On April 11th, their mother Nancy Kelly executed a contract assigning $10,664.93 of Torrence's life insurance policy proceeds to plaintiff-appellant Jackman Financial, a finance company that advances funds for funeral expenses, as security for Jackman Financial's loan to pay for Torrence's funeral. The assignment stated:

the undersigned [Kelly] hereby irrevocably assigns and transfers over to Jackman Financial Corp. the sum of $10,664.93, or so much thereof as is available from the proceeds of the following policies: # s Group number 617912 ID # 002939350 of the Humana INSURANCE COMPANY which may be or is due to the undersigned as beneficiary or by reason of any other qualification.

On April 13th, two days after Kelly signed the assignment to Jackman Financial, a North Carolina court appointed Kelly administrator of Torrence's estate. That same day, Kelly signed a Humana Beneficiary Form identifying herself, “Nancy T. Kelly—Administrator of Estate,” as the beneficiary of Torrence's plan. Later that month, Jackman Financial paid the funeral home and sent Humana a request for payment from Torrence's life insurance policy proceeds, attaching the assignment from Kelly and the form Kelly signed claiming to be the plan beneficiary.

On May 3, 2007, Humana sent a letter to Kelly explaining that Torrence's group plan included a facility-of-payment clause and stating that the company required additional information from Kelly “to determine benefit payment.” Humana acknowledged having received a copy of the assignment from Jackman Financial, as well as the Beneficiary Form signed by Kelly. The letter, quoting from the plan, noted that Humana would “rely upon an affidavit to determine benefit payment, unless We receive written notice of valid claim before payment is made.” Humana requested that a member of Torrence's family complete its enclosed form affidavit.

Three months later, after Humana issued a second notice to Kelly with the same request for an affidavit, Kelly completed the affidavit and identified Torrence's living relatives. On August 31, 2007, Humana sent Kelly a letter acknowledging receipt of her affidavit. The letter included the following language:

Our records indicate that the listed beneficiaries for any available life insurance proceeds are [redacted children's names,] minor children. Please note we are unable to issue life insurance proceeds to a minor. We require guardianship papers from the probate court....

Humana delivered Kelly a second identical notice in November 2007.

In early December 2007, the Superior Court of Rowan County, North Carolina, issued an order authorizing Humana to “deliver all funds due” to Torrence's minor children to the care of the court. On December 28, 2007, Humana communicated to Kelly that it had completed its review and issued checks totaling $16,053.29 to the clerk of the superior court for the benefit of Torrence's children.

Jackman Financial filed suit in an Illinois state court in September 2008 to recover the amount it had advanced for Torrence's funeral costs. Humana removed the case to the federal district court, asserting that the claims necessarily arose under the Employee Retirement Income Security Act of 1974 (ERISA). Jackman Financial then amended its complaint by deleting its state law claims and adding a single claim for denial of benefits under ERISA. When a purported assignee of a plan beneficiary brings a colorable claim for plan benefits under 29 U.S.C. § 1132(a)(1)(B), a federal district court has subject matter jurisdiction under ERISA. See, e.g., Kennedy v. Connecticut General Life Ins. Co., 924 F.2d 698, 700 (7th Cir.1991). The district court granted Humana's motion for summary judgment and denied Jackman Financial's motion for reconsideration. Jackman Financial has appealed.

II. DiscussionA. Humana's Decision to Pay the Children

We review de novo a district court's grant of summary judgment and denial of a cross-motion for summary judgment. See Prate Installations, Inc. v. Chicago Regional Council of Carpenters, 607 F.3d 467, 470 (7th Cir.2010). Under 29 U.S.C. § 1132(a)(1)(B), federal courts also review de novo an ERISA plan administrator's denial of benefits unless the plan gives the administrator discretionary authority to determine eligibility for benefits. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989). Because the group plan here gave Humana discretionary authority to administer it, we instead evaluate whether Humana's decision to deny benefits to Jackman Financial was arbitrary and capricious. See Marrs v. Motorola, Inc., 577 F.3d 783, 786 (7th Cir.2009).

Under the arbitrary and capricious standard, we overturn the administrator's decision only where there is an absence of reasoning to support it. See Hess v. Reg–Ellen Machine Tool Corp., 423 F.3d 653, 658 (7th Cir.2005); Tegtmeier v. Midwest Operating Engineers Pension Trust Fund, 390 F.3d 1040, 1045 (7th Cir.2004). We apply the standard as an abuse of discretion standard. See Holmstrom v. Metropolitan Life Ins. Co., 615 F.3d 758, 767 n. 7 (7th Cir.2010). Applying that standard here, we agree with the district court that Humana's decision to pay the proceeds of Torrence's life insurance plan to his children was not an abuse of its discretion. The facility-of-payment clause in Torrence's group plan provided Humana with the option of paying the life insurance proceeds to any of five named entities or groups if the named beneficiary had died. Humana did exactly that.

Plaintiff Jackman Financial argues that Kelly's assignment of the proceeds effectively entitled plaintiff to receive them and that Humana acted arbitrarily by ignoring the assignment. For plaintiff to acquire a right to the proceeds, however, Kelly herself must have had such a right to assign. Plaintiff argues that Kelly, as administrator of Torrence's estate, had the authority to disburse or assign the proceeds from the plan which, plaintiff contends, became part of Torrence's estate in the absence of a named beneficiary. We disagree with plaintiff's reasoning because it fails to come to grips with the facility-of-payment clause in the policy.¹

A facility-of-payment clause is one practical solution to the problems that arise when an insured person dies without an effective designation of a beneficiary. Rather than requiring a court to decide through a potentially expensive interpleader action, the clause allows the insurer simply to choose one or more beneficiaries, presumably in line with what the insured probably would have wanted if he or she had known that the beneficiary...