Zena Phillips v. The Prudential Insurance Compa

In the

United States Court of Appeals

For the Seventh Circuit

No. 11-3870

Z ENA P HILLIPS,

Plaintiff-Appellant,

v.

T HE P RUDENTIAL INSURANCE C OMPANY OF

A MERICA and P RUCO L IFE INSURANCE C OMPANY,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Illinois.

No. 11-cv-0058-DRH—David R. Herndon, Chief Judge.

A RGUED A PRIL 9, 2012—D ECIDED M AY 6, 2013

Before F LAUM and H AMILTON, Circuit Judges, and

F EINERMAN, District Judge.Œ

F EINERMAN, District Judge. Plaintiff Zena Phillips was

a beneficiary of a life insurance policy taken out by her

fiancé, Michael Strang, and issued by Defendant Pruco

Œ

The Honorable Gary Feinerman, of the Northern District of

Illinois, sitting by designation.

2 No. 11-3870

Life Insurance Company, a subsidiary of Defendant

Prudential Life Insurance Company of America (to-

gether, “Prudential”). When Strang died, Prudential

informed Phillips that the default method for paying

the claim was the “Alliance Account settlement option.”

The Alliance Account is what the insurance industry

calls a “retained asset account,” under which the insurer,

instead of paying a lump-sum death benefit, creates

an interest-bearing account for the beneficiary and

sends her a checkbook that can be used to draw down

the funds, in part or in whole, at any time. The funds

are held in Prudential’s general investment account,

which allows Prudential to profit from the spread (if any)

between its investment returns and the interest paid to

the beneficiary, which in Phillips’s case was three percent.

In this putative class action, Phillips claims that Pruden-

tial’s establishment of the Alliance Account as the

default payment method and enrollment of her in

an Alliance Account breached the insurance policy

in violation of Illinois contract law and unreasonably

delayed the payment of insurance benefits in violation

of section 155 of the Illinois Insurance Code, 215 ILCS

5/155. Phillips also claims that Prudential owed her

a fiduciary duty under Illinois law and breached

that duty by not disclosing information regarding the in-

vestments made with her funds and by keeping for

itself the investment profits. The district court dismissed

all three claims under Federal Rule of Civil Procedure

12(b)(6), 2011 WL 5915148 (S.D. Ill. Nov. 28, 2011), and

Phillips appeals.

No. 11-3870 3

We review de novo the district court’s judgment.

See Munson v. Gaetz, 673 F.3d 630, 632 (7th Cir. 2012).

The complaint’s well-pleaded factual allegations,

though not its legal conclusions, are assumed to be

true. See ibid.; Reger Dev., LLC v. Nat’l City Bank, 592

F.3d 759, 763 (7th Cir. 2010). In conducting our review,

we must consider not only “the complaint itself,” but

also “documents attached to the complaint, documents

that are critical to the complaint and referred to in it,

and information that is subject to proper judicial notice.”

Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1 (7th

Cir. 2012). We also must consider additional facts set

forth in Phillips’s district court brief and appellate

briefs, so long as those facts “are consistent with the

pleadings.” Ibid. To the extent that an exhibit attached

to or referenced by the complaint contradicts the com-

plaint’s allegations, the exhibit takes precedence. See

Forrest v. Universal Sav. Bank, F.A., 507 F.3d 540, 542

(7th Cir. 2007). The facts set forth below are stated as

favorably to Phillips as permitted by the complaint

and other materials that may be considered on review

of a Rule 12(b)(6) dismissal.

I. Breach of Contract

As noted above, Phillips claims that Prudential breached

the life insurance policy by making the Alliance

Account the default method of paying her claim and

by enrolling her in an Alliance Account. The parties

agree that Illinois law governs interpretation of the

policy. We have summarized Illinois law pertaining to

the interpretation of insurance policies as follows:

4 No. 11-3870

In Illinois, insurance policies are contracts; the

general rules governing the interpretation and con-

struction of contracts govern the interpretation and

construction of insurance policies. Illinois courts aim

to ascertain and give effect to the intention of the

parties, as expressed in the policy language, so long

as doing so does not contravene public policy. In

doing so, they read the policy as a whole and

consider the type of insurance purchased, the risks

involved, and the overall purpose of the contract. If

the policy language is unambiguous, courts apply it

as written. Policy terms that limit an insurer’s liability

are liberally construed in favor of coverage, but

only when they are ambiguous, or susceptible to

more than one reasonable interpretation.

Clarendon Nat’l Ins. Co. v. Medina, 645 F.3d 928, 933 (7th

Cir. 2011) (citations omitted). Although ambiguities are

construed in the insured’s favor, “a court will not

search for ambiguity where there is none.” Valley Forge

Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill.

2006); see also Native Am. Arts, Inc. v. Hartford Cas. Ins.

Co., 435 F.3d 729, 732 (7th Cir. 2006). “[I]n construing a

policy, governing legal authority must . . . be taken into

account as well, for a policy term may be considered

unambiguous where it has acquired an established

legal meaning.” Ace Am. Ins. Co. v. RC2 Corp., 600 F.3d 763,

766 (7th Cir. 2010) (internal quotation marks omitted).

The Prudential policy authorized the insured (Strang)

and the beneficiary (Phillips) to choose among several

payment options listed in the policy and any other

options that became available in the future:

No. 11-3870 5

[The insured] may choose to have any death benefit

paid in a single sum or under one of the optional

modes of settlement described below.

If the person who is to receive the proceeds of this

contract wishes to take advantage of one of these

optional modes, we will be glad to furnish, on

request, details of the options we describe below or

any others we may have available at the time the

proceeds become payable.

The policy listed five payment options as alternatives to

a lump-sum payment: (1) Prudential makes installment

payments over a fixed period of time of up to twenty-five

years; (2) Prudential makes monthly payments over

the course of the beneficiary’s life, with payments

certain for 120 months; (3) Prudential holds the proceeds

and pays interest to the beneficiary on an annual, semi-

annual, quarterly, or monthly basis; (4) Prudential

makes annual, semi-annual, quarterly, or monthly pay-

ments for as long as the proceeds allow; and (5) Prudential

makes payments like those on any annuity that

Prudential regularly issues.

Strang never elected a payment method. When he

died, Prudential sent Phillips a Claim Form. The form

stated that Prudential’s “preferred method of paying

death benefits” was the Alliance Account and touted

that option as “an easy, no-cost option that gives you

great flexibility,” one that allows the beneficiary to

“access funds immediately to cover current expenses, or

in the future after you have had a chance to consider

all your financial options.” The form explained: “Your

6 No. 11-3870

proceeds may remain in this option for as long as you

like while you continuously earn interest. To access

funds, simply write a draft (’check’) for $250 or more

to yourself or any third party. There are no monthly

service charges, per-check charges or check re-order

fees. You will periodically receive a statement showing

your current balance, account activity, interest earned,

and interest rate.” The form added: “This option allows

you to access all of your funds immediately or over time.

You may leave the money in the account, withdraw

the entire amount or write checks against the balance

($250 minimum).”

The Claim Form gave Phillips the opportunity to select

a payment method other than the Alliance Account,

and clearly stated that if she did not select a payment

method, the benefits would be paid by the Alliance Ac-

count option:

Unless you elect an alternative settlement option or

select another payment option, eligible death claim

benefits will be paid by way of the Alliance Account

settlement option. If you would like detailed informa-

tion about settlement options, please refer to the

enclosed Settlement Options brochure, contact our

Customer Service Office at (800) 496-1035, or contact

your Prudential representative.

If you would like to select an alternative settlement

option, indicate your settlement option below (as

described in the Settlement Options brochure).

________________________________________________

No. 11-3870 7

If you would like to select another payment option

allowed in the policy, indicate your payment option

below.

________________________________________________

As can be seen, the form had two lines for Phillips to

elect a payment option other than the Alliance Account.

The first allowed her “to select an alternative settlement

option,” and noted that those options were “described

in the Settlement Options brochure.” The second line

allowed her to choose “another payment option allowed

in the policy.” Phillips left those two lines blank

and returned the form. Prudential accordingly enrolled

her in the Alliance Account option and sent her a check-

book.

Prudential’s establishment of the Alliance Account as

the default option, and its enrolling Phillips in an Alliance

Account rather than providing her a lump-sum benefit

payment, did not breach the insurance policy. The

policy allowed Phillips to choose any available payment

method—those listed in the Settlement Options brochure,

those listed in the policy, or those, like the Alliance Ac-

count option, that Prudential “may have available at

the time the proceeds become payable”—and by leaving

the two lines blank on the Claim Form, Phillips chose

to enroll in the Alliance Account option. See Garcia

v. Prudential Life Ins. Co. of Am., 2009 WL 5206016, at

*8 (D.N.J. Dec. 29, 2009) (“When Plaintiff executed

the Claim Form without explicitly designating [how]

she wished to receive the benefits she was due under

the Policies, she effectively changed the method by

8 No. 11-3870

which she would receive those benefits from one sum

to an Alliance Account.”). Contrary to Phillips’s sug-

gestion, the policy did not make lump-sum payment

the default payment method, such that Prudential was

required to pay Phillips a lump sum unless she told

them otherwise; the policy entitled her to “choose” how

she would be paid, and she did just that.

The policy did obligate Prudential to “pay the beneficiary

the death benefit described in this contract promptly.”

But the Alliance Account was a valid way of paying

the “death benefit described in this contract”; the

policy’s articulation of that obligation was immediately

followed by the proviso that “[w]e make this promise

subject to all the provisions of this contract,” and the

policy explicitly contemplated that the beneficiary would

be able to choose payment by the methods described in

the policy “or any others we may have available at the

time the proceeds become available.” Thus, the policy

did not guarantee that it would “pay the beneficiary”

via a lump sum to the exclusion of any other option,

and nor did it rule out the particular option that Phillips

chose, the Alliance Account. The policy did guarantee

that Phillips would be able to choose to receive a

lump sum and that, if she did so, the sum would be

paid forthwith. But as discussed above, the Claim Form

did offer her that option (albeit vaguely), and she chose

the Alliance Account instead. As for promptness, there is

no suggestion that the payment—that is, the establish-

ment of the Alliance Account and the delivery of the

checkbook to Phillips—was not carried out “prompt[ly]”;

Phillips nowhere alleges that she had to wait long

No. 11-3870 9

to receive the checkbook that gave her access to her

funds or that any checks she drafted were not promptly

paid. Cf. Keife v. Metro. Life Ins. Co., 2013 WL 1007955, at

*7 (D. Nev. Mar. 12, 2013) (holding that the insurer’s

payment of benefits via a retained asset account is “im-

mediate” within the meaning of the policy at issue

in that case).

Phillips complains that Prudential did not make

her aware of her entitlement to request a lump-sum

payment. It is true that the Claim Form did not explicitly

mention the lump-sum option. And we accept at the

Rule 12(b)(6) stage that the Settlement Options brochure

did not mention it either and that Phillips did not read

the policy itself at the time she filled out the Claim

Form, leaving her unaware of that choice. But nothing

in the policy required Prudential to make explicit

reference to the lump-sum option on the Claim Form or

in the brochure, or to ensure that Phillips was subjec-

tively aware of that option when she made her selec-

tion. The contract merely required Prudential to

allow Phillips to choose lump-sum payment, and it did

offer that choice by permitting her to select “another

payment option allowed in the policy.”

The principal appellate decision cited by Phillips

to support her contract claim, Mogel v. UNUM Life Ins.

Co., 547 F.3d 23 (1st Cir. 2008), is inapposite. Mogel

was brought under the Employee Retirement Income

Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. The defen-

dant insurer in Mogel issued life insurance policies

that were “employee welfare benefit plans,” id. § 1002(1)

10 No. 11-3870

& (3), making the insurer an ERISA fiduciary,

id. § 1002(21)(A). 547 F.3d at 25. When the policies

became due, the insurer set up retained asset accounts

for the plaintiff beneficiaries and sent them check-

books that they could use to withdraw funds. Ibid. The

First Circuit held that so long as the insurer retained

possession of life insurance proceeds, it remained sub-

ject to suit as an ERISA fiduciary, despite having

issued checkbooks to the beneficiaries. Id. at 27. Mogel

certainly stands for the proposition that a retained asset

account is not equivalent to a lump-sum payment. Id. at

26; but cf. Rabin v. MONY Life Ins. Co., 387 F. App’x 36,

39 & n.1 (2d Cir. 2010) (holding that “because MONY’s

use of interest-bearing checking accounts permitted

Rabin to liquidate his proceeds at any time by

writing himself a check for the full account balance, this

disbursement method was not sufficiently different from

payment by check to permit a jury to find a material

breach,” and noting that “the life insurance policy in

Mogel explicitly called for a ‘lump sum’ payment,

whereas the contract here at issue explicitly authorizes

MONY to agree to non-lump-sum payments”). But that

proposition is irrelevant here, where the question is not

whether a retained asset account is the same as a lump-

sum payment, but whether Prudential’s enrollment of

Phillips in the Alliance Account option breached the

insurance policy. For the reasons given above, it did not.

Finally, Phillips argues that Prudential breached the

policy by failing to explain how the Alliance Account

worked. Phillips primarily relies on Illinois Insurance

Bulletin 2011-03, available at http://insurance.illinois.gov/

No. 11-3870 11

cb/2011/CB2011-03.pdf, which states that a beneficiary

“can only be deemed to have consented to the retained

asset account when there is full disclosure in the notifica-

tion of the terms of the Retained Asset Account at the

time of the claim.” But as Phillips’s counsel acknowl-

edged at oral argument, that bulletin had an effective

date of July 1, 2011, well after the events in this case. And

as for the disclosures that Prudential did give, none

were false or misleading.

For these reasons, the district court correctly dismissed

Phillips’s breach of contract claim.

II. Vexatious and Unreasonable Delay Under 215 ILCS

5/155

Phillips’s statutory vexatious and unreasonable delay

claim under section 155 of the Illinois Insurance Code

fares no better. The statute provides in relevant part:

“In any action . . . wherein there is in issue the liability of

a company . . . for an unreasonable delay in settling a

claim, and it appears to the court that such . . . delay

is vexatious and unreasonable, the court may allow as

part of the taxable costs in the action reasonable attorney

fees, other costs, plus an amount not to exceed any one

of [three designated] amounts.” 215 ILCS 5/155(1).

As described by the Supreme Court of Illinois, section

155 provides an “an extracontractual remedy to policy-

holders whose insurer’s refusal to recognize liability

and pay a claim under a policy is vexatious and unreason-

able.” Cramer v. Ins. Exch. Agency, 675 N.E.2d 897, 900

(Ill. 1996). “If there is a bona fide dispute regarding cover-

12 No. 11-3870

age—meaning a dispute that is [r]eal, genuine, and

not feigned—statutory sanctions [under section 5/155]

are inappropriate.” Medical Protective Co. v. Kim, 507

F.3d 1076, 1087 (7th Cir. 2007) (citations and internal

quotation marks omitted, alteration in original).

“Because this statute is penal in nature its provisions

must be strictly construed.” Citizens First Nat’l Bank of

Princeton v. Cincinnati Ins. Co., 200 F.3d 1102, 1110 (7th

Cir. 2000) (internal quotation marks omitted).

Prudential indisputably did not subject Phillips to

an unreasonable or vexatious delay in paying the claim

on Strang’s life insurance policy. Paying benefits via

an Alliance Account checkbook rather than a check is

not any kind of a delay, and even if it were, Phillips

could hardly complain, as she chose the Alliance

Account option. We suppose that Phillips might have

had a section 155 claim if Prudential had taken an ex-

cessive amount of time to set up her Alliance Account or

to send her a checkbook, or if any checks she wrote

had taken an unreasonable amount of time to clear. But

as noted above, there are no allegations to that effect,

and Phillips therefore has no conceivable claim.

III. Breach of Fiduciary Duty

Phillips’s fiduciary duty claim fails as well. In Illinois,

“it is well-settled that no fiduciary relationship exists

between an insurer and an insured as a matter of

law.” Greenberger v. GEICO Gen. Ins. Co., 631 F.3d 392,

401 (7th Cir. 2011) (brackets omitted). Phillips counters

that a fiduciary relationship was established when

No. 11-3870 13

Prudential became her investment manager for the Alli-

ance Account funds. See Commodity Futures Trading

Comm’n v. Heritage Capital Advisory Servs., Ltd., 823 F.2d

171, 173 (7th Cir. 1987) (brokers owe fiduciary duties to

their clients).

The premise of Phillips’s argument, that Prudential

became her investment manager, is incorrect. Prudential

did not invest Phillips’s life insurance proceeds for

her benefit. Regardless of how Prudential’s investments

performed, Prudential owed Phillips the same amount:

the death benefit plus whatever interest called for by

the Alliance Account had accrued. This is nothing more

than a debtor-creditor relationship, materially indistin-

guishable from the relationship between a savings

bank and a depositor, see Faber v. Metro. Life Ins. Co.,

648 F.3d 98, 105 (2d Cir. 2011) (a retained asset ac-

count “constitute[s] a straightforward creditor-debtor

relationship”); Rabin, 387 F. App’x at 42-43; Restatement

(Second) of Trusts § 12 cmt. k (“When the insured or

the beneficiary of a life insurance policy exercises an

option under which the insurance company makes de-

ferred payments, the company does not become

trustee unless it is under a duty to segregate and hold

and administer as a separate fund the proceeds of

the policy, and does so. Where, as is almost always, if

not always, the case, the payments are to be made out

of the general assets of the insurance company, it holds

nothing in trust and is not a trustee but is a debtor.”),

which is not a fiduciary relationship, see Thomas v.

UBS AG, 706 F.3d 846, 853 (7th Cir. 2013) (“a bank is not

a fiduciary of its depositors”); Miller v. Am. Nat’l Bank

14 No. 11-3870

& Trust Co. of Chi., 4 F.3d 518, 520 (7th Cir. 1993)

(same); Garcia, 2009 WL 5206016, at *11 (same). And

because there was no fiduciary relationship between

Phillips and Prudential, Phillips has no viable fiduciary

duty claim. See Greenberger, 631 F.3d at 401.

* * *

We have considered all of Phillips’s arguments, in-

cluding those not expressly referenced above, and find

them without merit. Our disposition of this appeal is

not intended to suggest any endorsement of the

business practice giving rise to this litigation. Prudential

apparently believes that it can earn larger profits

when beneficiaries of its life insurance policies elect the

Alliance Account option over the lump-sum payment

option. And in an apparent effort to “nudge” beneficiaries

into choosing the more profitable (to it) option, Pruden-

tial makes the Alliance Account the default option and

chooses not to reference the lump-sum option on the

Claim Form or in the Settlement Options brochure.

Whether this practice is disreputable is open to debate—

state insurance regulators are entitled to conclude

that the practice should be limited or restricted—but

for present purposes it suffices to say that the practice

did not breach the life insurance policy, did not effect a

vexatious and unreasonable delay under 215 ILCS 5/155,

and did not breach any fiduciary duty. The district

court’s judgment accordingly is A FFIRMED.

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