Court widens liability over insurers' investments

December 14, 1993|By Lyle Denniston | Lyle Denniston,Washington Bureau

WASHINGTON -- The Supreme Court ruled yesterday that federal law, not state law, applies to the investment of employee pension funds in some cases -- a decision that may expose insurers to possible lawsuits over their handling of pension assets.

The ruling, which could change dramatically the way insurance companies and pension plans do business, removed a key legal shield of the insurance industry.

The dissenting justices said yesterday the 6-3 decision, would have "serious and far-reaching effects" because it upsets "nearly 20 years of settled expectations among the buyers and sellers" of group contracts that insure workers' pension benefits.

Potentially, the ruling could affect the handling of as much as $350 billion in pension plan assets that insurers hold, according to the dissenters.

Insurance companies said they could be forced to change their method of dealing with pension plans under the 1974 federal Employee Retirement Income Security Act, or ERISA, which protects worker benefits.

In the first decision written by Justice Ruth Bader Ginsburg, the court settled two key issues under the ERISA law:

First, in the most significant part of the ruling, the court declared that insurance companies have a legal duty over how they invest pension assets that have been mixed with the insurers' general corporate accounts -- a mixing that is common in the industry.

In technical terms, the decision said that the insurers become a "fiduciary" under ERISA when they have the discretion to manage those assets.

Under ERISA, Justice Ginsburg wrote, an insurance company gets freed of its legal duty toward pensioned workers only when the company makes guaranteed pension payments -- thereby assuming the risk of its investment decisions.

Second, the court rejected an insurance industry claim that ERISA had no effect on the way insurers invest funds in their general accounts, because those are subject to regulation under state insurance law and companies could not obey both state law and the federal ERISA.

The court said Congress did not intend to give insurers a blanket exemption from ERISA simply because they might have conflicting duties under state insurance law. If the duties conflict, it said, ERISA controls.

Insurers have long offered two kinds of retirement investment options: one with pension funds placed into a segregated account managed solely for the benefit of the plan; the other with funds mixed in with the insurer's general account and sharing in the investment results achieved by other general account funds.

The second kind was the one at issue in yesterday's ruling. It involved a plan to insure the pensions of workers of Sperry Corp. (now a part of Unisys Corp.). Harris Trust and Savings Bank of New York, trustee of the Sperry plan, had a contract with John Hancock Mutual Life Insurance Co. to insure that plan.

Assets of the plan were held by Hancock, and mixed with its general account. The account was used by Hancock to meet all of its obligations, including those taking part in the pension plan.

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