In the
United States Court of Appeals
For the Seventh Circuit
No. 10-2112
JACKMAN F INANCIAL C ORP.,
Plaintiff-Appellant,
v.
H UMANA INSURANCE C O .,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:08-cv-05784—Charles R. Norgle, Judge.
A RGUED M ARCH 29, 2011—D ECIDED M AY 31, 2011
Before R OVNER, W ILLIAMS, and H AMILTON, Circuit Judges.
H AMILTON, 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
2 No. 10-2112
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 Fi-
nancial 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 exer-
cised 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:
No. 10-2112 3
• 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. Metropoli-
tan 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 pos-
sessing 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 pay-
ment of the benefits or proceeds accruing under the
contract”).
Torrence and the named beneficiary were killed simulta-
neously 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:
4 No. 10-2112
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 IN-
SURANCE 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 benefi-
ciary.
On May 3, 2007, Humana sent a letter to Kelly ex-
plaining 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 pay-
ment, unless We receive written notice of valid claim
before payment is made.” Humana requested that a
No. 10-2112 5
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
6 No. 10-2112
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. Discussion
A. 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 discre-
tionary authority to determine eligibility for benefits.
See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115
(1989). Because the group plan here gave Humana discre-
tionary 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 over-
turn the administrator’s decision only where there is an
No. 10-2112 7
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 assign-
ment of the proceeds effectively entitled plaintiff to
receive them and that Humana acted arbitrarily by ig-
noring 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 administra-
tor 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 plain-
tiff’s reasoning because it fails to come to grips with
the facility-of-payment clause in the policy.1
1
We do not reach the second step of Jackman Financial’s
argument, that Kelly had authority to make the assignment
(continued...)
8 No. 10-2112
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, pre-
sumably in line with what the insured probably would
have wanted if he or she had known that the beneficiary
designation was not effective. See generally French v.
Lanham, 57 F.2d 422, 422-23 (D.C. Cir. 1932) (noting that
the purpose of the facility-of-payment clause is for the
insurer to be able to issue a prompt valid payment, in-
cluding payment for funeral expenses).
When a facility-of-payment clause applies, it confers
broad discretion on an insurer in making certain benefit
determinations. See, e.g., Forcier, 469 F.3d at 185 (describing
how a facility-of-payment clause “puts both the policy-
holder and the participant on notice that, in the absence
of a beneficiary designation, payment by [the insurer]
to any member(s) of an enumerated class ‘will discharge
[the company’s] liability for the amount so paid’ ”). By
using such a clause, an insurer can contract for varying
1
(...continued)
two days before she received official letters of administration
from the North Carolina courts. Jackman Financial maintains
that Kelly’s authority as administrator related back to the
time of Torrence’s death under North Carolina law. Because
neither the policy nor its proceeds became part of Torrence’s
estate, it is irrelevant whether Kelly’s authority as admin-
istrator related back.
No. 10-2112 9
degrees of discretion with respect to the distribution of
insurance proceeds. See id.; Brown v. Metropolitan Life Ins.
Co., 100 F.2d 98, 99-100 (D.C. Cir. 1938) (recognizing the
validity of facility-of-payment clauses); La Raw v. Prudential
Ins. Co. of America, 12 F.2d 140, 142 (D.C. Cir. 1926) (right
of election as to whom payment shall be made under a
facility-of-payment clause “undoubtedly rests with the
company”).
The facility-of-payment clause in Torrence’s group
plan gave Humana the option of distributing the policy
proceeds to any of the listed relatives or the estate identi-
fied in the clause. Like the facility-of-payment clause
in Forcier, the clause in Torrence’s group plan made
Humana’s right to choose any one of the listed entities
unconditional, enabling the company to make its selec-
tion among them. See Forcier, 469 F.3d at 185. Although
Torrence’s estate was one of the possible recipients, as
was Kelly as Torrence’s mother, Humana was under
no obligation to select either of them as the substitute
beneficiary. Unless and until such a selection was
made—and it never was—Kelly never had an interest
in Torrence’s life insurance policy or in its proceeds
that she could assign to plaintiff either in her personal
capacity or as administrator of Torrence’s estate. Plain-
tiff’s claim to collect based on Kelly’s assignment fails.
Plaintiff nevertheless contends that Humana’s decision
to pay Torrence’s children was arbitrary and capricious
because Humana knew about Kelly’s assignment of the
plan proceeds to plaintiff and could have used its dis-
cretion to select Torrence’s estate as beneficiary. Plaintiff
10 No. 10-2112
is correct that Humana could have used its discretion in
this way, but it need not have done so. Humana was not
required to bail plaintiff out from an imprudent business
risk. Where an ERISA administrator makes an informed
decision and articulates a plausible reason for its deci-
sion, that informed explanation is sufficient for us to
uphold its decision. See Mote v. Aetna Life Ins. Co., 502
F.3d 601, 606 (7th Cir. 2007). The totality of the evidence
indicates that Humana decided to distribute the plan’s
proceeds to Torrence’s children based on the facility-of-
payment clause and the affidavit provided by Kelly.
Humana explained this basis for its decision by
describing in its correspondence with Kelly throughout
2007 the discretion granted to it by Torrence’s group
plan. It did not need to explain the “reasoning behind the
reasons.” Herman v. Central States, Southeast & Southwest
Areas Pension Fund, 423 F.3d 684, 693 (7th Cir. 2005),
quoting Gallo v. Amoco Corp., 102 F.3d 918, 922 (7th Cir.
1996).
B. Humana’s Request for Fees
Humana asks this court for an award of reasonable
attorney fees in its favor, though it did not seek them in the
district court. ERISA authorizes an award of reasonable
attorney fees to either party at the court’s discretion. See
29 U.S.C. § 1132(g)(1). We have recognized a “modest
presumption” in favor of awarding fees to the prevailing
party, though that presumption can be rebutted. See
Laborers’ Pension Fund v. Lay-Com, Inc., 580 F.3d 602, 615
(7th Cir. 2009), quoting Senese v. Chicago Area I.B. of
No. 10-2112 11
T. Pension Fund, 237 F.3d 819, 826 (7th Cir. 2001). Here,
we find that Jackman Financial’s position and the sur-
rounding circumstances effectively rebut the presump-
tion, so we deny Humana’s request.
In determining whether a fee award is appropriate
under ERISA, we have long recognized two tests, both
of which ask whether the losing party had a legitimate
basis to bring its suit. See Production & Maintenance Em-
ployees’ Local 504, Laborers’ Int’l Union v. Roadmaster Corp.,
954 F.2d 1397, 1402 (7th Cir. 1992). Under the first test,
an award of fees to a successful defendant in an ERISA
suit “may be denied if the plaintiff’s position was both
‘substantially justified’—meaning something more than
non-frivolous, but something less than meritorious—and
taken in good faith, or if special circumstances make an
award unjust.” See Herman, 423 F.3d at 696; Harris Trust &
Savings Bank v. Provident Life & Accident Ins. Co., 57 F.3d
608, 616-17 (7th Cir. 1995).
Under the second test, we consider the following
factors: (1) the degree of the offending party’s culpability
or bad faith; (2) the ability of the offending party to
satisfy personally an award of attorney fees; (3) whether
an award of attorney fees would deter other persons
acting under similar circumstances; (4) the amount of
benefit conferred on members of the plan as a whole;
and, (5) the relative merits of the parties’ positions. See
Sullivan v. William A. Randolph, Inc., 504 F.3d 665, 671
(7th Cir. 2007); Brewer v. Protexall, Inc., 50 F.3d 453, 458
(7th Cir. 1995). This five-factor test is often used in con-
junction with the “substantially justified” test and
12 No. 10-2112
largely involves the same inquiry. See, e.g., Herman,
423 F.3d at 696; Bowerman v. Wal-Mart Stores, Inc., 226 F.3d
574, 593 (7th Cir. 2000) (concluding that regardless of
which test is used, the question asked is essentially the
same); Quinn v. Blue Cross & Blue Shield Ass’n, 161 F.3d
472, 478 (7th Cir. 1998) (same).
Humana asserts that it should be awarded attorney
fees because Jackman Financial’s position was not sub-
stantially justified. The question is close, but we disagree.
The indications here are that Jackman Financial’s com-
plaint was filed in good faith in an attempt to recover
the outstanding balance it was owed. In the days
following her son’s death, Kelly intended to assign
Torrence’s plan proceeds to Jackman Financial to cover
the cost of her son’s funeral. It appears that neither
Jackman Financial nor Kelly knew about or considered
the facility-of-payment clause in Torrence’s group plan
at the time the assignment was executed. Long before
Humana paid the policy proceeds, Jackman Financial
gave Humana timely notice of its claim and the basis for
it. Although the suit was not successful, it had an under-
standable foundation.
Humana also argues that an award of fees in its
favor would deter future conduct by similarly situated
persons and would conserve plan expenses. On the
merits, we agree with Humana that where an insurance
plan contains a similar facility-of-payment provision,
the insurer is able to select a substitute beneficiary at its
discretion. Third parties seeking to recover by filing suit
will likely be unsuccessful. Nevertheless, we do not
No. 10-2112 13
believe that awarding fees to Humana in this case, in
light of the assignment and Jackman Financial’s payment
of the funeral expenses in reliance upon it, will have
any more deterrent effect than our clear statement that
a facility-of-payment provision grants the insurer
broad discretion. Future potential beneficiaries, as well
as assignees of such potential beneficiaries, should take
heed as to the broad selection authority granted to the
insurer through these clauses—longstanding features
of insurance policies. We do not discount the possibility of
fee awards in future cases if similar facility-of-pay-
ment clauses defeat future unsuccessful challenges to
insurers’ exercises of discretion.
III. Conclusion
The facility-of-payment clause in Torrence’s group life
insurance plan gave Humana the authority to choose a
beneficiary from the pre-determined list laid out in the
plan. Because Humana acted within its rights and not in
a manner that was arbitrary or capricious, we A FFIRM
the judgment of the district court.
5-31-11