In the

United States Court of Appeals

For the Seventh Circuit

No. 10-2112

JACKMAN FINANCIAL CORP.,

Plaintiff-Appellant,

v.

HUMANA INSURANCE CO.,

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.

ARGUED MARCH 29, 2011—DECIDED MAY 31, 2011

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-ofpayment” 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 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: 
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. 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:
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 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-ofpayment 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
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 discretionary 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 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
No. 10-2112 7

We do not reach the second step of Jackman Financial’s 1

argument, that Kelly had authority to make the assignment

(continued...)

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-ofpayment 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
8 No. 10-2112

(...continued) 1

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 administrator related back.

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

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, including 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 policyholder 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
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 identified 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 selection 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. Plaintiff’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 discretion 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 decision, 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-ofpayment 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 surrounding circumstances effectively rebut the presumption, 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 Employees’ 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 conjunction 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 substantially justified. The question is close, but we disagree.

The indications here are that Jackman Financial’s complaint 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 understandable 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-payment 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 AFFIRM

the judgment of the district court.

5-31-11