Plaintiffs' lawyers have been challenging cost-of-insurance
(COI) charges for years, with mixed results. The following
outline reviews the most recent flurry of cases.
1. The Phoenix Life Decision
In Fleisher v. Phoenix Life (April 2014), the United
States District Court for the Southern District of New York
rejected in part the policyholders' claims that COI increases
were not justified by the terms of the Universal Life contracts,
but left the door open on two other issues.
Specifically, the policyholders alleged that their UL contracts
only permitted an increase in their COI rates based on six
enumerated factors in their policies: "expectations of future
mortality, persistency, investment earnings, expense experience,
capital and reserve requirements, and tax assumptions."
Phoenix Life allegedly breached those contracts by: (1) increasing
COI charges for policyholders who had "low funding rates"
and low policy values, (2) applying discriminatory COI increases
against only a certain "class" of UL holders, and (3)
designing the COI increases to recoup prior losses, not address
future expectations. These claims were based on similar
allegations by the NY Insurance Department that had been settled by
Phoenix Life.
The court determined first that the six factors enumerated in the
contracts were "exhaustive," not
"illustrative," and thus unambiguously prevented Phoenix
Life from increasing COI charges based on other
factors. However, the court went on to decide that Phoenix
Life could raise the COI based on policyholders' funding rates
and policy vales, as they were logically tied to one of the six
factors: the company's expectations of investment
earnings.
The court thus granted Phoenix Life's summary judgment motion
in part. But it held that there was a question of fact as to
whether the insurer had unfairly discriminated by imposing
the COI increases only on two groups of policyholders without
a proper underwriting basis (i.e. for profitability, not actuarial,
reasons). The court also held that there was a question of fact
whether the COI increases were to recoup prior losses rather than
for future expectations.
2. The Lincoln National Decision
Lincoln National Ins. Co. v. Bezich (June 2015) also turns
on whether the permissible factors for a COI increase are limited
by the terms of the life insurance policy.
The Indiana court of appeals held, in certifying a class, that the
policy language unambiguously prevented Lincoln National from
"pad[ding] the COI rate" with expenses unrelated to
mortality expectations. It relied on policy language
stating:
"The monthly cost of insurance rate is based on the sex, issue age, policy year, and rating class of the Insured. Monthly cost of insurance rates will be determined by the Company based upon expectations as to future mortality experience."
In the court's view, this language connoted
"exclusivity": only mortality factors could be
considered in setting COI charges. The court also criticized
what it called Lincoln's "absurd" interpretation of
the COI rate provision to permit Lincoln to unilaterally increase
COI rates to reflect worse-than expected mortality, but not reduce
those rates in the event of mortality improvement. The court
disapproved of Lincoln's "heads we win, tails you
lose" power.
3. The AXA Equitable Complaints
Two class action complaints against AXA Equitable (SDNY and S.D.
Fla. Feb and March 2016) pursue the theory that COI increases must
be based only on the specific factors in the contract, but also
raise the claim that COI increases unfairly discriminate among
classes of policyholders.
Specifically, both of these complaints allege that AXA's UL
policies were originally marketed based on the promise of
"minimum premium" payments, but that the company later
"targeted" for COI increases the policies that had lower
accumulated policy values based on those "minimum
premium" payments. The COI increases allegedly forced
policyholders to either pay newly-increased premiums not justified
by the death benefits, or to lapse their policies and
"forfeit" premiums already paid. AXA purportedly was
recouping profits it lost due to the underperformance of its
policies overall.
The class complaints assert that the COI increases were not
permissible under the AXA contracts, which provided for COI
increases only based on "assumptions as to expenses,
mortality, policy and contract claims, taxes, investment income,
and lapse...." Similarly, plaintiffs asserted that AXA's
COI increases were not based on reasonable actuarial assumptions,
since mortality experience has improved substantially overall, and
AXA had reported in its 2014 annual statements that its experience
factors had not changed. Finally, the COI increases were claimed to
have discriminated against certain groups of
policyholders—those who "minimum funded" and those
with issue ages over the 70 with current face values of more than
$1 million, without a reasonable actuarial basis.
4. The Banner Life Complaint
The class action complaint against Banner Life (D. Md. Jan. 2016)
asserts a new theory for why COI increases are not justified by the
contract language: Banner Life's COI increases were
improperly driven by its "captive reinsurance"
arrangements that had caused financial problems, and thus the
increases were not based on unexpected investment, mortality,
lapse, and expense experience that would be justified under
the contracts.
The plaintiffs also try to distinguish themselves by pointing to
their "no lapse guarantee" policies. They say they were
induced by Banner Life's falsely-optimistic financial
statements into making "excess premium" payments (and
locking up money in the policy), rather than making "minimum
premium" payments (and thereby retaining more financial
flexibility) if Banner had made accurate disclosures about its
captive reinsurance arrangements.
Finally, this complaint sets forth more specific policy data than
usual, which allegedly show that the size of Banner Life's COI
increases was not justified based on reasonable actuarial
assumptions. These allegations make it more difficult to dispose of
the case as a matter of law.
5. The Transamerica Complaint
The class action complaint against Transamerica Life Insurance
Company (C.D. Cal, Feb. 2016) skips past the policy language
altogether, alleging that Transamerica improperly increased its COI
rates to address losses it has incurred on above-market interest
guarantees in its policies.
Instead of setting forth the actual policy language governing COI
increases, plaintiffs allege that a "reasonable
policyholder" would have interpreted Transamerica's UL
policy to only permit COI increases based on increased mortality
rates. They then go on to assert that increased mortality could not
have been the real basis for Transamerica's COI increases, as
mortality rates have been dropping overall for the general
public. Moreover, Transamerica had represented to regulators
in each of the prior four years that there was no expectation of
the need to increase COI rates, as part of "captive
reinsurance" arrangements that permitted Transamerica to
upstream dividends to its parent Aegon. The real reason for
the COI increases, plaintiffs suggest, was so that Transamerica
could either offset the above-market guaranteed interest rates on
its policies, or alternatively cause policyholders to terminate
those high-interest policies to avoid paying the increased
charges.
The complaint alleges that Transamerica breached the UL contracts
because even if the COI increases were based in part on legitimate
factors, the size of the increases meant that they must have
resulted from impermissible factors as well. The complaint
also asserts claims for unfair competition based on the misleading
marketing of these policies, and elder abuse claims based the
disparate impact that these COI increases have on elderly
policyholders.
6. Observations
- Plaintiffs continue to construct reasons why COI increases are not based on legitimate factors enumerated in the standard contract language. In light of these efforts, it is important for companies to carefully support any COI increases with actuarial assumptions that fall comfortably within the factors permitted by their contracts, and that fully support the fact and the amount of the increase.
- Since the Phoenix Life court was receptive to claims that COI increases cause "unfair discrimination" and "recoup lost profits," companies should expect more of those allegations. The Transamerica complaint also raises the risk of more elder abuse claims.
- These COI complaints are likely driven by life settlement holders, who hold large face amount policies originally purchased by elderly policyholders, and who have based their yield projections on paying low minimum premiums that will now be significantly increased.
- The AXA complaints foreshadow COI increases being cast as
"sales practice" claims. Those claims may eventually
question:
- Whether companies knew some time ago that mortality expectations for certain classes of policyholders would grow worse over time, but nevertheless maintained COI rates at artificially low levels in order to sell more policies, knowing that they could raise rates after they "locked in" policyholders with surrender charges; and
- Whether companies knew that life settlement companies were
buying their policies, which would eventually reduce lapse rates,
policy values, and investment results and thereby cause COI charges
to go up, but nevertheless maintained COI rates at artificially low
levels despite this knowledge, all in order to sell more policies
(again knowing that surrender charges would "lock in"
those policyholders).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.