United States: Life And Annuity Series: Cost-of-Insurance Charge Litigation – October 2017 Update

Four recent cost of insurance (COI) decisions were handed down over the summer of 2017. Three of these decisions preserved the plaintiffs' claims, even though the insurers had the express contractual right to increase COI charges for a number of different reasons. The fourth decision provides support for some defenses in these cases.

1. In re Lincoln National COI Litigation

The Pennsylvania federal court declined to dismiss numerous consolidated class actions against Lincoln National that claimed (among other things) Lincoln had increased COI rates in 2016 for its life insurance policies, in amounts ranging from 50% to 95%, based on factors not provided for under the policies.

Specifically, Lincoln had discretion under the policies to set the COI rates resting on its expectation of future mortality, interest expenses and lapses. Nevertheless, the plaintiffs alleged that Lincoln had dramatically increased COI rates not after considering these factors, but rather to recoup past losses (resulting from low interest rates, poor portfolio management, lower investment income and higher reinsurance rates) and to manage profitability (by inducing "shock lapses" of policies, particularly by the elderly). To support their allegations, the plaintiffs relied on Lincoln's statements to policyholders and the public explaining the reasons for these COI increases.

The court concluded that while some of Lincoln's stated reasons for the COI increases related to changes in the future expectations permitted by the policies, other statements "could be construed as suggesting that the decision was backward-looking and based, at least in part, on past 'persistent low interest rates'...." The court also credited the plaintiffs' allegation that, generally, mortality rates had improved nationwide (and thus would not support a COI increase), and discounted Lincoln's responses that such nationwide trends (i) do not amount to a plausible claim in the specific circumstances of Lincoln's rate classes and (ii) do not mean that any improvements have matched the improvements expected back when the policies were first issued and the COI rates were first set.

2. EFG Bank v. Transamerica Life Insurance Co.

The California federal court declined to grant Transamerica's motion to dismiss individual plaintiffs' claims alleging that COI increases in 2015 ranging from 5% to 91% did not result from Transamerica's expectations of future costs, and were an impermissible attempt to circumvent a minimum guaranteed interest rate and to recover past losses.

The court recognized that Transamerica had discretion to change COI rates as a result of its future expectations of numerous future cost factors, "including but not limited to" mortality, expenses, interest, persistency and taxes. Despite this broad range of factors, the court started from the premise that Transamerica did not have unfettered discretion to change COI rates and that "mortality is a significant cost factor" in any COI increase. It then concluded that the plaintiffs had stated a plausible claim that the COI increases were not driven by changes in mortality but instead included impermissible factors, based on plaintiffs' allegations that the COI increases were dramatic, that mortality expectations have improved over the past 20–30 years, and that Transamerica had not stated in its 2011–2015 regulatory filings that its anticipated mortality was worse than its current experience.

The court also decided that plaintiffs had stated a separate claim for breach of good faith and fair dealing based on allegations that Transamerica had exercised its discretion to unfairly frustrate the agreed purposes of the policy, and was deliberately trying to induce policy lapses or surrenders by forcing policyholders to otherwise pay "exorbitant premiums."

3. DCD Partners v. Transamerica Life

The same California federal court also denied Transamerica summary judgment on similar class action claims for breach of contract, breach of good faith and fair dealing, and unfair competition. The court concluded that there were material issues of fact regarding Transamerica's "true expectations" about mortality when it increased its COI charges, and whether Transamerica allegedly "contrived" the reasons for the COI increases to "justify an increase of a certain magnitude and thereby increase profits."

The court ruled that testimony from an actuary at Transamerica—that the COI increases resulted from anticipated future mortality costs—was not dispositive. The court found that the underlying actuarial work (which did not reference any previous mortality assumptions) may have been "designed" to result in a substantial COI increase rather than an accurate determination about future mortality.

4. Kalodner v. Genworth Life and Annuity

The Pennsylvania federal court granted in part Genworth's motion to dismiss an individual plaintiff's claims alleging that COI charges had been improperly increased by 46% in violation of the formula set forth in a whole life policy. The plaintiff alleged that Genworth had not only considered the four permissible factors of mortality, interest, expense and persistency, but also had engaged in impermissible "modeling" of pricing assumptions to arrive at an acceptable profit margin.

Despite the language permitting COI increases for "persistency" reasons, the court rejected Genworth's argument that the policy unambiguously authorized it to consider premium persistency and patterns when setting the COI. Thus, the court held that plaintiff had stated a claim for breach of the insurance policy when Genworth considered such premium patterns in setting the COI charges.

However, the court also dismissed plaintiff's claims that Genworth had engaged in impermissible "modeling" of pricing assumptions to achieve a profit when that modeling occurred after Genworth had established pricing assumptions based on the four permissible factors (mortality, interest, expense and persistency). According to the court, the policy language did not prohibit Genworth from modeling to achieve a profit either before or after establishing its pricing assumptions based on the four permissible factors.

Moreover, the court rejected the plaintiff's claim that Genworth had an obligation to recalculate its mortality expectations based on a nationwide decline in mortality rates. The court concluded that the policy language (which specified the 1980 CSO Table, and permitted a change in COI rates as a result of expectations of future mortality) did not impose on Genworth "any requirement that [it] reassess its expectations and alter the rate accordingly" based on updated trends developed during 1990–1995.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions