Arent Fox Represents Opt-Out Plaintiffs in Coordination with Class Actions Against Universal Life Insurance Carriers for Unlawful Cost-of-Insurance Increases
Some carriers have increased COI rates by as much as 100 percent in a single year, leaving ULI policy owners to fend for themselves to recoup increased premium payments and deter future increases through litigation. Class action litigation and settlement has resulted in meaningful relief to many policy owners, including short-term moratoriums on future COI increases and partial recovery of premiums resulting from the increases. But the settlements kept the increases in place. And carriers continued implementing COI increases despite these class settlements. One even implemented another COI increase against the same class members after the moratorium expired. As a result, many putative class members have opted out from those settlements with a goal, not only to secure more favorable relief but also so that the carriers’ net cost-benefit from litigation would deter future COI increases.
Arent Fox represents certain opt-out plaintiffs that are both consumer and investor policy owners in COI increase litigation against Transamerica Life Insurance Company (“Transamerica”), AXA Equitable Life Insurance Company (“AXA”), and John Hancock Life Insurance Company (U.S.A.) (“John Hancock”). The cases range from a single policy with a relatively modest face amount to multiple policies with a combined face amount of over $50 million. But without any contractual provision or other legal theory of recovery for attorney’s fees, the cost of litigating these cases easily can exceed the ultimate recovery, which the carriers undoubtedly counted on. So these plaintiffs have banded together with other opt-out investors to coordinate litigation with class plaintiffs in each of those actions. The coordination effort has resulted in numerous efficiencies that significantly have reduced litigation costs, permitting opt-out plaintiffs, including those with a single policy, to continue their individual litigation against the carriers. That strategy so far has resulted in a confidential settlement for a single policy plaintiff.
ULI policies are particularly susceptible to unlawful increases, not only because of the lack of regulations but also because of their flexible premium feature. Like whole life insurance, a ULI policy provides death benefit coverage throughout the life of the insured, so long as the policy owner pays sufficient premiums to keep the policy in force. The COI is a component of the premium that covers the carrier’s actual cost of the insured’s risk of death. Under whole life insurance, the premium is fixed. In the earlier years, the premium typically is far higher than the actual COI, so most of the premium is used to accumulate a “cash value” that earns tax-deferred interest. That “cash value” operates as a reserve during the policy’s later years to cover the higher COI associated with the increased risk of death as the insured advances in age. By contrast, a ULI policy does not charge a fixed premium. Instead, it “unbundles” the COI and the “cash value” component, giving a policy owner the option to pay either a premium that just covers the COI or a higher premium to build the cash value. ULI policies permit carriers to change the COI rate, which exposes ULI policy owners to premium manipulation.
ULI policy terms, however, generally limit the circumstances under which carriers can change COI rates in three ways. First, the policies permit a COI rate change only if assumptions about certain enumerated cost factors, like mortality, interest, persistency, and taxes, change from the carrier’s assumptions when it sold the policies. Second, the change in costs must be prospective, so a carrier cannot increase COI rates to recoup past losses. Third, a COI rate change can be implemented only against a certain class of insureds. In a more extreme example, if a carrier hypothetically found that smokers over the age of 65 now live shorter lives than expected at policy issuance because of the pandemic, then the carrier can raise the COI rate for such insureds that is proportionate to the expected cost change resulting from that new assumption. But if, by contrast, a carrier’s investments had suffered because of historically low-interest rates, then the carrier cannot raise COI rates to reach its original profit projections. Typically, however, policy owners expect the COI rate to increase only modestly each year to cover the cost from the higher risk of death for the insured’s advancing age.
In the early- to mid-2000s, investors became attracted to ULI policies because of the flexible premium feature and the perception that underwriters under-valued ULI policies at that time, i.e., charged lower premiums relative to the actual cost for the insured’s expected risk of death. So they bought ULI policies from original policy owners in the secondary and tertiary markets, expecting to receive a return on investment from the arbitrage opportunity. Investors generally bought ULI policies with older insureds and face values over $1 million. And after acquisition, they typically paid the minimum premiums to keep the policies in force.
In 2010, carriers started to implement massive and unprecedented COI increases on ULI policies. The increases generally targeted a “class” of ULI policies that had been purchased by investors in the secondary and tertiary markets, though they certainly also affected typical consumers that purchased the policies for their families and life planning purposes. Carriers generally also gave no explanation for the increases. Yet no apparent circumstances supported a change in future cost factors, definitely none that justified a 100 percent increase. To the contrary, changes in certain cost factors, like mortality, warranted a rate decrease at the time because people lived longer than expected at policy issuance.
Phoenix Life Insurance Company (“Phoenix”) led the wave by implementing COI increases in 2010 and 2011 that affected more than a thousand of its ULI policies. The class in Fleischer v. Phoenix Life Insurance Company, No. 1:11-cv-08405-CM-JCF (S.D.N.Y. filed Nov. 18, 2011) alleged that the COI increases improperly targeted life settlement investors, and therefore were not based upon the policies’ enumerated factors. The class settled by establishing a common fund of $42.5 million that accounted for about 68.5 percent of the additional premiums from the increases, imposing a 5-year moratorium on future COI increases, and prohibiting Phoenix from contesting death claims for policies that lacked an insurable interest or were procured by misrepresentations in the application. The original increases, however, remained in effect.
Though Fleischer set the standard for class settlements in other COI increase cases, it clearly did not deter carriers from implementing COI increases. In fact, after the moratorium in the Fleischer settlement expired, Phoenix implemented a second wave of COI increases in 2017 on the same class members. The class sued Phoenix again in Advance Trust & Life Escrow Services, LTA v. PHL Variable Life Ins. Co., No. 1:18-cv-03444-PAC, (S.D.N.Y. filed Apr. 19, 2018). The lawsuit is still in the early stages of discovery.
Opt-Out Plaintiffs Coordinate with Class Actions to Benefit from Litigation Efficiencies
Class actions have been integral for opt-out plaintiffs to litigate against the carriers. They generally lead and undertake fact discovery to position the case, not only for class certification but also for class settlement. That work results in significant litigation efficiencies for opt-out plaintiffs that generally trail (or coordinate with) class actions and benefit from that work, which leads to substantial litigation cost savings.
That has been the case for the opt-out plaintiffs represented by Arent Fox in eight separate COI increase lawsuits against Transamerica, AXA, and John Hancock. Without the work of class actions, litigating the COI increases, particularly for consumers with only a single policy, would have been cost-prohibitive. The class actions give opt-out plaintiffs an opportunity to secure greater relief than the class, which likely will deter future COI increases if carriers are faced with the prospect of litigating many of the cases separately.
The following summarizes the class action and opt-out plaintiff cases pending against each of those three carriers.
Transamerica faced two leading class action lawsuits for its unlawful COI increases against certain groups of universal life insurance policies. The class in Feller v. Transamerica Life Ins. Co., No. 2:16-cv-01378 (C.D. Cal. filed Feb. 28, 2016) challenged the COI increases implemented by Transamerica in the years 2015 and 2016 that affected 70,846 policies. The class in Thompson v. Transamerica Life Ins. Co., No. 2:18-cv-05422 (C.D. Cal. filed June 18, 2018) also challenged similar increases implemented in the years 2017 and 2018 that affected approximately 7,800 policies. They both alleged that Transamerica breached the express terms of the policies by implementing COI increases that were not based on enumerated cost factors and that recouped past losses. Transamerica settled both lawsuits.
The Feller settlement closely followed the terms of the settlement reached in Fleischer. It established a common fund totaling $195 million, which accounted for approximately 62 percent of the COI increases through settlement. The common fund was reduced by over $84 million for the proportionate share of each opt-out policy. Like Phoenix, Transamerica also agreed to waive contesting death claims from class policy owners and to a 5-year moratorium against additional increases. The settlement also established a modified methodology for future COI increases to ensure that Transamerica cannot recover past losses. The COI increases, however, remain in effect.
The Thompson settlement is similar. It established a common fund that accounted for 100 percent of the COI increases through settlement. And instead of a 5-year moratorium on future COI increases, Transamerica agreed to seven years. Like in Feller, these COI increases also remain in effect.
Transamerica faces eleven separate lawsuits filed by opt-out plaintiffs, most of which are large-fund investors. Arent Fox filed six of them, representing a mix of large and small investors and consumers. All of the separate lawsuits used Feller and Thompson as a springboard for discovery, requiring little if any additional discovery. Three of the lawsuits, including the one with a single policy owner represented by Arent Fox, completed discovery and recently opposed Transamerica’s motion for summary judgment. Arent Fox recently settled on behalf of that single policy owner on confidential terms.
AXA faces a lead class action in Brach Family Foundation, Inc. v. AXA Equitable Life Ins. Co., No. 16-cv-00740 (S.D.N.Y. filed Feb. 1, 2016) and at least seven separate lawsuits for its unlawful COI increases implemented in March 2016 on approximately 1,700 Athena Universal Life II policies. Arent Fox represents an investor in one of the separate cases. The increase targeted a subset class of policies with issue ages above 70 and current face value above $1 million, which plaintiffs allege are factors that do not constitute a “class” of insureds. The Court coordinated the class action and separate lawsuits for discovery, and granted class certification. The parties have completed discovery and finished briefing summary judgment motions.
John Hancock currently faces a lead class action lawsuit in Leonard v. John Hancock Life Insurance Company of New York, et al., No. 18-cv-04994-AKH (S.D.N.Y filed June 5, 2018) for unlawful COI increases implemented around May 2018 on Performance ULI policies issued between 2003 and 2010. The COI increases affect approximately 1,500 policies.
Several separate investor lawsuits are also pending, including one filed by Arent Fox. The cases all similarly allege that John Hancock raised COI rates on certain of its Performance UL and Performance UL Core policies (“Performance Policies”) in part because the owners acquired the policies in the secondary market. In support, the investors claim that John Hancock only increased COI rates on only one-third of Performance Policies and did not reveal the criteria for the increase. Additionally, John Hancock’s historical lapse rates allegedly have not varied that much from year to year, such that it would be reasonable to increase COI rates to account for a greater anticipated future lapse rate. The investors contend that increases are not based upon any of the enumerated cost factors; rather, they are aimed at increasing John Hancock’s profitability on its legacy block of policies, which have not performed as well as expected.
The Court has not formally coordinated the class action with the separate investor lawsuits, though it has set the same pretrial schedule for most. All the parties instead have agreed to informally coordinate discovery among the class action and separate actions, resulting in significant litigation efficiencies and cost savings. The cases are currently in the midst of fact discovery.