Friday, January 13, 2017

No. 197: Genworth Financial—A New Class Action Lawsuit Filed by Three Long-Term Care Insurance Policyholders

On December 28, 2016, three long-term care (LTC) insurance policyholders filed a class action complaint against Genworth Financial, Inc. (GFI), two subsidiaries, and four executives. The general nature of the lawsuit may be gleaned from these two paragraphs in the 22-paragraph introductory section of the complaint:
1. This case concerns the financial harm caused to millions of current and former policyholders of Genworth long term care ("LTC") insurance policies, as a direct result of Defendants' deliberate misconduct in wrongfully depleting needed policy reserves—which is the portion of an insurer's revenue held aside to pay future claims.
6. Defendants executed an undisclosed scheme from 2010 until late 2014 to buoy Genworth's stock price and enrich themselves by diverting hundreds of millions of dollars of policyholders' premium payments away from Genworth's reserve funds and into their own pockets and the coffers of GFI and its investors.
The case was assigned to U.S. District Judge John A. Gibney, Jr. President Obama nominated him in April 2010 and the Senate confirmed him in December 2010. (See Leifer v. Genworth, U.S. District Court, Eastern District of Virginia, Case No. 3:16-cv-1008).

The Plaintiffs
Erika Leifer, now 65 and a New York City resident, purchased an LTC insurance policy from Genworth Life Insurance Company of New York (GLICNY) in 2002. She purchased a second LTC insurance policy from GLICNY in 2004. In February 2016, GLICNY informed her by letter that the premiums on both policies would be increasing by 60 percent, and that "it is possible that your premium will increase again in the future."

Saul Jacobs, now 65 and a Pennsylvania resident, purchased an LTC insurance policy from a predecessor of Genworth Life Insurance Company (GLIC) in 2003. In March 2016, GLIC informed him by letter that the premiums on his policy would be increasing by 20 percent, and that "it is possible that your premium will increase again in the future."

Helene Wenzel, now 72 and a San Francisco resident, purchased an LTC insurance policy from a predecessor of GLIC in 2003. In December 2016, GLIC informed her by letter that the premiums on her policy would be increasing by 26 percent in phases over the next three years, and that "it is possible that your premium will increase again in the future."

The Defendants
The corporate defendants are GFI, GLIC, and GLICNY. The individual defendants are Michael D. Frazier, chairman, president, and chief executive officer from May 2004 until May 2012; Thomas J. McInerney, president and chief executive officer since January 2013 and head of the LTC insurance business since July 2014; Patrick B. Kelleher, chief financial officer from 2007 through 2011, and executive vice president from January 2011 through December 2013; and Martin P. Klein, chief financial officer from May 2011 through October 2015, and acting president and acting chief executive officer from May 2012 through December 2012.

The Class
The plaintiffs bring the action on behalf of a class of Genworth LTC insurance policyholders. The class consists of:
All persons residing in the United States who, at any time prior to November 5, 2014 (the "Class Period"), purchased LTC insurance from Genworth Life Insurance Company or Genworth Life Insurance Company of New York.
The "class period" referred to in the above description of the class ends on the day the plaintiffs allege that "the truth became known when Defendants finally admitted that Genworth had not properly accounted for its reserves, and those reserves were now underfunded by more than half a billion dollars." There are three subclasses consisting of New York State policyholders, Pennsylvania policyholders, and California policyholders.

The Allegations
The "factual background" section of the complaint identifies several allegations including these four: (1) Genworth claimed to buck industry trends and set itself apart from the rest of the LTC insurance market, (2) Genworth repeatedly assured its policyholders and potential insureds that its reserves were more than adequate, (3) Genworth's false statements allowed it to divert hundreds of millions of dollars from its reserves and into the coffers of its holding company and the pockets of its senior executives, and (4) Genworth and the individual defendants had various and powerful motives to commit fraud.

The "claims for relief" section of the complaint includes these six counts: (1) breach of the implied covenant of good faith and fair dealing, (2) violation of a section of the New York Insurance Law, (3) violation of a section of the New York General Business Law, (4) violation of several sections of the California Unfair Competition Law, (5) violation of a section of the Pennsylvania Insurance Bad Faith Law, and (6) unjust enrichment. The plaintiffs seek certification as a class action, a declaratory judgment, statutory damages, restitution, injunctive relief, costs, pre- and post-judgment interest, and attorney fees.

I requested from Genworth a brief statement suitable for inclusion in this post. A spokeswoman said the company's policy is not to comment on matters in litigation.

General Observations
This is an important case, but it has a long way to go. If it gets to a jury, it would be necessary for the discovery process to have turned up sufficient evidence to support the allegations under the "preponderance of the evidence" standard that is needed for plaintiffs to prevail in civil lawsuits. Although the allegations in the complaint appear strong, I believe that the case will end with a settlement, assuming it survives the inevitable motion to dismiss the complaint.

In that regard, it is helpful to consider another recent class action lawsuit against Genworth. The complaint was filed in October 2014, around the time that Genworth announced the need to increase reserves significantly. The plaintiffs were shareholders rather than policyholders. The case was filed in the same court as the Leifer case discussed above, and was reassigned to Judge Gibney after originally having been assigned to another judge. The lead plaintiffs were Her Majesty The Queen In Right Of Alberta, Fresno County Employees' Retirement Association, and City of Pontiac General Employees' Retirement System. The defendants were GFI, McInerney, and Klein. It was a hard fought case. A trial was set for May 2016. In March 2016, however, the parties informed Judge Gibney that they had reached a $219 million settlement. They filed it in April 2016, and the judge preliminarily approved it. He held a fairness hearing in July 2016, and gave his final approval in September 2016. The last court document filed in the case was the judge's order awarding the plaintiffs' attorneys about $61 million in legal fees (28 percent of the $219 million settlement fund), and about $3.8 million in reimbursement of litigation expenses. (See In re Genworth Financial, Inc. Securities Litigation, U.S. District Court, Eastern District of Virginia, Case No. 3:14-cv-682.)

Available Material
I am offering a complimentary 66-page PDF containing the Leifer policyholder class action complaint (61 pages) and the last court document filed in the earlier shareholder class action lawsuit (5 pages). Email jmbelth@gmail.com and ask for the January 2017 package relating to the class action lawsuits against Genworth.

===================================