Background on the Case
In July 2016 two plaintiffs filed a lawsuit against Nationwide about COI increases on variable universal life insurance policies. The lawsuit has an extra dimension that transformed the case into a strange one.
One plaintiff is Laura L. Palumbo, a Connecticut resident. She is the trustee of an irrevocable insurance trust created in 1994. The other plaintiff is William J. Palumbo. He is the grantor of the trust, the insured in the two policies the trust owns, and Laura's father.
Both policies are variable universal life, each with a $500,000 death benefit. They were issued in 1994 and 1996 by Provident Mutual Life Insurance Company. William was aged 57 when Provident issued the first policy. The initial planned annual premium for the first policy was $9,800. In 2002 Provident demutualized under the sponsorship of Nationwide, and the policies became Nationwide policies.
The plaintiffs said they obtained updated illustrations in September 2014 and were shocked to learn the account values of the policies had declined sharply. They said they were also shocked to learn that in the first policy, for example, the new planned annual premium—about $29,000 compared to the $9,800 initial planned annual premium—made the policies unaffordable. The plaintiffs said that, when Laura wrote to Nationwide asking how the monthly mortality charges were calculated, the company's compliance office said it was "unable to get that question answered."
The Extra Dimension
Laura had long been a registered representative authorized to sell securities such as variable life insurance policies, and she was involved in the sale of the policies to the trust. In April 2015 she wrote to Nationwide alleging the company had made misrepresentations and omissions relating to the COI charges.
In May 2015 Nationwide filed a U5 (the termination notice used in the securities industry) with the Financial Industry Regulatory Authority (FINRA) saying a complaint had been made against Laura by the Palumbo Trust alleging misrepresentations and omissions in the sale of variable life insurance. Laura contacted FINRA disputing the U5. In January 2017, when I looked at the BrokerCheck report about Laura on FINRA's website, I found no mention of the U5 or any other "disclosure event." I therefore concluded that the U5 had been deleted.
The Allegations
The plaintiffs alleged Nationwide made misrepresentations and omissions of material facts to the plaintiffs regarding the COI charges in the two policies. Among the first seven of the ten allegations in the original complaint were breach of contract and violations of certain Connecticut statutes. The other three allegations related to Laura and the U5.
In August 2016 Nationwide filed a motion to dismiss the first seven claims. In that filing Nationwide said the parties were discussing the possibility of an amicable resolution of the final three claims.
In August 2016 Nationwide filed a motion to dismiss the first seven claims. In that filing Nationwide said the parties were discussing the possibility of an amicable resolution of the final three claims.
In December 2016 the judge ordered the plaintiffs to file an amended complaint adding FINRA as a nominal defendant. The plaintiffs thereupon filed the amended complaint adding FINRA as a nominal defendant. In the amended complaint the plaintiffs made clear FINRA was not accused of wrongdoing and was added as a nominal defendant only to facilitate relief with respect to the final three claims. In February 2017 the parties filed stipulations dismissing the final three claims.
The Settlement
On March 20, 2018, the judge stayed all case deadlines in anticipation of settlement. On May 10 he said the parties reported the case has settled, and he dismissed the case. He directed the clerk "to administratively close the file without prejudice to re-opening on or before 6/10/18." He said the parties may file a stipulation of dismissal prior to that date if they wish to do so. On June 8 the parties filed a joint motion for a one-month extension until July 10. They said: "Good cause exists for this request because the parties are still working together to effectuate the terms of the settlement reached between the parties before filing a Stipulation of Dismissal." On June 14 the judge granted the motion. The court file contains no information about the terms of the settlement.
On March 20, 2018, the judge stayed all case deadlines in anticipation of settlement. On May 10 he said the parties reported the case has settled, and he dismissed the case. He directed the clerk "to administratively close the file without prejudice to re-opening on or before 6/10/18." He said the parties may file a stipulation of dismissal prior to that date if they wish to do so. On June 8 the parties filed a joint motion for a one-month extension until July 10. They said: "Good cause exists for this request because the parties are still working together to effectuate the terms of the settlement reached between the parties before filing a Stipulation of Dismissal." On June 14 the judge granted the motion. The court file contains no information about the terms of the settlement.
General Observations
Usually the focus in a COI case is on the question of whether the mortality charges imposed upon the policyholders are implemented in a manner consistent with the precise language of the policy. In this case I was not able to deduce the answer to that question.
In its motion to dismiss the first seven claims, Nationwide attached not only the policies but also a few of the quarterly statements sent to Laura in her capacity as trustee of the trust. The statements show beginning account values and ending account values. If the plaintiffs had reviewed the statements, it should have come as no surprise that the account values had declined significantly.
In its motion to dismiss the first seven claims, Nationwide attached not only the policies but also a few of the quarterly statements sent to Laura in her capacity as trustee of the trust. The statements show beginning account values and ending account values. If the plaintiffs had reviewed the statements, it should have come as no surprise that the account values had declined significantly.
An important question is whether Nationwide should have routinely provided each year, without a request from Laura, updated illustrations showing the future planned annual premiums needed to prevent substantial erosion of the account values. A company may say it has no contractual or other legal obligation to provide updated illustrations. However, I think a company should provide updated illustrations at least once a year to reduce the likelihood of policyholder disappointment.
As indicated at the outset, the "extra dimension" made this a strange case and was the primary reason for my decision to report on the case. I had never heard of a case in which a U5 was filed against a person who submitted a complaint to the company.
In No. 202 I predicted the case would be settled quietly. I say "quietly" because this was not a class action lawsuit, and the terms of settlements in individual lawsuits usually remain confidential.
Available Material
In No. 202 I offered a complimentary 10-page PDF containing a few case documents. The package is still available. Email jmbelth@gmail.com and ask for the February 2017 package about the Palumbo/Nationwide case.