During and after the 2004-2007 heyday of stranger-originated life insurance (STOLI), PHL Variable Life Insurance Company and its affiliates (collectively, Phoenix) issued many universal life insurance policies destined for sale into the secondary market for life insurance policies generally, and for sale into the STOLI market specifically. Many of the policies had face amounts of at least $1 million, and were on the lives of insureds aged at least 68. Many eventually became owned by Fortress Investment Group, a global asset management firm that invests in the secondary market for life insurance. When market interest rates declined after the Great Recession, the policies became unprofitable to Phoenix, which then imposed cost-of-insurance (COI) increases.
In 2010 PHL singled out certain STOLI policies for large COI increases. Fortress, by then the owner of many such policies, filed complaints with state insurance regulators. California, New York, and Wisconsin found the 2010 COI increases to be in violation of their insurance laws. PHL disagreed with that finding. The California Department of Insurance took no further action, and the 2010 COI increases imposed on California policyholders remained in effect.
Developments in New York
Developments in New York
What was then the New York State Department of Insurance ordered PHL to rescind the 2010 COI increases and return the money, with interest, to the owners of policies issued in New York. PHL did so.
In 2011 PHL implemented new COI increases only on policies issued in New York. The New York Department did not object to the 2011 COI increases.
Developments in Wisconsin
The Office of the Commissioner of Insurance (OCI) of Wisconsin ordered PHL to rescind the 2010 COI increases on policies issued in Wisconsin. PHL refused to do so, and began what turned out to be a long legal battle. Here I describe the dispute and the settlement agreement that ended it.
The Hearing Notice
On April 30, 2013, OCI Attorney Richard B. Wicka notified PHL there would be a prehearing conference on May 20, 2013, followed by a hearing on June 26, 2013, before Administrative Law Judge (ALJ) Alice M. Shuman-Johnson. The notice said OCI had received a complaint from Fortress on February 9, 2012 alleging the 2010 COI increases were discriminatory because they targeted investor-owned policies, were not in accordance with the terms of the policies, and the marketing materials misled consumers. The hearing notice said PHL issued nine Wisconsin policies subject to the 2010 COI increases, and seven were still in force. The notice also explained why OCI determined that the 2010 COI increases violated Wisconsin insurance laws. On June 7, 2013, Commissioner of Insurance Theodore K. Nickel of Wisconsin ordered that the ALJ's decision would be the OCI final decision.
The Motions for Summary Judgment
On January 31, 2014, PHL and OCI filed motions for summary judgment. On October 16, 2014, after the motions had been fully briefed, the ALJ issued a decision granting in part and denying in part the motions for summary judgment. On January 13, 2015, the ALJ issued a preliminary order. On March 23, 2015, the ALJ issued a final order requiring PHL to pay restitution in the aggregate amount of about $535,000, including interest, to the owners of the seven policies. The ALJ also required PHL to pay $40,000 to the State of Wisconsin.
The Petition for Judicial Review
On April 1, 2015, PHL filed in the Dane County (Wisconsin) Circuit Court a petition for judicial review of the preliminary order and the final order. On April 16, 2015, PHL and OCI entered into a stipulation staying enforcement of the preliminary order and the final order during the judicial review. While the judicial review was ongoing, PHL made three escrow payments to the Dane County Circuit Court clerk totaling about $79,000.
The Public Records Dispute
On July 2, 2015, PHL filed a complaint in the Dane County Circuit Court alleging OCI and Commissioner Nickel had violated Wisconsin's Public Records Law. The public records dispute had begun on January 6, 2015. On September 15, 2015, the Circuit Court judge stayed the petition for judicial review pending resolution of the public records dispute.
The Settlement Agreement
By way of a settlement agreement signed by an OCI official on June 19, 2017 and by a PHL attorney the next day, OCI and PHL settled the matter. Also, PHL and the policyholders have resolved their differences. The agreement provides no information about the financial aspects of the settlement. Two key paragraphs of the agreement read:
10. In light of the foregoing, the Parties wish to resolve all complaints, claims, charges, grievances and appeals, demands and liabilities arising specifically under the Preliminary Order, the Final Order, the Judicial Review Action, and the Public Records Action.
11. The Parties enter into this binding Settlement Agreement to resolve all pending disputes from the beginning of time to and including the effective date of this Settlement Agreement, and solely to avoid expense and further litigation in court.
I think few state insurance departments have the human and financial resources necessary to carry on an extended legal battle with a major insurance company. Wisconsin is one of them, but the dispute described in this post illustrates the limits even there. I have written this post in part to illustrate why states with limited resources are reluctant to take on a major insurance company.
I express my thanks to OCI officials, who responded promptly and thoroughly to the public records requests I submitted when the dispute began. Thereafter I did not follow developments closely. When I learned recently about the settlement agreement, OCI officials again responded promptly and thoroughly to my public records requests.
I wrote in The Insurance Forum about Phoenix COI increases, and I have written about the subject on my blog. For example, I refer interested readers to No. 9 (11/21/13), No. 26 (1/29/14), No. 103 (6/15/15), and No. 266 (5/16/18). The complimentary packages offered in those posts are still available.
Now I offer a complimentary 43-page PDF consisting of the OCI hearing notice (6 pages), the ALJ decision on motions for summary judgment (22 pages), the ALJ preliminary order (3 pages), the ALJ final order (5 pages), and the settlement agreement (7 pages). Email firstname.lastname@example.org and ask for the June 2018 package about the Phoenix-Wisconsin dispute.