Friday, September 20, 2019

No. 333: Universal Life and Numerous Cost-of-Insurance Lawsuits Against Transamerica

Over the years Transamerica Life Insurance Company has been the defendant in numerous lawsuits stemming from substantial increases in cost-of-insurance (COI) charges in universal life (UL) policies issued by the company. I have written about a few of such cases. Here I discuss several of them, including two on which I had not written previously.

The DCD Lawsuit
On April 30, 2015, Transamerica removed to federal court from a state court in California an individual lawsuit filed by DCD Partners, LLC (DCD), Personal Involvement Center, LLC (PIC), and Reverend Dr. J. Benjamin Hardwick (JBH). DCD owns the policies at issue in this case. PIC is a Nevada LLC. JBH is the founder and trustee of PIC. I have not written previously about this case. (See DCD v. Transamerica, U.S. District Court, Central District of California, Case No. 2:15-cv-3238.)

The case was assigned to Senior U.S. District Judge Christina A. Snyder. President Clinton nominated her in January 1997. The Senate confirmed her in November 1997. She assumed senior status in November 2016.

On June 19, 2015, DCD filed an amended complaint. On July 20, 2015, Transamerica filed a motion to dismiss the amended complaint. On September 8, 2015, DCD filed a second amended complaint. Here are some lightly edited excerpts from the second amended complaint (the full second amended complaint is in the complimentary package offered at the end of this post):
4. Historically, inner-city African-Americans have experienced difficulties in obtaining life insurance. Therefore, JBH, pastor of the Praise of Zion Baptist Church, worked with Transamerica to develop a race-neutral life insurance program that would provide benefits to the members of the congregation to, for example, pay burial expenses. Pursuant to the program, an investor, in exchange for a portion of the benefits, would pay the premiums on the policies issued on members of the congregation who chose to take part in the program. The remainder of the benefits would be provided to the named insured's designated beneficiary and non-profit entities that provide services to youth and families while improving the quality of life in the South Los Angeles community. In March 2004 Transamerica issued 1,229 policies (Pool 1) under the program. In November 2004 Transamerica issued an additional 1,171 policies (Pool 2).
5. For nearly a decade, Transamerica collected millions of dollars in premiums on these charitable life insurance policies, and the policies provided benefits to their insureds, their families, and various non-profit entities. The payment of the life insurance benefits enabled the families of the insureds to pay for funeral and other expenses upon the deaths of their loved ones. Unfortunately, Transamerica recently more than doubled the amounts charged for the policies.
25. Each policy provides a death benefit totaling $275,000. Upon the death of an insured, Transamerica makes three payments: (1) $15,000 to the insured's beneficiary for funeral and other expenses; (2) $35,000 to PIC (which is distributed among various non-profit entities and projects); and (3) $225,000 to the investor paying the premiums.
28. The aggregate cash value of the policies at the time of the increase in rates was approximately $260,000.
48. On February 18, 2014, Transamerica delivered a notice of payment due for Pool 1 that increased the projected remittance amount by an additional 62.5 percent. In the fall of 2014, Transamerica delivered a notice of payment due for Pool 2 that increased the projected remittance amount by an additional 64.8 percent.
49. Prior to the increases in the projected remittance amounts, Plaintiffs paid approximately $1,831,589 in annual premiums for the policies. As of January 2015, projected annual premium payments were $4,318,873, representing a 135.8 percent increase in annual premiums.
The second amended complaint includes six claims for relief. They are breach of written contract, breach of the covenant of good faith and fair dealing, tortious breach of the duty of good faith and fair dealing, unfair competition, declaratory relief, and negligent misrepresentation.

On October 8, 2015, Transamerica filed a motion to dismiss portions of the second amended complaint. On December 23, 2015, the judge denied the motion.

On March 7, 2016, the judge set the trial to begin May 6, 2017. On January 27, 2017, Transamerica filed a motion for summary judgment. On February 25, 2017, the judge postponed the trial until August 29, 2017. On August 9, 2017, the judge granted in part and denied in part Transamerica's motion for summary judgment.

The trial was in two parts. The first part, before a jury, was on DCD's claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The second part, before the judge, was on DCD's claims relating to unfair competition and declaratory relief.

The jury portion of the trial began September 5, 2017 and ended September 13 after five trial days. The jury found in favor of the plaintiffs. (The jury verdict form is in the complimentary package offered at the end of this post.)

The bench portion of the trial began February 6, 2018. On December 13, 2018, the judge handed down a final judgment. She said DCD is entitled to recover from Transamerica $9,761,403.89 (including prejudgment interest), postjudgment interest, and injunctive relief. She denied Transamerica's motion for a new trial, and its motion for judgment as a matter of law. She also denied the following: DCD's claim for violation of California's Unfair Competition Law, DCD's request for declaratory relief, DCD's claim for tortious breach of the duty of good faith and fair dealing, DCD's claim for negligent representation, DCD's claim for attorney fees, and the claims of the other two plaintiffs. (The final judgment is in the complimentary package offered at the end of this post.)

On January 8, 2019, Transamerica filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. The case number there is 19-55037. At this writing, the appellate docket is lengthy.

The Gail Thompson Lawsuit
On June 18, 2018, Gail Thompson, a California citizen in her late 60s, filed a complaint in this class action lawsuit. The case was assigned to Judge Snyder. I have not written previously about this case. (See Gail Thompson v. Transamerica, U.S. District Court, Central District of California, Case No. 2:18-cv-5422.)

Thompson is owner and primary beneficiary of a TransSurvivor 115 UL policy issued around July 1, 2000, with a face amount of $500,000. On September 19, 2018, Transamerica filed a motion to dismiss the case. On December 26, 2018, the judge denied the motion.

On May 8, 2019, Thompson filed an amended complaint that included eight additional named plaintiffs. They are residents of Colorado, Michigan, New York, Pennsylvania, and Texas. The additional named plaintiffs own policies with a total face amount of $8.2 million. The complaint refers to "monthly deduction rates" (MDRs) rather than "cost-of-insurance" (COI) rates.

The complaint alleges that Transamerica "suddenly, unilaterally, and massively" increased MDR rates on various policies. As examples, some of the increases were 47 percent or 58 percent. Others were 39 percent followed by another 39 percent in each of the following two years "effectively ratcheting the compounded increase to 169% after the third contemplated increase." Here are the final three paragraphs of the "Nature of the Action" section of the amended complaint:
6. In its notices to Policyholders announcing the MDR Increases, Transamerica stated that the increases are "in addition to the customary increases that are associated with age," and attributed them to Transamerica's "current expectations about our future costs to provide this coverage." Transamerica's true reasons for imposing the drastic MDR Increases, however, were (a) to increase its own projected future profits at the expense of the Policyholders, thereby contravening the contractual prohibitions against recouping past losses or imposing MDR Increases for reasons other than legitimate cost factors, (b) to avoid its own contractual obligations to pay guaranteed interest under the Policies and to provide no-lapse coverage under the No-Lapse Endorsement, thereby contravening its duty to treat Policyholders in good faith, and (c) to induce policy terminations by elderly Policyholders, also in bad faith.
7. As a direct result of the MDR Increases, the largely elderly Policyholders are now suddenly facing termination of their life insurance at a time when they can no longer obtain replacement coverage.
8. As alleged below, the MDR Increases violate the express and implied terms of the Policies and were imposed on the Policyholders in bad faith and in contravention of California's Unfair Competition Law ("UCL"), and a violation of California's Elder Abuse Statute. Plaintiffs in this action seek injunctive and equitable relief, and ancillary damages, to halt and reverse Transamerica's massive MDR Increases. These increases have already injured Plaintiffs and, if allowed to proceed, will continue to cause irreparable injury to Plaintiffs and other members of the putative classes (collectively "Class Members").
The three classes of policyholders are a National Class, California Subclass I, and California Subclass II (Senior Policyholders.) The six causes of action are: (1) Breach of Contract—All Classes, (2) Contract Breach of the Implied Covenant of Good Faith and Fair Dealing—Plaintiff Thompson and California Subclass I, (3) Tortious Breach of the Duty of Good Faith and Fair Dealing—Plaintiff Thompson and California Subclass I, (4) Injunctive and Restitutionary Relief Pursuant to UCL—Plaintiff Thompson and California Subclass I, (5) Declaratory Relief—All Plaintiffs and All Classes, and (6) Elder Abuse—Plaintiff Thompson and California Subclass II. (The amended complaint is in the complimentary package offered at the end of this post.)

On May 20, 2019, the judge referred the case to a private mediator. On August 13 the judge extended to September 24 the deadline for the plaintiffs to file a motion for class certification.

The Lebbin Lawsuit
I have posted six items about this individual lawsuit. The most recent post was No. 331 (September 6, 2019). I expect to write more about the case, which relates to UL in the instance of an insured who recently reached age 102. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. (9:18-cv-80558.)

The Feller Lawsuit
I have posted three items about this class action lawsuit. The most recent was No. 302 (March 1, 2019). The case was handled by Judge Snyder. I discussed her granting of final approval to a $195 million settlement in February 2019. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

The Hill Lawsuit
I discussed this state court lawsuit briefly in No. 245 (December 21, 2017). On February 2, 2018, the Alabama Supreme Court, in a split decision, denied a petition for a writ of mandamus. I am attempting to find out more about what transpired in this case. (See Hill v. Transamerica, Circuit Court, Jefferson County, State of Alabama, Case No. 2016-6000401.)

Other Lawsuits Against Transamerica
In the course of preparing this post, I encountered seven other lawsuits against Transamerica. I have not reviewed them, but I list them here for anyone who might be interested. Each is or was in the U.S. District Court for the Central District of California, and each is or was assigned to Judge Snyder. Here, as of this writing, are the names, case numbers, and dates of the first and last entries on each docket:
Brighton Trustees v. Transamerica, 2:19-cv-4210, 5/15/19-9/6/19
Hamra v. Transamerica, 2:18-cv-6262, 7/19/18-6/26/19
Lois Thompson v. Transamerica, 2:16-cv-3238, 5/16/16-7/10/17
Lyons v. Transamerica, 8:16-cv-973, 5/26/16-6/28/16
Wells Fargo Bank v. Transamerica, 2:19-cv-6478, 7/25/19-9/6/19
Wells Fargo Bank v. Transamerica, 2:19-cv-6791, 8/5/19-9/6/19
White v. Transamerica, 2:16-cv-3578, 5/23/16-6/28/16
General Observations
My purpose in preparing this post is to report on the DCD and Gail Thompson lawsuits, which I had not discussed previously. This is by no means an exhaustive discussion of the subject of COI rate increases associated with UL policies. I have written not only several blog posts but also earlier articles on the subject in The Insurance Forum, a monthly newsletter I published from January 1974 through December 2013.

I have written extensively about problems associated with UL and have offered suggestions on how to address the problems. In No. 294 (November 8, 2018), I identified "the administrative problem" as one of the most important. With regard to that problem, I made several suggestions. One was that state insurance regulators should expand the requirements imposed prior to approval of UL policies, such as the filing of sample annual reports to be issued to policyholders and agents explaining the policies. A second suggestion was that state insurance regulators should require prior approval of COI increases, just as they require prior approval of increases in the premiums for long-term care insurance policies.

Available Material
I am offering a complimentary 87-page PDF consisting of the second amended complaint in the DCD case (32 pages), the jury verdict form in the DCD case (2 pages), Judge Snyder's final judgment in the DCD case (4 pages), and the amended complaint in the Gail Thompson case (49 pages). Email jmbelth@gmail.com and ask for the September 2019 package about the Transamerica UL COI litigation.

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Thursday, September 12, 2019

No. 332: Long-Term Care Insurance—An Update on the General Electric Litigation and Other Matters

In No. 329 (August 28, 2019), I discussed the whistleblower report by Harry Markopolos on accounting issues at General Electric Company (GE), with special attention to GE's accounting for its long-term care (LTC) insurance legacy problems. Here is an update on some matters I addressed there, and other related items.

The NAIC LTC Insurance Task Force Meeting
In No. 310 (April 22, 2019), I discussed the formation of a new LTC insurance task force by the National Association of Insurance Commissioners (NAIC). The chairman of the new task force is Scott A. White, the Virginia insurance commissioner. On August 4, 2019, the new task force met during the summer national meeting of the NAIC in New York City. I obtained the minutes from the NAIC website. (The minutes are in the complimentary package offered at the end of this post.) At the outset of the meeting,
Commissioner White said state insurance regulators have been grappling with the issue of long-term care insurance (LTCI) for many years. Several different NAIC working groups and task forces have been focused on addressing the inconsistency among the states in rate review practices and concerns over potential reserve inadequacies within the industry... Commissioner White said it is also fair to say that as state insurance regulators have had discussions, there are strong views but a lack of consensus on how to move forward.
I have said it more bluntly. In No. 313 (May 20, 2019), for example, I said the new task force will "kick the can down the road" as its predecessors have done.

Commissioner White went on to say the new task force has held five regulator-only meetings and identified six "workstreams" to accomplish the goals of the new task force: (1) Multistate Rate Review Practices, (2) Restructuring Techniques, (3) Reduced Benefit Options and Consumer Notices, (4) Valuation of LTCI Reserves, (5) Non-Actuarial Variations, and (6) Data Call Design and Oversight. Commissioner White also said:
The Task Force is currently in the planning stages and will likely continue through the end of August. He said he anticipates some of the workstreams will become full working groups, with significant interaction in open sessions. However, some workstreams will continue to operate in a confidential setting until work products begin to develop, at which time the Task Force will conduct its business in open session. The Task Force has been charged with delivering a proposal on these and other related matters to the Executive (EX) Committee by the 2020 Fall National Meeting.
The A. M. Best Commentary on LTC Insurance
On August 28, 2019, A. M. Best, a major rating firm, issued a five-page commentary entitled "GE's Long-Term Care Exposure Magnifies Counterparty Risk for Several Insurers," and subtitled "Uncertainty about LTC reserving complicates insurers' analysis of counterparty exposure." Here is the first paragraph of the commentary:
Long-term care (LTC) insurance has been the source of many concerns and discussions in the industry for some time. Sentiment surrounding LTC results has been negative for years, driven by poor performance. The poor performance was due to inadequate pricing related to factors such as low interest rates, lapse rates, mortality, morbidity, and policyholder utilization assumptions, among others. These factors led to large losses and significant reserve increases on inforce business and drove many insurers to depart from the market.
One exhibit in Best's commentary shows information from reinsurance exhibits in the 2018 statutory statements filed in March 2019 by 20 insurance companies. The exhibit focuses on two reinsurance companies owned by GE: Employers Reassurance Corporation and Union Fidelity Life Insurance Company. Best refers to those two reinsurance companies together as the "ERAC Group."

The exhibit shows the amount of reserve credit taken by each of the 20 insurance companies for reinsurance with the ERAC Group. For each of the 20 insurance companies, the reserve credit taken for reinsurance with the ERAC Group is shown as a percentage of the ceding insurance company's capital and surplus. Of the 20 insurance companies, seven have at least $1 billion of reserve credit taken for reinsurance with the ERAC Group. Those seven companies, with the ratio (as a percentage) of reserve credit taken for reinsurance with the ERAC Group to capital and surplus shown in parentheses, are: Genworth Life of New York (1,403.8%), Genworth Life and Annuity (519.3%), Genworth Life (443.8%), Lincoln Benefit Life (410.8%), American United Life (194.8%), Allianz Life of North America (46.0%), and Massachusetts Mutual Life (14.4%).

Shareholder Litigation Against GE
In No. 257 (March 12, 2018) and No. 298 (December 10, 2018), I wrote about shareholder litigation that began in November 2017 against GE and several of its current and former top officers. The plaintiffs are large shareholders who allegedly suffered losses because of major charges taken by GE in connection with its operations, including its legacy LTC insurance problems. There were several related lawsuits, all of which were consolidated and assigned to U.S. District Judge Jesse M. Furman. (See, for example, Sjunde AP-Fonden v. GE, U.S. District Court, Southern District of New York, Case No. 1:17-cv-8457.)

On September 20, 2018, GE moved to dismiss the consolidated complaint. On October 12 the plaintiffs opposed the motion to dismiss the consolidated complaint.

On February 27, 2019, new plaintiffs filed another lawsuit against GE, and said the new lawsuit was related to the old lawsuits. The new lawsuit was accepted as related to the old lawsuits and was assigned to Judge Furman.

On March 4 the judge ordered all the parties to confer and submit to him by March 13 a joint letter with suggestions on how to proceed. On March 13 the parties submitted the letter. On March 15 the judge adopted the suggestion and ordered the parties to submit to him, within two weeks after he rules on the pending motion to dismiss the old consolidated lawsuit, another joint letter on how to proceed. When I posted No. 329 on August 28, the judge had not yet ruled on the motion to dismiss the old consolidated lawsuit.

On August 29 the judge issued an opinion and order relating to the motion to dismiss the old consolidated lawsuit. He granted GE's motion to dismiss the old consolidated lawsuit
except as to (1) Plaintiffs' Section 10(b) and Rule 10b-5 claims concerning (a) factoring in GE's 2016 Form 10-K and (b) GE's failure to disclose factoring in its Class Period financial statements, which survive against GE and Bornstein; and (2) for now, Plaintiffs' Section 29(a) claims against each Individual Defendant.
The comments quoted above are in the concluding section of Judge Furman's lengthy and complex opinion and order. He went on to explain why he has decided to give the plaintiffs an opportunity to amend the claims he dismissed. He ordered the parties to confer and submit to him, by September 19, a joint letter with their suggestions about the next steps in the litigation. One possibility is the filing of what would be the fifth amended consolidated complaint. (The full opinion and order is in the complimentary package offered at the end of this post.)

General Observations
Several non-regulators made comments at the August 4 meeting of the NAIC's new LTC insurance task force. However, those non-regulators were handicapped because they had no knowledge of what had happened at the five regulator-only (secret) sessions. Regulators at the August 4 meeting undoubtedly have in their possession a summary of the discussions that occurred during the secret sessions. I would like to see the summary. My address for regular mail is P.O. Box 245, Ellettsville, IN 47429. If an envelope with no return address appears in my regular mail, I would be grateful.

Best's commentary on LTC insurance is copyrighted, and Best denied my request for permission to include it in the complimentary package I am offering to readers at the end of this post. However, on September 4 Best issued a press release about the commentary, and has no objection to my offering the press release, which is in the package. The press release includes a link for obtaining access to the commentary.

Available Material
I am offering a complimentary 71-page PDF consisting of the minutes of the August 4 meeting of the NAIC's new LTC insurance task force (13 pages), Best's September 4 press release about its commentary on GE's LTC exposure (1 page), and Judge Furman's August 29 opinion and order (57 pages). Email jmbelth@gmail.com and ask for the September 2019 package about LTC insurance and GE.

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Friday, September 6, 2019

No. 331: The Age 100 Problem—A Further Update on the Lebbin Lawsuit Against Transamerica

I have been writing for 18 years about "the age 100 problem" in life insurance. In No. 327 (August 19, 2019), I posted an update about a lawsuit filed by Gary H. Lebbin, a centenarian, and the Lebbin-Spector Family Trust ("Trust"). The trustees of the Trust are Gary's two children. The defendant is Transamerica Life Insurance Company. Here I provide another update. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

Recent Developments
Several major 2019 developments in the case are described in No. 327. On January 30, by which time Gary was afflicted with dementia, Transamerica offered to settle with Gary for $10,000. On February 5 Gary accepted the offer and withdrew from the lawsuit. On February 22 the Trust filed an amended complaint that omitted Gary as a plaintiff, leaving the Trust as the only plaintiff. The amended complaint included five counts: (1) declaratory relief, (2) breach of contract, (3) breach of the covenant of good faith and fair dealing, (4) reformation, and (5) rescission.

On July 19 the judge issued an order granting the Trust's claim for breach of contract. The other four counts were denied by the judge or later withdrawn by the Trust. On July 30 the judge held a ten-minute conference. He canceled the trial, which had been set for August 5, because the parties said they had resolved the case. (A transcript of the conference is in the complimentary package offered at the end of this post.)

On August 9 the judge issued an order setting the briefing schedule to resolve the issue of damages on the Trust's breach-of-contract claim. The issue of damages is the only remaining issue in the case. The judge ordered the Trust to file, by August 30, a motion for summary judgment (MSJ) on damages. He also provided for the filing of possible further briefs on September 30, October 21, and November 8.

The Trust's MSJ on Damages
On August 30 the Trust filed its MSJ on damages. The MSJ incorporates a memorandum of law. Here is the concluding sentence of the MSJ (the full MSJ is in the complimentary package offered at the end of this post):
For the foregoing reasons, [the Trust] respectfully request[s] that the Court enter summary judgment in [its] favor as to damages, awarding [the Trust] a return of all premiums paid to Transamerica in the sum of $1,670,140.91, along with prejudgment interest.
The prejudgment interest rates the Trust suggests are the Florida statutory rates at the time of each premium payment. The Trust does not anticipate a dispute over the calculation of the damages, and says it will provide the interest figure prior to the entry of final judgment.

General Observations
The MSJ provides a detailed discussion of the Trust's reasoning. It is important to note that the Trust claims damages for its breach-of-contract claim, which the judge had granted, rather than its rescission claim, which the judge had denied. The MSJ discusses in detail the distinction between a breach-of-contract claim and a rescission claim.

The judge's briefing schedule provides that Transamerica's reply brief, or its cross-motion for summary judgment on the damages relating to the breach-of-contract claim, is due September 30. I plan to report further developments.

Available Material
I am offering a complimentary 32-page PDF consisting of the transcript of the judge's July 30 conference (9 pages) and the Trust's August 30 MSJ on damages (23 pages). Email jmbelth@gmail.com and ask for the September 2019 package about Lebbin v. Transamerica.

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Tuesday, September 3, 2019

No. 330: A Special Request

A close friend of mine has been diagnosed with amyotrophic lateral sclerosis (ALS). The mission of the ALS Association (www.alsa.org) is
To discover treatments and a cure for ALS, and to serve, advocate for, and empower people affected by ALS to live their lives to the fullest.
I would be grateful to readers of this blog who join me in contributing to the ALS Association (P.O. Box 37022, Boone, IA 50037-0022). Please notify me at jmbelth@gmail.com. I will tell my friend of your kindness unless you prefer anonymity. Thank you.

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