No. 232: Suicide—A Recent Court Case Illustrates the Tragic Consequences of an Intractable Life Insurance Problem

Blogger's note: S. Travis Pritchett is Distinguished Professor Emeritus of Finance and Insurance at the University of South Carolina—Columbia. He is one of my closest friends. Before he began his outstanding professional career in education and research, he worked for several years as an investigator in the claims division of a major life insurance company. In that capacity he handled many cases of suicide or suspected suicide. I sought his comments on a draft of this post. He does not agree with my bottom line. Therefore, with his permission, I present his thoughts at the end of this post, thus allowing readers to draw their own conclusions.

Belth's Thoughts on the Collins Case

The nature of life insurance creates certain intractable problems. One, for example, is the disappearance problem, which is beyond the scope of this post. Another is the suicide problem, which is at the heart of a recent court case illustrating the tragic consequences of the problem. Here I discuss the recent case, which involves rulings by a federal district court and a federal appellate court. (See Collins v. Unum Life, U.S. District Court, Eastern District of Virginia, Case No. 2:15-cv-188, and U.S. Court of Appeals, Fourth Circuit, Case No. 16-1636.)

Background on the Suicide Problem
Suicide in the context of life insurance always has been a problem. If a life insurance policy contract were to pay the death benefit following the insured's suicide at any time during the entire period of the contract, the contract would be viewed as encouraging suicide and therefore contrary to the public interest. On the other hand, if a contract were to exclude payment of the death benefit following the insured's suicide at any time during the entire period of the contract, the contract would be viewed as inadequate protection for the beneficiaries.

Early in the history of life insurance in this country, the typical policy excluded suicide altogether. The reason was that companies felt they needed to protect themselves against those who buy life insurance when they were contemplating suicide. However, the companies came to believe that such a total exclusion was not necessary to protect adequately against adverse selection. Companies, state insurance regulators, and state legislators worked out an admittedly imperfect compromise solution to the problem. Today policies invariably contain a suicide exclusion (and return of the premiums paid) in the event of the insured's suicide during the first two years (sometimes one year) of the policy, and payment of the full death benefit in the event of the insured's suicide at any time thereafter.

Background on the Collins Case
David M. Collins served as a U.S. Navy SEAL for almost twenty years. He endured grueling deployments in Kuwait, Iraq, and Afghanistan. As a result of numerous and continuing traumatic experiences during his deployments, he developed Chronic Traumatic Encephalopathy (CTE), Post-Traumatic Stress Disorder (PTSD), and/or Major Depressive Disorder (MDD).

When Collins left the service in 2012, he went to work for a private firm. It had a basic group life insurance plan providing a death benefit of $104,000 that was paid for in its entirety by the firm. The firm also had a supplemental group life insurance plan providing a death benefit of $500,000 that was paid for by the employee. Collins enrolled in both plans on September 10, 2012. The plans were underwritten and administered by Unum Life Insurance Company of America, and were subject to the Employee Retirement Income Security Act of 1974 (ERISA). Both plans had the same two-year suicide exclusion. Here is the wording:

Your plan does not cover any losses where death is caused by, contributed to by, or results from:

— suicide occurring within 24 months after your initial effective date of insurance; and

— suicide occurring within 24 months after the date any increases or additional insurance becomes effective for you.

The suicide exclusion will apply to any amounts of insurance for which you pay all or part of the premium.

The suicide exclusion also will apply to any amount that is subject to evidence of insurability requirements and Unum approves the evidence of insurability form and the amount you applied for at that time.

Unum approved the $104,000 of coverage under the basic plan effective October 1, 2012. Unum approved the $500,000 of coverage under the supplemental plan effective February 14, 2013.

The complaint in the lawsuit filed later describes in excruciating detail the deterioration in the ability of Collins to function normally, especially in early 2014. The complaint also describes his many medical examinations and the treatments he received.

Developments in 2014
On March 12, during the two-year suicide exclusion period, Collins was found in the driver's seat of his car with a bullet wound in the head and a handgun lying between his legs. That day he had texted Jennifer Mullen Collins, his wife: "Pick up Sam.....so sorry baby I. Love u all." He also had emailed a Navy SEAL friend: "I'm in bad times bro...please make sure my lovely wife Jennifer and children Sam and Grace are taken care of please...hate to do this to you but you know how to get things done. Take care friend." His death was ruled a suicide.

On April 3 Jennifer filed death claims under the basic and supplemental plans. She included the death certificate and a detailed letter from one of her husband's physicians.

On April 8 Unum denied the $500,000 claim under the supplemental plan. Collins had paid for the coverage.

On April 9 Unum approved the $104,000 claim under the basic plan. The employer had paid for the coverage. Unum remitted the payment to Jennifer.

Jennifer filed an appeal with Unum concerning the denial of the $500,000 claim. She submitted extensive evidence from physicians and experts demonstrating that her husband did not commit suicide, was suffering from CTE, PTSD, and MDD, was not able to form the intent to commit suicide, and/or was not sane at the time of his death.

Unum requested all medical records and emails. Jennifer provided the material, which included five medical opinions from different medical centers that her husband did not commit suicide, was suffering from CTE, PTSD, and MDD, was not able to form the intent to commit suicide, and/or was not sane at the time of his death. Unum denied Jennifer's appeal of the denial of the $500,000 benefit.

Later Developments
On April 29, 2015, Jennifer filed a lawsuit against Unum. On May 26 Unum answered the complaint. On December 23 Jennifer filed a motion for summary judgment. On the same day Unum filed a motion for summary judgment.

On May 6, 2016, the district court judge filed an opinion and order denying Jennifer's motion for summary judgment and granting Unum's motion for summary judgment. On June 2 Jennifer filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit. On July 6, 2017, a three-judge appellate panel issued a unanimous unpublished opinion affirming the district court judge's rulings.

A Harsh Allegation
The Collins complaint contains a harsh allegation. Paragraph 96 of the complaint reads:

Unum has paid the Basic Policy benefits of $104,000 and denied the Supplemental Policy benefits of $500,000. It appears that this decision may have been strategic, designed to keep Mrs. Collins from challenging its decision to deny benefits under the Supplemental Policy ($500,000) for fear that Unum would reverse its decision and demand repayment of the benefits paid on the Basic Policy ($104,000).

The allegation may have been unjustified. With regard to paragraph 96, Unum said this in its answer to the complaint:

Unum admits the allegations in the first sentence of Paragraph 96 of the Complaint. Unum denies the remaining allegations in Paragraph 96.

Unum also addressed the allegation in a footnote on page 7 of its memorandum in support of its motion for summary judgment. Unum said the suicide exclusion in the basic plan and in the supplemental plan "will apply to any amounts of insurance for which you pay all or part of the premium." Unum also said the employer paid the premiums for the basic plan and Collins paid the premiums for the supplemental plan.

The district court judge addressed the allegation on page 8 of his opinion and order. He cited the footnote mentioned in the preceding paragraph. He said the employer paid the premiums for the basic plan, the suicide exclusion did not apply to the basic plan, Collins paid the premiums for the supplemental plan, "and so Unum denied the claim" under the supplemental plan. The appellate court panel did not address the allegation in its affirmation of the district court judge's rulings.

The Judges
The Collins case was assigned to Senior U.S. District Court Judge Robert G. Doumar (a 1991 Reagan nominee). The Fourth Circuit panel consisted of Chief Judge Robert L. Gregory (a 2000 Clinton nominee), Circuit Judge Paul V. Niemeyer (a 1987 Reagan nominee), and Circuit Judge Pamela A. Harris (a 2014 Obama nominee).

Leimberg's Comments on the Collins Case
I learned about the Collins case when Steve Leimberg, who operates an important email newsletter, posted an article about the appellate court opinion. He gave me permission to include his article in the complimentary package I offer in this post.

General Observations
In making the following observations, I am aware of the "slippery slope" problem. If exceptions are made to the provisions of the insurance contract, the contract might serve no useful purpose.

I am also aware of the "fine print" problem. In this case the suicide clause is buried on page 16 of the 29-page basic plan, and on page 33 of the 58-page supplemental plan. Also the title of the section in both plans is "What Losses Are Not Covered Under Your Plan?" In other words, the titles do not mention "Suicide." Thus it is unlikely that the insured would see or comprehend the significance of the suicide clause.

The judges found that Unum, the underwriter and administrator of the ERISA plan, did not abuse its discretion by denying the claim, and that there was ample evidence to support the reasonableness of the denial. However, if Unum had exercised its discretion and honored the $500,000 claim, there would have been no appeal to Unum, no lawsuit, no appeal to the Fourth Circuit, no attorneys, and no judges.

In 1973, when there was a change in the top management of Unum's parent company and subsidiaries, the organization moved "from a claim payment approach to a claim management approach." In other words, its focus changed from paying claims to denying claims. Over the years I have written extensively about the Unum companies' disability insurance claims practices. My most important examination of the subject was the special 12-page February 2003 issue of The Insurance Forum. The issue includes an internal company memorandum about the change from the claim payment approach to the claim management approach. The issue also includes an article by Mark D. DeBofsky, an expert on ERISA. The article, which I had requested from him, is entitled "Using ERISA Against Those It Was Designed To Protect." DeBofsky explains how ERISA "has been misused and misinterpreted to create a virtually impenetrable shield against redress for misconduct by employers and insurers."

Connecticut Mutual Life Insurance Company (CML) is one of the great names in the history of life insurance. Sadly CML no longer exists. In the January and July 1976 issues of the Forum, I wrote about CML's claims practices. The facts of the cases led me to believe that CML tried to figure out how to pay a claim rather than how to deny a claim. When I corresponded with CML, an official said:

Our claim policy, to the extent it can be expressed in a few words and in general terms, is simply that we expect to pay all benefits that are supposed to be paid when they are supposed to be paid. Whether or not a benefit has been claimed is beside the point—if we have information to suggest that a benefit might be due, we pursue the situation and determine whether or not it is. Our claim practice does not include maximizing profit as one of its objectives—that's the job of other parts of the Company.

One of my readers, in response to one of my blog posts about claims practices, said he was aware of a life insurance company in which for many years the president of the company had to approve personally every denial of a death claim. With the passage of time and the growth of the company, it became impractical to continue the tradition.

In the January and August 1978 issues of the Forum, I wrote about a tragic situation involving an insured's suicide. An agent of Bankers Life Company (now Principal Life Insurance Company) allowed a client to buy a new policy to replace four existing policies that were beyond the two-year suicide exclusion period. The death benefit of the four policies combined was $52,000. When the insured committed suicide less than two years later, the company refunded the premiums paid on the new policy but denied payment of the death benefit. The beneficiary went to court and later entered into a confidential settlement, out of which the beneficiary probably had to pay attorney fees. I think it would have been better for everyone (except the attorneys) if the company had figured out a way to justify paying the full death benefit.

I feel the same way about the Collins case. I realize judges are supposed to follow the law and the facts wherever they lead, and are supposed to ignore the circumstances of the parties. In this case, I think Unum could have figured out a way to justify paying the $500,000 claim. Had Unum done so, it would have saved the time, effort, and expense of the legal battle. At the same time, Unum would have assisted the family of an American hero who gave his life for our country.

Available Material
I am offering an 85-page complimentary PDF consisting of the text of the Collins complaint (18 pages), the district court opinion and order granting the Unum motion for summary judgment and denying the Collins motion for summary judgment (34 pages), the appellate court opinion affirming the district court opinion and order (8 pages), the Leimberg article about the appellate court opinion (6 pages), the February 2003 special issue of The Insurance Forum (12 pages), the January and July 1976 articles in the Forum (4 pages), and the January and August 1978 articles in the Forum (3 pages). Email jmbelth@gmail.com and ask for the September 2017 package about the case of Collins v. Unum Life.

Pritchett's Thoughts on the Collins Case

The fact that David Collins developed CTE, PTSD, and MDD as a result of his service as a U.S. Navy SEAL is so very sad, to say the least. Yet I do not see how these service-connected conditions are relevant to the decision made by Unum on the supplemental plan where the suicide exclusion applied because Collins had paid the premium for the coverage.

I have had a long time to think about the application of the suicide exclusion. During my five years with a major life insurance company in the 1960s, I investigated many deaths involving the possibility of suicide. I say "possibility" because investigations were not requested by the home office in cases where death was clearly due to suicide during the suicide exclusion period. A fair number of death certificates listed the cause of death as accidental or due to some health condition when in fact the deceased committed suicide. It was these cases that I helped investigate.

My reports to the home office always ended with a recommendation. However, final decisions were made by the home office's claims division, where the staff included attorneys. My boss, the divisional claims manager, always insisted that our primary objective was to try to help claimants (similar to your quote from a CML official). However, we also paid close attention to contract language. Having said this, I saw exceptions by the home office to making decisions strictly on contract provisions.

However, these uncommon exceptions supported the sales force, rather than being based on anything about the insured or the beneficiary. For example, I investigated a case where a marine officer trainee was killed when, while returning from a late date, he drove his convertible under the rear of a tractor trailer. He had signed a life insurance application the previous week but had not paid the premium. Instead the agent had personally paid the premium planning to collect from the insured later. The claim was paid to the insured's father (a respected physician) three days after the death; the agent received a lecture.

In another case, involving a prominent auto dealer, I established during the contestability period that in his application the insured had not told the truth about material health conditions, including the use of drugs for depression. The home office agreed the claim should be denied. However, upon appeal from the insurance agency manager, who claimed that future sales in the area would be hurt if a claim were denied on such a well-known person, the claim was paid. Marketing departments at that time were king in life insurance companies.

I believe strongly that a life insurance policy is a legal contract, and that claim decisions necessarily need to be consistent with policy provisions when facts surrounding a claim are clear. In other words, claim decisions should be objective and consistent with policy provisions—period.

With respect to claim decisions concerning suicide I am not aware that it is or should be relevant whether one is sane or insane, has significant health conditions (regardless of how such conditions materialized), is an American hero, a scoundrel, a rabbi, a priest, moral or immoral. I would venture to say that the typical person who dies due to a non-accidental self-inflicted injury is not thinking rationally at the time of suicide. Having said this, I have not looked at literature in, for example, sociology or medicine, that tries to define suicide and whether external issues ever factor into whether or not they believe a death is due to suicide. The plaintiff apparently tried this approach in the Collins case. It seems to me that Unum's suicide exclusion language rules out consideration of such factors by saying "Your plan does not cover any losses where death is caused by, contributed to by, or results from suicide." I believe that Unum and the judges, in the Collins case, made the proper decisions on the supplemental life insurance.

In my opinion, this claim would have been denied under the application of the old CML practice you quoted because I doubt that a suicide during the suicide exclusion period would have met their test of "simply that we expect to pay all benefits that are supposed to be paid..." I imagine the words "supposed to be" related to CML contract language.

The text message Collins sent to his wife and the email sent to his fellow SEAL on the date of his death are clear evidence that he intended to kill himself. In cases I worked on, such messages (then, notes or other actions, well before the days of texts and emails) were evidence that death was due to suicide.

I would not conclude as you do that Unum should have found a way to justify paying the $500,000 claim. Unum is not a charity or a governmental agency. They should not feel—even though the claim decision maker might personally like to—any more obligation to help a specific American hero than you or I should—today—write large checks to help the family of David Collins. Literally hundreds of thousands (maybe millions) of veterans now unfortunately have service related health conditions like those from which Collins suffered! The prevalence of suicide among these veterans is significantly higher than that for others. The effects of modern warfare are terrible. Perhaps the Veterans Administration, with the authorization of Congress and the President, should do more for Collins and other veterans. However, I do not think life insurance companies should bend contract provisions to do so. That would not just affect shareholders, but also dividends to participating policyholders, experience-rated group premiums and premiums for new individual policies.

I share the opinion that Unum disability insurance claim practices have been deplorable. Yet I question whether that has any direct relevance to the Collins case involving supplemental group life insurance. I think you should reconsider the implication that claim decisions should factor in the likelihood of the insurance company being sued and the time and expense a legal battle might entail.

I fully agree with you that suicide is an intractable problem for life insurance companies. My overall feeling is that it is so sad that Collins suffered due to his service to our country. I hope his family is receiving adequate military retirement, Veterans Administration, Social Security, and other survivor benefits. However, I do not believe that Unum should have paid benefits under the supplemental plan.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 231: Life Insurance Fraud—A Case Involving Incredible Criminal Allegations

On June 22, 2017, the U.S. Attorney's office in the Southern District of Ohio filed a 33-count grand jury indictment against three individuals, along with a motion to seal the indictment. On August 9 the office filed a motion to unseal the indictment, and the judge unsealed it the same day. Often there are only a few days (the time needed to arrest the defendants) between the filing under seal and the unsealing. In this case extra time was needed to complete the investigation. On August 10 the office issued a press release about the case. (See U.S.A. v. Stevenson, U.S. District Court, Southern District of Ohio, Case No. 2:17-cr-134.)

The Defendants
The defendants are Mitch G. Stevenson, his wife Patricia Stevenson, and their daughter Candace G. Stevenson. The indictment charges each defendant with one count of money laundering conspiracy. The indictment also charges Mitch with twenty-two counts of money laundering, Patricia with two counts of money laundering, and Candace with eight counts of money laundering. Money laundering conspiracy is a crime punishable by up to twenty years in prison. Money laundering is a crime punishable by up to ten years in prison.

On August 10 Patricia and Candace made their initial appearances before a magistrate judge. A private attorney represented Patricia. The magistrate judge appointed a federal public defender to represent Candace. On August 11 Mitch made his initial appearance before the magistrate judge. A private attorney represented Mitch. The defendants were released after their initial appearances. The docket reflects the filing of orders describing the conditions of release and the filing of financial affidavits. However, those documents are not publicly available, at least not yet.

The Policies
In early 2009 West Coast Life Insurance Company issued two life insurance policies on the life of Person A, a Cincinnati resident and relative of the defendants. The policies had a combined death benefit of $2.9 million. Mitch was the initial owner and beneficiary of one policy, for $1.5 million. Person B, another relative of the defendants, was the initial owner and beneficiary of the other policy, for $1.4 million. In early 2011 Patricia became owner and beneficiary of the first policy, and Candace became owner and beneficiary of the second policy. The indictment does not identify the agent who submitted the application, and does not comment on West Coast Life's underwriting.

The Impostor
The application for the policies required Person A's medical history and a medical examination. An examination of an impostor took place on February 6 or 7, 2009, in Sugar Land, Texas, a Houston suburb. The identity of the impostor (she represented herself as a relative of the defendants) is not known. The impostor weighed 176 pounds, and said her address was in Sugar Land. The impostor said she had not been treated for dizziness, diabetes, or high blood pressure, and had not been a hospital patient for five years. The indictment does not identify the physician or paramedic who examined the impostor.

Three weeks before the medical examination of the impostor in Texas, the real Person A was in the emergency room of a Cincinnati hospital. At that time Person A weighed 387 pounds. During the previous two years, Person A had made at least 17 visits to hospital emergency rooms. Also, Person A had been taking medications for diabetes, high blood pressure, and other conditions. On February 6, 2009 (the day of, or the day before, the examination of the impostor in Texas), Person A was in the emergency room of a Cincinnati hospital.

The Death Claims
On January 9, 2012, Person A died at a Cincinnati hospital. On January 25 Patricia and Candace filed death claims with West Coast Life. On January 30 the company issued checks for the death benefits. Each check was about $4,000 larger than the death benefit, perhaps reflecting interest from the date of death to the date of the checks.

Use of the Money
On February 8, 2012, Patricia and Candace deposited the checks into four newly opened bank accounts. On February 21 Candace used a $248,000 cashier's check to buy a 2012 Bentley GT Convertible and registered it in her name. On February 24 Patricia used $700,000 in cashier's checks to transfer funds to Mitch. He and Patricia used some of the money for a land contract for a home in Mason, Ohio, near Cincinnati.

The defendants moved money from bank to bank. The indictment alleges that the transactions were "designed in whole or in part to conceal and disguise the nature, location, source, ownership, and control of the proceeds of criminal activity." The indictment seeks forfeiture of the proceeds derived from the illegal activity.

General Observations
The indictment presents overwhelming evidence supporting incredible criminal allegations. I do not understand how the defendants could have thought they would be able to get away with such a brazen scheme to defraud a life insurance company.

It seems likely the case will not go to trial. I think it will end with plea agreements and sentencing of the defendants to significant prison time. I plan to report further developments.

Available Material
I am offering an 18-page complimentary PDF consisting of the U.S. Attorney's press release (2 pages) and the indictment (16 pages). Email jmbelth@gmail.com and ask for the August 2017 package about the U.S.A. v. Stevenson case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 230: Long-Term Care Insurance—Another Lawsuit Involving Claims Practices at Senior Health Insurance Company of Pennsylvania

In No. 229 (posted August 8, 2017), I reported on a 2013 long-term care (LTC) insurance claims practices lawsuit against Senior Health Insurance Company of Pennsylvania (SHIP). While working on that post, I learned of a 2011 claims practices lawsuit against SHIP. Here I report on the earlier case. (See Gottlieb v. Conseco, U.S. District Court, Central District of California, Case No. 2:11-cv-2203.)

U.S. District Court Judge George H. King handled the Gottlieb case. President Clinton nominated him in April 1995, and the Senate confirmed him in June 1995. He served as chief judge from September 2012 to June 2016, and retired in January 2017. U.S. Magistrate Judge Victor B. Kenton was also involved in the case.

Background
In January 1988, Beatrice Orkin Gottlieb, a California resident aged 57 at the time, acquired LTC insurance coverage from AIG Life Insurance Company (AIG). The insurance was evidenced by a certificate issued by the AIG Long Term Care Trust. The master contract became effective in June 1987. In group insurance, a "master contract" covers the entire group, and a "certificate" is issued to each member of the group. The certificate in this case had an Extended Home Care Benefit Rider in which "home" was defined. Some definitions of "home" are mentioned later.

In December 1991 American Travellers Life Insurance Company (ATL) informed Gottlieb by letter that ATL had "reinsured and assumed" the coverage from AIG. ATL said that "you can be assured that the benefits of your policy will remain exactly the same." (The underlining was in the original.)

In December 1999 ATL informed Gottlieb by letter that the company's name had changed to Conseco Senior Health Insurance Company (CSHI) because Conseco, Inc. had acquired ATL. The letter said: "The name change will in no way affect the terms and conditions of your policy." In November 2008, when Conseco transferred CSHI to an oversight trust, SHIP became the company's name.

In April 2010 Gottlieb entered a skilled nursing facility. In July 2010 she moved to another skilled nursing facility. Her daughter, Debbie Ferman, filed a claim against SHIP, which denied the claim. The denial appeared to be based on an endorsement added to the policy changing the definition of "home." Gottlieb had never agreed to the endorsement and had never even received it.

The Lawsuit
In March 2011 Gottlieb filed a class action lawsuit against CSHI doing business as SHIP. Gottlieb filed a first amended complaint in May 2011, a second amended complaint in September 2011, and a third amended complaint in September 2012. The four complaints and the exhibits attached to them differ significantly.

The Settlement
In October 2012 the parties reached a settlement. In December 2012 Judge King issued an order preliminarily approving the settlement, conditionally certifying a class for the purposes of the proposed settlement, approving the class notice, and scheduling a final approval hearing. The class notice offers the entire settlement agreement (63 pages including exhibits) to class members interested in seeing it. Here is a paragraph of the class notice summarizing the case:

This lawsuit [name of case] is about whether the term "home" in certain insurance policies includes Assisted Living Facilities or Residential Care Facilities. Plaintiff has alleged that in certain instances, it does. Under the Proposed Settlement, SHIP agrees that if a Long Term Care Policy defines "home" as a "private home, a home for the aged, a residence home, or a similar residential institution, or your home" and does not specifically exclude benefits for Home Health Care provided in an Assisted Living Facility or Residential Care Facility for the Elderly, claims for benefits will not be denied on the basis that said facility is not an insured's "home."

The class notice also contains a paragraph summarizing the terms of the proposed settlement. Here is a portion of that paragraph:

Under the Proposed Settlement, SHIP agrees to consider an Assisted Living Facility as an insured's "home" under a Long Term Care Policy owned by a member of the Settlement Class. SHIP will notify all State Departments of Insurance or their regulatory equivalents, in writing, of the terms of the Settlement.... There are no provisions for money damages to be paid to Class Members. The Class Representative, or Mrs. Gottlieb, did, however, include individual claims for relief against SHIP for its alleged failure to pay certain benefits to her under her own Long Term Care Policy. Therefore, SHIP has agreed to pay her the full contract value of her policy in the amount of $182,500, along with an additional $5,000 for representing the Class, which required her to incur travel and other expenses related to maintaining the lawsuit.

In March 2013 Judge King issued a final order and judgment approving the settlement. In April 2013 Gottlieb filed a motion for attorneys' fees in the amount of $250,000. In July 2013 Magistrate Judge Kenton granted the motion. SHIP appealed Magistrate Judge Kenton's order to the U.S. Circuit Court of Appeals for the Ninth Circuit. In August 2015 the appellate court affirmed Magistrate Judge Kenton's order.

The remainder of the class notice paragraph describing the terms of the proposed settlement explains an "audit process" SHIP agreed to implement. SHIP was required to submit quarterly audit reports to attorneys for the class for two years following the settlement's effective date. The reports show nothing of significance. For example, here is one of the reports from a law firm representing SHIP:

This letter provides you with information from defendant SHIP under the terms of the March 12, 2013 Final Order and Judgment, and, in particular, information pertaining to Paragraph 4(c) and (d). This pertains to the quarter ending September 30, 2014. Through this office, SHIP advises that under the audit process described in the order there have been no claim denials for health care benefits wherein the stated reason for the denial included a determination that the insured resided in an ineligible setting. SHIP has further advised that it has audited at least 25% of review notes to ensure that the ALF Op Memo was applied in a manner consistent with the terms of the Settlement and Order. [Blogger's note: "ALF Op Memo" is a memorandum describing the standard operating procedure when a policy includes a provision relating to Assisted Living Facilities.]

General Observations
There were three insurance company name changes in the Gottlieb case. The first resulted from the transfer of coverage from AIG to ATL by way of so-called assumption reinsurance. Neither company gave Gottlieb an opportunity to consent to the transfer. Rather, ATL merely informed her of the transfer by letter. See No. 220 (posted June 1, 2017), which explains why the transfer of coverage without Gottlieb's consent arguably violated her constitutional rights. The subject is treated in detail in chapter 23 of my 2015 book entitled The Insurance Forum: A Memoir.

The second name change—ATL to CSHI—resulted from Conseco's acquisition of ATL. The third name change—CSHI to SHIP—resulted from Conseco's transfer of CSHI to an oversight trust. Policyholder consent is not required when an entire company is sold, or when a company merely changes its name. In other words, policyholder consent is required only when a block of policies is transferred from one company to another.

One of the exhibits attached to the third amended complaint is interesting. It is a transcript of a tape recording of part of a telephone conversation between Ferman (Gottlieb's daughter) and Robert Bryant, who represented a firm that was handling claims administration for SHIP. The transcript illustrates what a claimant is up against when he or she contacts the company about a claim denial. It also makes clear that Ferman was not easily brushed off.

Available Material
I am offering a 52-page complimentary PDF consisting of the text of Gottlieb's third amended complaint (17 pages), the appendix to the third amended complaint showing the transcript of the Ferman/Bryant telephone conversation (10 pages), Judge King's final order (8 pages), Magistrate Judge Kenton's order (13 pages), and the Ninth Circuit's affirmation of Magistrate Judge Kenton's order (4 pages). Email jmbelth@gmail.com and ask for the August 2017 package about the Gottlieb v. Conseco case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 229: Long-Term Care Insurance—Senior Health Insurance Company of Pennsylvania Shows How Not To Handle a Claim

In January 1996, Mary ("Molly") White, an Ohio resident aged 67 at the time, purchased a long-term care (LTC) insurance policy from American Travellers Life Insurance Company (ATL). The company later became Conseco Senior Health Insurance Company, and still later became Senior Health Insurance Company of Pennsylvania (SHIP).

In May 2013, Ruth White, who is Molly's daughter and holds power of attorney for her, filed a claim with SHIP for benefits under the policy. SHIP denied the claim. In August 2013, Ruth filed an appeal with SHIP, which denied the appeal. Since 2013, Molly's mental and physical conditions have deteriorated. Ruth filed additional claims, most recently in October 2016. SHIP denied the claims. In June 2017, Ruth filed a lawsuit against SHIP in state court in Ohio. In July 2017, SHIP removed the case to federal court.

U.S. District Judge John R. Adams is handling the case. President George W. Bush nominated him in January 2003, and the Senate confirmed him in February 2003. (See White v. SHIP, U.S. District Court, Northern District of Ohio, Case No. 5:17-cv-1531.)

The APC Rider
The ATL policy provides for benefits when the insured is in a "Long Term Care Facility" or "Assisted Living Facility." The policy also has a complimentary rider that provides benefits under an "Alternative Plan of Care" (APC) recommended by a physician.

The crux of the dispute is whether the APC rider provides benefits when Molly is at home rather than in one of the above facilities. ATL promoted the APC rider in marketing material. The company said such things as "Unlimited Coverage for Custodial, Intermediate and Skilled Care PLUS Alternate Care Benefits!" It also made it sound as though the APC rider provided a way to receive benefits at home without being admitted to one of the above facilities. The APC rider reads:

If you would otherwise qualify for benefits, we will consider paying for the cost of services you require under a written alternative plan of care. Such alternative care must be a medically acceptable alternative to Long Term Care or Home Health Care.

The alternative plan of care must be initiated by you. It must be developed and written by your physician and consistent with generally accepted medical practices. Those parts which are mutually agreeable to you, your physician and us will be adopted.

Alternative care may include but not be limited to: (1) special treatments; (2) different sites of care; or (3) modifications to your residence to accommodate your needs. Suggested services and benefit levels may be different from, or not otherwise covered by, the policy. If so, they will be paid at the levels specified in the alternative plan of care.

Agreement to participate in an alternative plan of care will not waive any of your rights or our rights under the Policy. However, the total of all benefits paid under this Rider will be an offset to those otherwise payable under the Policy to the extent that is agreed to by you and us in the written alternative plan of care. [Blogger's note: The final sentence above is in boldface type.]

Denial Letters
As mentioned earlier, SHIP denied the claims and appeals that Ruth submitted. For example, in a June 2013 letter to Molly's physician, a SHIP "care manager" said:

In order to evaluate Mary White's eligibility for benefits, we reviewed care plan assessment, care notes, and the results of a recent onsite nursing assessment, have spoken to Ruth White and have determined that Mary White needs assistance with bathing, dressing, toileting, transferring, mobility, and continence.

It is our understanding that Mary White does not desire to receive services in a nursing home setting and wishes to receive care at home. However, Mary White's policy covers Long Term Care Facility or Assisted Living Facility care, only.

In an August 2013 letter to Ruth, the same care manager said it differently. Here are the two key paragraphs:

You requested benefits under your Alternative Plan of Care rider. In order to determine your eligibility, both you and your physician submitted information on whether admission to a nursing home would otherwise be required for your condition, that your care needs can adequately be met at home and a plan of care describing the type of services sufficient to support your care needs at home. We will not pay benefits for any type of Alternative Care unless we are first reasonably satisfied that you would otherwise require nursing home confinement.

We have carefully reviewed the circumstances of your claim, as well as the information your physician submitted on your behalf. Your physician did not recommend nursing home confinement or indicate that you require a level of care that requires nursing home confinement. In addition, we have carefully considered the circumstances of your claim, including the type, level and frequency of care you have received, as well as the reasons you submitted for making this request. We have determined that we are unable to approve your request for coverage of care outside of an eligible Long Term Care Facility or Assisted Living Facility. This denial is based on the lack of proper medical documentation to support the request that covered benefits, under the policy, are not suitable for you.

The Lawsuit
On June 15, 2017, Ruth filed a breach of contract lawsuit against SHIP in the Summit County (Ohio) Court of Common Pleas (Case No. CV-2017-06-2489). On July 20, SHIP removed the case to federal court and filed its answer to the complaint. The next day, the case was assigned to Judge Adams, who immediately issued a case management conference scheduling order. Here are some but not all the elements of the order:

• Judge Adams set the case management conference for July 31.
• He ordered lead counsel and parties with full settlement authority to be present and have calendars available for scheduling.
• He ordered any undue hardship motions or motions to continue to be filed by July 26.
• He ordered, in the event of a motion for continuance, that counsel confer and agree on three alternative dates not later than August 7.
• He ordered the plaintiff to make a settlement offer by July 27, and he ordered the defendant to respond with a settlement offer by July 28.

On July 26, the parties filed a joint report on their planning meeting. On July 27, Ruth filed initial disclosures, a demand for $87,000, plus estimates of $20,000 in attorney fees and $11,300 in costs. The next day, SHIP filed an offer of $17,500. On July 31, at the case management conference, the case was placed on the expedited track. On the same day, Ruth filed additional documents.

SHIP Data
I asked the insurance department in Pennsylvania, SHIP's state of domicile, how many consumer complaints it received in recent years against the company. A spokesman said the department received 25 complaints in 2013, 20 in 2014, 19 in 2015, 26 in 2016, and 11 thus far in 2017.

According to SHIP's statutory statement for 2016, Pennsylvania is the fourth largest state by LTC premiums (after Texas, California, and Florida). By extrapolation from Pennsylvania's 26 complaints in 2016, I estimate there were 300 consumer complaints filed against SHIP in 2016 with all the state insurance departments combined. I think 300 is a large number for a company with capital and surplus of only $28 million at the end of 2016.

In SHIP's statutory financial statements, page 4, line 13 shows "Disability benefits and benefits under accident and health contracts." The figures (in millions) in SHIP's four most recent annual statements are $415 in 2013, $412 in 2014, $414 in 2015, and $309 in 2016. I think the 2016 figure is a sharp drop from the figures in the three prior years.

Long Term Care Group
Long Term Care Group (LTCG) is an LTC insurance administration company. I believe that LTCG administers claims against SHIP. All the SHIP letters I have seen in this case show SHIP at P.O. Box 64913, St. Paul, MN 55164. One of LTCG's locations is in Eden Prairie, a suburb of the Twin Cities. The SHIP/LTCG contract probably says SHIP bears sole responsibility for the claims practices described in this post.

My Inquiry to SHIP
In view of the SHIP data and the LTCG situation mentioned above, I decided to ask SHIP a few questions. I sent them to the New York firm that handles media relations for SHIP. I asked:

1. Is Long Term Care Group handling claims for SHIP? If so, which office of LTCG? If not, who is handling claims for SHIP?
2. Is SHIP in the process of denying all claims? Irrespective of your answer, please indicate the number of new claims approved and the number of new claims denied in 2013, 2014, 2015, 2016, and thus far in 2017.
3. Is SHIP in the process of discontinuing as many previously approved claims as possible? Irrespective of your answer, please indicate the number of previously approved claims discontinued (other than by death of the insured) in 2013, 2014, 2015, 2016, and thus far in 2017.

An official of the media relations firm responded promptly. He said SHIP has no comment on the questions.

General Observations
I am writing about this case because I think SHIP's claim denial letters are outrageous. They are not only gibberish but also seem to conflict with the language of the APC rider. However, I decided not to go into further detail here. Instead, interested readers are invited to obtain the complimentary package I offer at the end of this post. The package contains the ATL policy, including the APC rider, and seven denial letters.

I think the case grabbed the attention of Judge Adams, because he has been moving it along with lightning speed. I hope that the parties settle the case quickly to avoid lengthy delays that would be caused by discovery efforts and a jury trial.

In addition to the White case, I am aware of only two other lawsuits ever filed against SHIP relating to claims practices. I wrote about one of those cases in the May 2012 and November 2013 issues of The Insurance Forum. (See Hall v. SHIP, Superior Court, State of California, County of San Bernardino, Case No. CIVRS 1200996.) I have not written about the other case, which initially was against a SHIP predecessor but eventually involved SHIP. (See Gottlieb v. Conseco Senior Health, U.S. District Court, Central District of California, Case No. 2:11-cv-2203.)

If there were about 300 consumer complaints filed nationally in 2016 against SHIP, it seems reasonable to ask why there have not been many lawsuits. I think the answer is that we are talking about caregivers who are busy tending to the needs of some of our most vulnerable citizens. After the caregiver loses the claim struggle with SHIP, after a state insurance department's consumer complaint division tells the caregiver the insurance department cannot act as the insured's attorney, and after a private attorney approached by the caregiver says a lawsuit against SHIP would be a long legal battle with a doubtful outcome, the caregiver simply gives up.

As I have reported, SHIP is an LTC insurance company in runoff (not selling new policies) and is in fragile financial condition. Indeed, SHIP would have been insolvent at the end of 2016 without a $50 million surplus note on which it has not paid any interest.

Yet the four officers whose names appear on the first page of SHIP's 2016 statutory financial statement appear to be getting by. According to data filed with the insurance department in Nebraska, Paul Lorentz received total compensation of $411,886 in 2016, Ginger Danough $396,423, Barry Staldine $325,403, and Kristine Rickard $239,154.

Available Material
I am offering a 53-page complimentary PDF consisting of the state court complaint (3 pages), SHIP's answer including exhibits (24 pages), seven denial letters (10 pages), the case management conference scheduling order without exhibits (5 pages), Ruth's demand for $87,000 (2 pages), Ruth's preliminary budget estimate (1 page), SHIP's offer of $17,500 (3 pages), and the two articles in The Insurance Forum about the Hall v. SHIP case (5 pages). Email jmbelth@gmail.com and ask for the August 2017 package about the White v. SHIP case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 228: Stranger Originated Life Insurance—Sun Life of Canada Wins a Partial Court Victory

Sun Life Assurance Company of Canada recently won a partial victory in a lawsuit relating to stranger originated life insurance (STOLI). There have been many STOLI lawsuits, and I have written about a few of them. I am writing about this one because it illustrates vividly the fraudulent nature of STOLI transactions.

U.S. District Judge Pamela Lynn Reeves handled the case. President Obama nominated her in May 2013, and the Senate confirmed her in March 2014. (See Sun Life v. Conestoga, U.S. District Court, Eastern District of Tennessee, Case No. 3:14-cv-539.)

Developments in the Lawsuit
In November 2014 Sun Life filed a lawsuit against Conestoga Trust Services, LLC. The defendant was the sixth assignee of a $2 million life insurance policy Sun Life issued in April 2008 on the life of Erwin Collins. At the time, Collins was a 74-year-old resident of Knoxville, Tennessee. Conestoga acquired the policy in April 2013. Collins died in June 2014, more than four years beyond the expiration of the two-year contestability period. Sun Life sought a court declaration that the policy was void from inception as an illegal wagering contract. In December 2014 Conestoga answered the complaint.

In January 2015 Conestoga filed an amended answer and a counterclaim against Sun Life. In February 2015 Sun Life responded to the answer and counterclaim, and Conestoga filed a motion for judgment on the pleadings. In April 2015 Sun Life opposed the motion. In September 2015 Judge Reeves denied the motion as premature, saying the record was not sufficiently developed for her to determine whether the policy was void from inception as a STOLI scheme, or whether Conestoga was an "innocent bona fide assignee."

In March 2016 Conestoga filed a motion for summary judgment. In September 2016 Judge Reeves denied the motion as moot. In October 2016 Conestoga filed an amended motion for summary judgment, and Sun Life filed a motion for summary judgment.

In January 2017 the parties requested a delay in the proceedings. Judge Reeves postponed the trial, which had been scheduled for March 2017, until November 2017.

The Ruling
On July 12, 2017, Judge Reeves handed down a memorandum opinion and a judgment. Here is the third paragraph of the opinion:

For the reasons that follow, the court finds there was a pre-existing agreement for Erwin Collins to obtain the policy and transfer it to a stranger investor. Therefore, the policy constitutes a STOLI scheme, and under Tennessee law, it violates public policy and is void ab initio. As a result, Sun Life does not have to pay the death benefit to Conestoga. However, Sun Life must refund the premiums to Conestoga so that Sun Life does not obtain a windfall.

The Scheme
Eugene E. Houchins, III (Norcross, Georgia) was the key figure in the case. He was a life insurance broker and president of Bonded Life Company, which he used to procure life insurance policies. He invited Robert Coppock to earn fees by referring elderly persons to him for a program under which those persons would receive money through life insurance policies taken out on their lives. Houchins retained Coppock as a Bonded Life agent. Bonded Life paid Coppock a referral fee of 20 percent of the first-year premium on any completed transaction. Coppock referred Collins to Houchins.

Collins created "The Erwin A. Collins Irrevocable Life Insurance Trust." The trust applied for the policy, and was to be owner, beneficiary, and premium payer of the policy. Houchins worked with David Wolff of Iron Core Capital. Wolff worked with Life Asset, a firm in the secondary market for life insurance policies.

In September 2007 Houchins submitted an informal inquiry to Sun Life about whether Collins would qualify for a Sun Life policy. A week later, Sun Life made a tentative offer subject to a formal application and full underwriting. On November 5, 2007, Ann Collins, the wife of Erwin Collins, signed an application in Knoxville in her capacity as trustee of the Collins trust. A couple of months later, the application and supporting documents were submitted to Sun Life.

In late February 2008 Life Asset told Wolff it would not acquire a beneficial interest in a policy on Erwin Collins because Tennessee was a state where Life Asset would not conduct business. To solve the "Tennessee problem," Houchins had a different trust, with a Georgia address, reapply for a policy. The new application supposedly was signed in Georgia by the insured, by a Houchins friend as trustee, and by Houchins' father as broker/registered representative. Houchins removed references to Tennessee from the policy and trust documents, used a phony Georgia address as the insured's residence, and arranged to have signatures falsely notarized in Georgia. Houchins arranged financing for the initial premium payment, and Sun Life issued the policy.

The Houchins Deposition
On August 4, 2016, a Sun Life attorney deposed Houchins in Atlanta. The transcript shows it was a memorable five-hour deposition. After answering questions about his name and address, Houchins invoked his Fifth Amendment right against self-incrimination in response to virtually all other questions. His attorney, apparently to be on the safe side, instructed Houchins to take the Fifth despite the fact that the statute of limitations had run out on any conceivable crime for which Houchins might have been charged. The facts in the case were developed from documents in the record and the testimony of others. The Sun Life attorney used the deposition questions to enter many documents into the record. To provide readers with a glimpse of what happened at the deposition, I am offering an excerpt from the transcript.

The Houchins Declaration
In addition to the Sun Life lawsuit, there were other cases involving Houchins. They suggest that he was involved with companies other than Sun Life, such as Pacific Life Insurance Company and Phoenix Life Insurance Company, that there was a $2 million Pacific Life policy on Collins, and that Houchins was involved with several trusts other than the Collins trust. Pacific Life filed an interpleader lawsuit in California when it received claims for the death benefit on the Collins policy from not only the Collins trust but also from a firm that had loaned money to the trust to pay premiums on the policy. In the interpleader case, Houchins filed a declaration describing his involvement in the Pacific Life case. To provide readers with his description, I am offering the Houchins declaration.

General Observations
I first wrote in 1999 about what later came to be known as STOLI. I sometimes called it speculator initiated life insurance (spinlife). I have criticized lax underwriting of policies with large face amounts on the lives of elderly individuals. It is difficult to understand how the companies allowed such cases to be approved, considering all the shenanigans that STOLI promoters used.

It should be noted that many STOLI schemes originated during the STOLI heyday before life insurance companies became aware of the full extent of the fraudulent activity. Here are some of the STOLI tactics I wrote about over the years: lying to proposed insureds, telling proposed insureds to sign blank forms, lying to insurance companies about the income and wealth of proposed insureds, coaching proposed insureds about how to respond if companies or inspection firms asked questions, paying accountants and inspection firms to lie in their reports, forging documents, paying notaries to certify forged signatures, lying to banks and premium lenders, paying attorneys to prepare trust instruments and loan documents, destroying evidence, and finding life insurance companies that were willing to look the other way and allow the issuance of STOLI policies.

I think Judge Reeves got it right. Although the Collins policy was well beyond the two-year period of contestability, she declared the policy void from inception. Also, despite the fact that Sun Life had incurred costs, including expenses associated with issuance of the policy and expenses associated with the lawsuit, the judge required Sun Life to return the premiums Conestoga had paid so as to avoid a windfall for Sun Life. In my view, Sun Life had only itself to blame for the lax underwriting that allowed the policy to be issued.

Available Material
I am offering a 57-page complimentary PDF consisting of the Sun Life complaint (12 pages), an excerpt from the Houchins deposition in the Sun Life case (18 pages), the Houchins declaration in the Pacific Life interpleader case (9 pages), the memorandum opinion by Judge Reeves (17 pages), and the judgment (1 page). Email jmbelth@gmail.com and ask for the August 2017 package about the Sun Life/Conestoga case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 227: Long-Term Care Insurance—A Major Ruling in a Lawsuit against CalPERS

Los Angeles Superior Court Judge Ann I. Jones recently handed down a major ruling in a class action lawsuit against the California Public Employees' Retirement System (CalPERS). The case relates to large premium increases CalPERS imposed on owners of long-term care (LTC) insurance policies.

The Complaints
On August 6, 2013, the plaintiffs filed the original complaint after CalPERS notified them of an 85 percent increase in the premiums for their LTC insurance policies. On January 10, 2014, the plaintiffs filed an amended complaint. (See Sanchez v. CalPERS, Superior Court of California, County of Los Angeles, Case No. BC517444.)

The Parties
The plaintiffs in the original complaint were Alma Sanchez and Holly Wedding. The plaintiffs in the amended complaint are Sanchez, Wedding, Richard M. Lodyga, and Eileen Lodyga. Sanchez is no longer a class representative because of her advanced age and incapacity; she was born July 5, 1925.

The defendant in the original complaint was CalPERS. The defendants in the amended complaint are CalPERS, eight current and former members of its administrative board (Rob Feckner, George Diehr, Michael Bilbery, Richard Costigan, J. J. Jelincic, Henry Jones, Priya Mathur, and Bill Slaton), and the actuaries who initially helped set the premiums (Towers Watson and two predecessor firms).

The Causes of Action
The amended complaint asserts six causes of action: (1) breach of fiduciary duty, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) rescission, (5) declaratory and injunctive relief, and (6) professional negligence. The sixth cause of action was against Towers Watson, with whom the plaintiffs have settled.

The Defendants' Motion
On March 10, 2017, the defendants filed a motion for summary judgment or, in the alternative, summary adjudication. Here are a few comments (selected and edited) from the defendants' motion:

In accordance with the Public Employees' Long Term Care Act adopted by the California legislature in 1995, CalPERS provides the nation's only self-funded, voluntary, and not-for-profit LTC insurance program. In 1995, LTC insurance was a relatively new product and robust actuarial data were not available to assist insurers in pricing. CalPERS retained a leading LTC actuarial firm, Towers Perrin, and a leading LTC administrator, Long Term Care Group, to assist in designing the LTC program, developing a premium rate schedule, and administering the LTC program.

CalPERS is a government entity, not a for-profit corporation. Accordingly, when it set its pricing, CalPERS did not incorporate a profit margin or the cost of commissions for insurance brokers. In addition, because the LTC program is not subject to insurance regulations, CalPERS enjoyed flexibility in investing the LTC fund.

CalPERS retained Coopers & Lybrand to review Towers Perrin's initial pricing model and provide an actuarial second opinion. Coopers did not recommend that CalPERS make any changes to the premium schedule for the LTC program, nor did Coopers recommend that any changes be made to the pricing assumptions made by Towers Perrin.

The actuarial assumptions used by CalPERS, like those used by the rest of the fledgling LTC insurance industry, did not prove to be accurate. In addition to substantial deviations relating to policy lapse rates and claims experience, financial market crashes in 2002 and 2008 led to premium increases throughout the LTC industry. Many private insurers exited the LTC insurance business: decreasing from over 100 private LTC carriers in 2002 to only about a dozen today. Other private insurers went into receivership. To address this industry-wide problem, CalPERS instituted substantial premium increases in 2003 (30 percent increase) and 2007 (41.7 percent increase), and 5 percent thereafter in 2010, 2011, 2012, and 2013. In early 2013, CalPERS advised policyholders of a further rate increase of 85 percent spread out over two years, beginning in 2015.

The Plaintiffs' Opposition
On April 28, 2017, the plaintiffs filed an opposition to the defendants' motion. Here are a few comments (selected and edited) from the plaintiffs' opposition:

In 1995, CalPERS decided to compete in the LTC insurance market by offering LTC insurance to CalPERS' members and their families. To sell its policies, CalPERS aggressively marketed the program through written materials, seminars, and word of mouth. CalPERS' advertising stated that, as a trusted, non-profit entity, it could offer rates that were 30 percent less than those of commercial carriers. Class Members were also repeatedly told that premiums were "designed to remain level" throughout the life of the program and to enroll at a young age. By 2003, CalPERS' aggressive marketing campaign led to more than 175,000 people enrolling in its LTC program. Compared to private insurance, CalPERS' LTC plan was initially cheaper, provided excellent benefits, and was purportedly managed by CalPERS, who the Class Members thought they could trust.

That trust was misplaced. After several years advising Class Members that the LTC trust fund was a "great success," in 2003, CalPERS announced a 30 percent rate increase for all policyholders as "a direct result of the LTC fund's lower than expected investment earnings related to the prolonged downturn of the stock markets." CalPERS raised premiums again in 2007 and 2010. But in 2013, CalPERS announced that, on top of all other rate increases, it was increasing premiums for LTC policyholders with certain benefits by another 85 percent!

The 2013 rate increase resulted from three failures by CalPERS. First, at the outset of the program, CalPERS mispriced certain policies that included a benefit known as "inflation protection." Second, at the beginning of the program, CalPERS adopted a highly aggressive investment strategy. In 2012, when CalPERS decided to change this investment strategy, it had to increase premiums. Third, CalPERS' pricing model did not include any reserves. In 2012, CalPERS decided to incorporate a 10 percent reserve into its pricing model and that too resulted in increased premiums.

In 1996, CalPERS retained Coopers & Lybrand to examine its LTC program and provide recommendations regarding its investment strategies and pricing. Coopers warned CalPERS that its conduct would likely lead to "criticism that it had 'low-balled' premiums to attract sales, with the intent—or at least willingness—to make future increases." But CalPERS ignored those warnings.

The Ruling
On June 15, 2017, Judge Jones handed down her ruling. She denied the defendants' motion for summary judgment. With regard to the defendants' motion for summary adjudication, she granted the motion as to the first cause of action (breach of fiduciary duty) and the fourth cause of action (rescission). However, she denied the motion as to the second cause of action (breach of contract), the third cause of action (breach of the implied covenant of good faith and fair dealing), and the fifth cause of action (declaratory and injunctive relief). Thus she allowed the case to proceed with three of the causes of action, and the case may go to trial early in 2018.

General Observations
The Sanchez case is reminiscent of a personal experience I had 20 years ago. In No. 144 (posted February 16, 2016), I said I had seen an LTC insurance promotional letter distributed by a predecessor of Genworth. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes to your health." I wrote to the company expressing the opinion that, although the sentence was technically correct, it was deceptive because the company had the contractual right to increase premiums on a class basis. A company officer said he understood my concern, because some companies had increased premiums, but he provided reasons why the sentence was not deceptive. One reason, for example, was that the company had never increased premiums and had an "internal commitment to rate stability." Later I saw a promotional letter virtually identical to the earlier letter except that the company had quietly removed the sentence about which I had expressed concern. I say "quietly" because the company did not inform me it had made the change. Now the plaintiffs in the Sanchez case allege, in paragraphs 35 and 37 of the amended complaint, that CalPERS in 1995 said the premiums for its LTC insurance were "set," the "rates do not increase simply because of age or illness," and the rates are "locked in for the life of your coverage."

I plan to report on the results of the trial. I also plan to report on any settlement agreement that the parties may reach.

Available Material
I am offering a 120-page complimentary PDF consisting of the text of the amended complaint (39 pages), the defendants' motion (33 pages), the plaintiffs' opposition to the defendants' motion (33 pages), and the judge's ruling (15 pages). Email jmbelth@gmail.com and ask for the July 2017 package about the Sanchez/CalPERS case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 226: The Age 100 Problem—The Achilles' Heel of Life Insurance—Lands in Court

On July 20, 2017, Gary Lebbin and a trust he created filed a lawsuit against Transamerica Life Insurance Company relating to what I have called "the age 100 problem in life insurance." The case involves universal life and illustrates problems faced by elderly insureds. The following paragraph is in the introductory section of the complaint:

2. For decades, life insurance carriers, such as Transamerica, sold permanent universal life insurance policies, marketed as "insurance for life," utilizing outdated mortality tables that did not take into account the fact that Americans were, and are, increasingly living to and past the age of 100. The result has been the improper termination of life insurance policies that were originally sold to policy holders as "permanent insurance." The life insurance industry has left its customers (who faithfully paid their premiums with the expectation that they would have coverage for the remainder of their lives) uninsured. Further twisting the knife, these terminations have exposed customers to adverse tax consequences that are in direct contradiction to the guarantees made when these policies were purchased.

The case was assigned to U.S. District Judge Theodore D. Chuang. President Obama nominated him in September 2013 and the Senate confirmed him in May 2014. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

The Plaintiffs
Lebbin was born in September 1917 in Germany, came to the United States in 1938 to escape Nazi persecution, and married in 1944. His wife died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he created a trust that purchased two second-to-die universal life policies from Transamerica with a total face amount of $3.2 million. His two children are the trustees of the trust.

The Policies
The policies are second-to-die policies on Lebbin and his wife. Now that she is deceased, the policies are single-life policies. They are based on the 1980 Commissioners Standard Ordinary (CSO) mortality table, in which the terminal age is 100. The terminal age is the age at which the table shows no survivors among insureds. In other words, the death rate in the year prior to the terminal age is 1 (or 1,000 deaths per 1,000 lives). Thus the table is based on the assumption that no one among the insured population survives to age 100. Lebbin will reach the terminal age in September 2017.

Marketing of the Policies
Lebbin says Transamerica represented the policies as "permanent" coverage that would insure him and his wife "for life," that would provide for the "cash value earnings" to grow income-tax-deferred, that the death benefit would be income-tax-exempt, and that "withdrawals (and thus the ability to determine when and if the cash value earnings would constitute taxable income) would be within the control of the Plaintiffs."

I visited the Transamerica website in July 2017. Here is how the company describes whole life and universal life:

Whole life insurance provides permanent protection for life as long as premiums are paid. In addition to guaranteed cash value that you can access through a loan, your loved ones are guaranteed to receive a death benefit. You should expect to pay a higher premium than you would for a term life policy, but your premiums remain the same throughout your lifetime.

Unlike term and whole life insurance, universal life provides an additional level of flexibility. It allows policy owners to modify the amount and frequency of premium payments as long as there is sufficient cash value in the policy to cover monthly deductions. When the insured dies, a guaranteed amount of money, or death benefit, is left to the named beneficiaries. In addition to the death benefit, universal life also contains a cash value. The cash value grows tax-deferred until funds are withdrawn.

The Insuring Agreement
The insuring agreement is the heart of any insurance policy. Here is the full insuring agreement in Lebbin's policies:

While the policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the beneficiary if both Joint Insureds die before the policy anniversary nearest Joint Equal Age 100, or will pay the net cash value, if any, to the owner on the policy anniversary nearest Joint Equal Age 100 if both or either Joint Insured is living on that date. All payments are subject to the provisions of this policy.

The definitions section of the policy says "Joint Equal Age" is "the adjusted age of the Joint Insureds which reflects a risk that would be equivalent to two people of the same age, class of risk, and smoking status." Since Lebbin's wife is no longer living, the policy is now a single-life policy. Here is the effective language of the insuring agreement:

While the policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the beneficiary if the Insured dies before the policy anniversary nearest age 100, or will pay the net cash value, if any, to the owner on the policy anniversary nearest age 100 if the Insured is living on that date. All payments are subject to the provisions of this policy.

Lebbin alleges that, on top of the loss of the death benefit, his (or the trust's) receipt of the cash values of the policies at age 100 will have adverse income tax consequences. I do not know the magnitude of the tax problem because I do not know how Transamerica calculates the amount of taxable income shown on the Form 1099 it sends to the policyholder. Nor do I have access to the statements that Transamerica promised to provide to the policyowner each year.

Extended Maturity Riders
The 2001 CSO mortality table has a terminal age of 121. According to the Lebbin complaint, some life insurance companies—but not Transamerica—offer the option of an Extended Maturity Rider (EMR) for universal life policyholders who own policies based on older mortality tables that have a terminal age of 100. Although EMRs are discussed in actuarial publications, I am not aware of any discussions of EMRs for traditional whole life policies. Here is Principal Life Insurance Company's brief description of its EMR for universal life policies:

If the insured reaches the stated maturity age, maturity is extended to the date of his or her death. The rider is automatically added to policies in states where approved, and there is no charge for the rider. There will be no charges during the maturity extension period. However, loan interest will continue to be charged. No additional premium payments, other than loan payments, will be allowed.

According to the Lebbin complaint, he wrote to Transamerica and asked the company to attach EMRs to his policies. The company declined the request.

The Complaint
The counts in Lebbin's complaint are breach of contract, negligent misrepresentation, fraud (intentional misrepresentation), violations of Maryland's Consumer Protection Act, unjust enrichment, declaratory relief, reformation, and rescission. He requests, among other forms of relief, a declaratory judgment, compensatory and punitive damages, an injunction, reformation or rescission, pre-judgment and post-judgment interest, attorney fees, and court costs.

General Observations
I first wrote about the age 100 problem in 2001, in two articles in The Insurance Forum. I also wrote about the problem in No. 141 (posted February 1, 2016), where I said I was writing to four companies in which my wife and I own life insurance to ask about the problem. Three letters went to policyholder service departments. They did not understand my inquiry. One, for example, sent beneficiary change forms.

The fourth letter went to an executive who understood my inquiry. He said his company writes to the policyholder several months before the insured reaches age 100. The company offers to hold the money after age 100, pay interest on it, refrain from charging further premiums, and pay the money at the insured's death. He sent me a sample letter. It did not address the question of whether the policyholder who accepts the offer would have constructive receipt (for income tax purposes) of the death benefit at the terminal age after having accepted the offer to allow the company to hold the money until the insured's death. The standard company response to the income tax question is to "consult your tax adviser," despite the fact that there is no way a tax adviser would be in a position to answer the question.

It is an understatement to say the age 100 problem is serious. Indeed, I think the problem is the Achilles' heel of life insurance. The bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. The problem is so serious that, as I said in my second Forum article on the subject, the companies do not want to discuss the matter. I further believe that neither the Internal Revenue Service (IRS) nor the income-tax-writing committees of Congress want to discuss the matter.

Now we have the Lebbin case. It is not a class action; indeed, there is no time for a class action because Lebbin is close to the terminal age. Even if the case survives the inevitable motion to dismiss the complaint, there would be no time for discovery, and there would be no time for a trial. I believe and hope that Transamerica and Lebbin's attorneys will be able to reach a confidential settlement that will solve his immediate problem.

I think the only way to force the industry and other interested parties to address the age 100 problem is to mount a class action. If it survives the motion to dismiss the complaint, and if a class is certified, the parties would have powerful incentives to avoid a trial, and any proposed settlement would be in the public domain.

Available Material
In No. 141, I offered a 37-page complimentary PDF consisting of the two 2001 Forum articles (4 pages), an excerpt from a variable universal life prospectus (1 page), a 2009 IRS request for comments (8 pages), a 2009 comment letter from the American Council of Life Insurers (22 pages), and a 2010 IRS revenue procedure (2 pages). The package is still available. Email jmbelth@gmail.com and ask for the February 2016 package about the age 100 problem.

I am now offering a 54-page complimentary PDF consisting of the Lebbin complaint (20 pages) and an exhibit showing the $2 million Lebbin policy (34 pages). Email jmbelth@gmail.com and ask for the July 2017 package about the age 100 problem.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com