Monday, February 3, 2014

No. 27: An Important Lawsuit Against Coventry First

Coventry First LLC (Fort Washington, PA) is an intermediary in the secondary market for life insurance. In 2010, Leonard T. Griswold (Erdenheim, PA) filed a class action lawsuit against Coventry. I think the case, which remains pending, is important.

Griswold's Policy
In January 2006, United of Omaha Life Insurance Company issued a flexible premium adjustable life policy to Griswold, who was aged 74 at the time. The applicant and owner of the policy was Griswold's irrevocable life insurance trust, which had been established in Georgia. The trustee was Wells Fargo Bank NA (Atlanta, GA). The beneficiary of the policy was Griswold's wife Jean. The death benefit of the policy was $8.4 million, and the annual premium was $737,000. The company issued the policy in the non-tobacco category, but in the 175 percent substandard class because of Griswold's cardiac condition. One agent was Kevin J. McGarrey (Exton, PA). The other agent was Mark T. Berlenbach (Sicklerville, NJ), against whom the Pennsylvania insurance department issued a related consent order in July 2010.

In March 2008, Coventry offered to buy the policy for $1,675,000, consisting of $1,530,000 for Griswold and a commission of $145,000 for McGarrey. Griswold did not learn of McGarrey's $145,000 commission until March 2010, when a Pennsylvania insurance department investigator informed him of it.

Griswold's Lawsuit
In October 2010, Griswold filed a class action lawsuit against Coventry in state court in Pennsylvania. Relying heavily on the findings of investigations of Coventry in 2006 by the New York Attorney General and the Florida Office of Insurance Regulation, Griswold alleged there was a bid-rigging scheme that resulted in his receiving substantially less than the fair market value of the policy. (I wrote about the New York and Florida investigations of Coventry in the January/February 2007, December 2007, and December 2009 issues of The Insurance Forum.)

The defendants in Griswold's lawsuit were Coventry, three affiliates of Coventry, and Reid S. Buerger, executive vice president of Coventry. Griswold alleged six counts: fraudulent viatical settlement acts and common law fraud, common law fraud, fraudulent concealment, aiding and abetting breach of fiduciary duty, conversion, and unjust enrichment. Griswold sought class certification, compensatory damages, punitive damages, disgorgement of profits, and injunctive relief. (Griswold v. Coventry, Court of Common Pleas, Montgomery County, Pennsylvania, Case No. 2010-29237-0.)

In November 2010, Coventry removed the case to federal court for three reasons: diversity, because at least one member of the class was a citizen of a state different from any defendant; the class consisted of more than 100 members; and the amount in controversy exceeded $5 million. The case was assigned to U.S. District Judge C. Darnell Jones II. (Griswold v. Coventry, U.S. District Court, Eastern District of Pennsylvania, Case No. 2:10-cv-5964.)

On December 6, 2010, in federal court, Griswold filed an amended complaint alleging the six counts in the original state court complaint and adding two others: conspiracy in restraint of trade, and RICO (Racketeer Influenced Corrupt Organizations Act). He sought the same five forms of relief sought in the original complaint.

Coventry's Motion to Dismiss
On December 23, 2010, Coventry filed a motion to dismiss the complaint or compel arbitration. Coventry argued the plaintiffs lacked standing, the arbitration clause in the purchase agreement required the plaintiffs to arbitrate claims on an individual basis rather than a class basis, the plaintiffs failed to state a RICO claim, and the plaintiffs failed to state an antitrust claim.

On June 26, 2011, Judge Jones conducted a hearing. He considered Coventry's motion to dismiss the complaint or compel arbitration, the opposition to the motion, the answer to the opposition, and the oral arguments at the hearing.

Denial of Coventry's Motion to Dismiss
On February 27, 2013, Judge Jones denied Coventry's motion to dismiss the complaint or compel arbitration. He ruled the plaintiffs have standing, denied the request to compel arbitration because the plaintiffs were not signatories to the agreement containing the arbitration clause, ruled the plaintiffs pled sufficient facts to establish a pattern of racketeering activity and more particularized information will be borne out through discovery, and ruled the plaintiffs pled sufficiently to confer standing with respect to the antitrust claims. 

Coventry's Appeal
Coventry appealed to the Third Circuit the denial of its motion to dismiss the complaint or compel arbitration. The appellate panel consists of Judges Thomas L. Ambro, Thomas M. Hardiman, and Joseph A. Greenaway Jr.

On January 14, 2014, after extensive briefing, the panel heard oral arguments. The parties discussed three matters at the hearing: the question of standing, because the trust that owned the policy before it was sold into the secondary market no longer exists; the question of whether arbitration can be applied in the case of a party that was not a signatory to the agreement providing for arbitration of disputes; and the question of individual versus class arbitration. A decision by the panel probably is months away. (Griswold v. Coventry, U.S. Court of Appeals, Third Circuit, Case No. 13-1879.)

Coventry's Producer Agreement
Recently, while reviewing Griswold's lawsuit, I saw a document I had not seen previously. It is a six-page producer agreement that Coventry uses. Section 2.3, entitled "Duties," requires the producer to "identify and submit to Coventry all Policies produced by Producer, in respect of which a Life Settlement is being sought by Seller." Section 2.4, entitled "Right of Counteroffer," reads:
If Producer receives a bona fide offer (a "Competing Offer") from any person or entity, other than Coventry, to consummate a Life Settlement with respect to any Policy submitted by Producer to Coventry pursuant to Section 2.3 above, Producer shall promptly, but in no event more than one business day after the receipt of such Competing Offer, notify Coventry in writing of all of the material terms, including price, of such Competing Offer and shall provide Coventry with such verification of the Competing Offer as Coventry shall reasonably require, and Coventry shall have a right to make a counteroffer to contract for a Life Settlement in respect of such Policy on terms that with respect to purchase price of the policy are more favorable to the seller than those set forth in the Competing Offer. If Coventry desires to exercise this right to make a counteroffer, it shall deliver written notice to such effect to Producer within three business days of Coventry's receipt of written notice of the Competing Offer and such verification of the Competing Offer as Coventry shall reasonably require.
According to public documents filed after the New York and Florida investigations, Coventry at that time used a "Right of Final Offer" clause in its producer agreement. I have not seen the wording of the "Right of Final Offer" clause. It is my understanding that the clause was changed to a "Right of Counteroffer" clause as a compromise with the regulators. I am making the current form of the producer agreement available as a complimentary PDF. Send an e-mail to and ask for Coventry's producer agreement.