Monday, June 15, 2015

No. 103: Phoenix Moves to Settle Two Cost-of-Insurance Lawsuits

On May 1, 2015, Phoenix Companies, Inc. filed an 8-K (material event) report with the Securities and Exchange Commission disclosing that the company is moving to settle two of several long-standing class action lawsuits. The complaints were filed because of cost-of-insurance (COI) increases on variable universal life policies of the type used in stranger-originated life insurance (STOLI). Phoenix made the move when the cases were about to go to trial. (See Fleisher v. Phoenix Life Ins. Co. and SPRR v. PHL Variable Ins. Co., U.S. District Court, Southern District of New York, Case Nos. 11-cv-8405 and 14-cv-8714.)

The description of the settlement in the 8-K filed May 1 was very brief.  For that reason, I postponed writing about the settlement until I could see it.  Phoenix filed it in court on May 29, and as an exhibit to another 8-K on June 3.

Background of the Dispute
Phoenix first imposed COI increases on the STOLI policies in 2010. The company rescinded the 2010 increases, but only for New York policyholders, when the New York Department of Insurance ordered the company to do so. The company then imposed COI increases in 2011 on New York policyholders without objection from the Department.

California and Wisconsin regulators ordered Phoenix to rescind the 2010 increases, but the company refused. California did not pursue the matter. Wisconsin began administrative proceedings and prevailed, but Phoenix appealed and the matter is in litigation.

Several class action lawsuits were filed against Phoenix by angry policyholders. I wrote about some of the cases in the October 2012, December 2012, and November 2013 issues of The Insurance Forum, and in blog post No. 9 (November 13, 2013).

Purposes of the Agreement
U.S. District Court Judge Colleen McMahon has been handling the two cases. In the recent filing, the parties sought her preliminary approval of the settlement, certification of a class solely for the purposes of the settlement, approval of the notice to class members giving them an opportunity to object to or opt out of the settlement, and approval of the plan for a fairness hearing. Judge McMahon promptly issued an order preliminarily approving the above items and appointing an administrator.

Thrust of the Dispute
The agreement, reached with the help of a mediator, includes brief descriptions of the parties' views. Here is the language:
The [Plaintiffs] alleged, in part, that Defendants' decision to raise cost of insurance rates on certain policies in April 2010 and on other policies beginning in November 2011 was unlawful and in violation of the terms of the Policies. These complaints further alleged that Defendants' rate increases did not apply uniformly to a class of insureds, discriminated unfairly between insureds of the same class, and were designed to recoup past losses.
Defendants deny any and all allegations of wrongdoing and do not admit or concede any actual or potential fault, wrongdoing, liability, or damage of any kind to Named Plaintiffs and the putative settlement class in connection with any facts or claims that have been or could have been alleged against them in the Actions. Defendants deny that they acted improperly or wrongfully in any way, believe that the Actions have no merit and contend that Named Plaintiffs' claims are improper as a matter of law. Defendants further contend that their decisions to implement the cost of insurance increases were, at all times, in accordance with the Policies' terms and accepted actuarial standards.
Structure of the Agreement
The basic document is a stipulation of settlement. Phoenix agrees to create a $42.5 million settlement fund and agrees not to object to a request for plaintiffs' attorney fees of one-third of the settlement fund (about $14.2 million). Phoenix agrees to pay plaintiffs' attorney expenses and the settlement expenses out of the settlement fund, leaving a net settlement fund of around $27 million. Phoenix agrees to pay an additional $6 million in plaintiffs' attorney fees outside the settlement fund, so that the total plaintiffs' attorney fees are about $20.2 million. No funds will revert to Phoenix, and the settlement includes broad releases. The parties entered into a separate, confidential agreement allowing Phoenix to terminate the agreement in the event too many class members opt out.

The system for allocating the net settlement fund among the class members is the responsibility of the plaintiffs' attorneys. Phoenix states that it is not insolvent, and that the payments required under the settlement will not render Phoenix insolvent. Phoenix agrees not to impose further COI increases on the class members until after the end of 2020.

There are three exhibits attached to the stipulation of agreement. Exhibit A is the notice to be sent to class members informing them of the settlement, offering them an opportunity to object to or opt out of the settlement, and inviting them to attend the fairness hearing.

Exhibit B is the proposed order for Judge McMahon to issue. She crossed out the word "proposed" and issued the order on June 3. She preliminarily approved the settlement as "fair, reasonable and adequate to the class," conditionally certified the class for purposes of the settlement, appointed Susman Godfrey LLP as class counsel for purposes of the settlement, appointed Rust Consulting as the settlement administrator. and scheduled a hearing for September 9, 2015.

Exhibit C shows proposed letters providing required notices to certain interested parties about the proposed agreement. Among those parties are the U.S. Attorney General, the coordinator of the federal Class Action Fairness Act, and state insurance regulators.

The Brief Initial Description
As mentioned earlier, the description of the settlement in the 8-K filed May 1 was very brief. Phoenix said it "will establish a Settlement fund," "will pay a class counsel fee if the Settlement is approved," "agreed to pay a total of $48.5 million," and "expects to incur a $48.5 million charge in the first quarter of 2015."

The brief description implied that Phoenix is proposing to create a $48.5 settlement fund. As explained above, the gross settlement fund is $42.5 million, and the other $6 million is an extra payment to the plaintiffs' attorneys.

General Observations
I am not sufficiently familiar with the cases to express an opinion about the fairness of the proposed settlement, or about whether the $20.2 million in fees for the plaintiffs' attorneys are reasonable. I also do not know whether the system the plaintiffs' attorneys will use to allocate the net settlement fund of around $27 million will be fair.

I am puzzled about the provision under which Phoenix promises not to impose further COI increases until after 2020. All the insureds were at least 68 years old when the policies were issued about a decade ago, and by 2021 the surviving insureds will be in their 80s and 90s.

It is impossible to know what will happen in the other COI lawsuits in which Phoenix is involved. However, the proposed settlement provides a template for settlements of those cases.

Available Material
I am offering, as a complimentary 77-page PDF, the version of the settlement filed in court on May 29. E-mail and ask for the Phoenix COI settlement.