Monday, February 15, 2016

No. 143: Cost-of-Insurance Charges and a Lawsuit against AXA Equitable for Alleged Inequitable Treatment of Policyholders

On February 1, 2016, a policyholder filed a cost-of-insurance (COI) class action lawsuit against AXA Equitable Life Insurance Company alleging inequitable treatment of certain policyholders. The case resembles lawsuits filed several years ago against operating subsidiaries of Phoenix Companies, Inc., relating to stranger-originated life insurance (STOLI) transactions. The current case focuses on AXA Equitable's singling out of certain policyholders for substantial COI increases and alleges breach of contract. (See Brach Family Foundation v. AXA Equitable, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)

The Policy
According to the complaint, the plaintiff is a family foundation and not-for-profit corporation. The plaintiff owns a flexible premium universal life insurance policy on the life of a woman who was 81 when AXA Equitable issued the policy on May 21, 2007. The policy remains in force. The face amount is $20 million. The policy, including the application for the policy, is attached to the complaint as an exhibit.

The rating class was standard non-tobacco user. The minimum initial premium payment, due on or before delivery of the policy, was about $145,000. The planned periodic annual premium was about $930,000. The surrender charge at the beginning of the first policy year was about the same as the first-year planned annual premium. The surrender charges, which decline steadily, will be zero after 15 policy years.

The Application for the Policy
Part 1 of the application for the policy had personal information redacted (blacked out). Part 2, the paramedical or medical examination, was redacted in its entirety.

The unredacted portion of Part 1 showed the application was dated April 30, 2007, in Brooklyn, New York. Joel Berger of JB Brokerage Corp. was the "licensed financial professional/insurance broker" who signed the application. The owner of the policy was shown as the primary beneficiary and there was no contingent beneficiary. The owner's name and street address were redacted, but it was located in Brooklyn. The owner was described as a trust under a trust agreement dated April 1, 2007, although, as mentioned earlier, the complaint described the owner as a family foundation and not-for-profit corporation. The application showed the insured as having annual earned income of $80,000 and annual rental income of $2 million. The application said the face amount was determined by the family and its legal advisers. No cash accompanied the application, but the application said the premium was to be paid in cash and there was no intent to "finance any of the premium required to pay for this policy through a financing or loan agreement." An important item in the application—"Please state the reason you are purchasing this policy (e.g., estate planning, business insurance, etc.)"—was not answered.

The Allegation
The plaintiff alleges in the complaint that certain policyholders will be subjected to "unlawful and excessive" COI increases that the company announced in October 2015 to take effect in March 2016. The plaintiff seeks to represent a class of policyholders who own policies that allow policyholders to pay the minimum premiums needed to keep the policies in force by covering the COI charges and certain other expenses. Any premiums paid above those minimum premiums are added to the account values of the policies.

The plaintiff alleges that AXA Equitable is increasing COI charges on almost 1,700 policies selected in part for the pattern of premium payments. The allegation is based on press reports. Thus the plaintiff alleges that the company is targeting policyholders who minimize their premiums to keep account values as small as possible, despite the fact that the policies expressly allow policyholders to do so. The policy paragraph entitled "Changes in Policy Cost Factors" reads:
Changes in policy cost factors (interest rates we credit, cost of insurance deductions and expense charges) will be on a basis that is equitable to all policyholders of a given class, and will be determined based on reasonable assumptions as to expenses, mortality, policy and contract claims, taxes, investment income, and lapses. Any change in policy cost factors will never result in an interest crediting rate that is lower than that guaranteed in the policy, or policy charges that exceed the maximum policy charges guaranteed in the policy. Any change in policy cost factors will be determined in accordance with procedures and standards on file, if required, with the insurance supervisory official of the jurisdiction in which this policy is delivered.
General Observations
This case presents a crucial unanswered question. What precisely is the meaning of the word "class" that appears in the policy provision quoted above? That question was at the heart of years of legal proceedings in the Phoenix COI cases, and I think it is at the heart of this case also.

The question can be asked in another way. Is it fair and equitable to treat those paying minimum premiums—to keep flexible premium universal life policies in force—as a separate class for pricing purposes, or should policies be classified in the traditional manner by such variables as age, gender, occupation, and health status? The question was not answered in the Phoenix cases, because the cases were settled and not adjudicated.

On a separate matter, and for various reasons, I think the policy owned by the plaintiff in this case may be viewed as the result of a STOLI transaction, despite the fact that there is no mention of the policy having been resold in the secondary market. The nature of the insurable interest of the owner/beneficiary/applicant (the trust or family foundation) in the life of the insured is unclear, as is the relationship between the amount of insurance and the financial status of the insured. The application did not explain how the amount of insurance was determined and did not indicate the purpose of the insurance, although it is possible that the broker provided that information to the company in a separate communication. The policy was issued in 2007, during the STOLI heyday before most life insurance companies tightened their underwriting practices.

Available Material
I am making available a 49-page PDF consisting of the 18-page complaint and the 31-page exhibit containing the policy and the application. Email and ask for the February 2016 Brach/AXA Equitable package.