Monday, February 22, 2016

No. 145: Cost-of-Insurance Charges and an Unusual Type of Lawsuit against John Hancock

On December 22, 2015, a policyholder filed an unusual type of cost-of-insurance (COI) class action lawsuit against John Hancock Life Insurance Company USA. The case is unusual because, rather than alleging unlawful increases in COI charges, it alleges an unlawful failure to decrease COI charges in response to decreasing mortality rates. It also alleges unlawful charges for a certain rider. (See 37 Besen Parkway v. John Hancock, U.S. District Court, Southern District of New York, Case No. 1:15-cv-9924.)

The Policy
The plaintiff owns a survivorship universal life policy on the lives of a husband and wife. John Hancock issued the policy on June 1, 2000. The husband was 70 at the time, and the wife was 65. One spouse is now deceased, but the policy remains in force on the life of the other. The current face amount is $1.445 million. The plaintiff says there have been no COI decreases despite the company's improving mortality experience.

The COI Decrease Class
The plaintiff seeks to represent two classes of policyholders, one of which is the "COI Decrease Class." It consists of policyholders who allegedly paid "unlawful and excessive" COI charges. The allegations are based on this policy provision relating to "Applied Monthly Rates," which are used to calculate monthly COI charges:
The Applied Monthly Rates will be based on our expectations of future mortality experience. They will be reviewed at least once every 5 Policy Years. Any change in Applied Monthly Rates will be made on a uniform basis for Insureds of the same sex, Issue Age, and Premium Class, including tobacco user status, and whose policies have been in force for the same length of time.
The COI Decrease Class includes owners of survivorship universal life and other survivorship policies. It also includes owners of individual universal life, variable life, and variable universal life policies.

The plaintiff alleges that John Hancock did not reduce COI charges despite improvement in the company's mortality experience. In its initial answer, filed January 13, 2016, the company says that "nationwide mortality rates as a whole have generally decreased over the last several decades." However, the company denies that the case "can properly be pursued or maintained as a class action," that "the Plaintiff is a qualified class representative," or that "class relief is available from John Hancock."

The Rider Overcharge Class
The other class is the "Rider Overcharge Class," which consists of policyholders who allegedly were charged "unlawful and excessive premiums" for the "Age 100 Waiver of Charges Rider." The rider provides that the company will waive certain charges, including COI charges, after the younger insured attains or would have attained age 100.

The policy attached to the complaint as an exhibit contains what may be a drafting error that prompted this aspect of the lawsuit. The rider includes a "Table of Monthly Rates per thousand of Net Amount at Risk." The table has two columns: "Age," which refers to the age of the younger insured, and "Age 100 Waiver Monthly Rate," which is multiplied by the net amount at risk to determine the monthly COI charge for the rider. The "Age" column runs only from 1 to 32. The "Age 100 Waiver Monthly Rate" column shows 0.0000 for each age from 1 through 5, and 0.0533 for each age from 6 through 32. Paragraph 13 of the complaint reads:
Notwithstanding the plain language of the policy, John Hancock charged plaintiff additional premiums for the Age 100 Rider even though the insureds were older than 32 years old. This action therefore seeks monetary relief for these impermissible additional premiums charged by John Hancock and paid by plaintiff and other similarly situated policyholders.
In its initial answer, John Hancock does not address the matter directly. Here is the answer to paragraph 13 of the complaint:
John Hancock refers to the Plaintiff's policy and to the individual policies of each purported class member for their respective true, complete and accurate terms. John Hancock denies the remaining allegations in paragraph 13.
Later in its initial answer, John Hancock asserts that the copy of the policy attached to the complaint as an exhibit "is not a full, accurate, and complete copy" of the policy. The answer provides no explanation for that assertion. It remains to be seen whether "a full, accurate, and complete copy" will be filed later in the proceedings.

General Observations
The policy language focusing solely on mortality experience as a basis for changing COI rates is unusual. It is more common for a policy to allow changes in COI rates for any reason, including changes in investment experience, expense experience, or mortality experience. I have seen cases where plaintiffs had success with the "mortality experience only" language, but awards to those plaintiffs were refunds after COI charges were increased without adverse mortality experience. I have never before seen a case involving a claim for failure to decrease COI charges after improvement in mortality experience. This case warrants close attention.

Available Material
I am making available a complimentary 66-page PDF consisting of the 19-page complaint, the 33-page policy attached to the complaint as an exhibit, and the company's 14-page initial answer to the complaint. Email and ask for the February 2016 COI/John Hancock package.