Wednesday, April 20, 2016

No. 157: Lincoln National Life's Cost-of-Insurance Charges and the Settlement of an Indiana State Court Lawsuit

On June 2, 2015, a three-judge panel of the Indiana Court of Appeals handed down a unanimous ruling against Lincoln National Life Insurance Company (Fort Wayne, IN) in a class action lawsuit relating to cost-of-insurance (COI) charges. I learned of the case only recently, after the trial court approved the final settlement of the case.

COI Charges
The amount of protection in any given month of a universal life policy is the death benefit minus the account value. The COI charge in any given month is the COI rate per $1,000 per month multiplied by the amount of protection in thousands of dollars. The policy specifies a guaranteed maximum COI rate for each age of the insured, and the company is free to use COI rates below the maximum rates. The lawsuits involving COI charges allege that the companies increased COI charges in a manner that violated the provisions of the policies.

The Lincoln Policy
From 1986 to 2008, Lincoln sold a variable universal life policy called the "Ensemble II." Peter S. Bezich bought such a policy in 1996. With regard to the charges assessed against the policy each month, the policy says:
The monthly deduction for a policy month shall be equal to (1) plus (2), where: (1) is the cost of insurance ... [and] (2) is a monthly administrative charge. This charge is equal to $6.00 per month in each policy year.
The Bezich Lawsuit
In June 2009, Bezich filed a class action lawsuit in state court alleging that Lincoln had imposed COI charges in excess of those permitted in the policy. In July 2009, Lincoln removed the case to federal court. Bezich sought to move the case back to state court. In June 2010, after a long dispute, the federal court moved the case back to state court.

In July 2012, after extensive discovery, Bezich filed an amended complaint. He alleged three counts of breach of contract: that Lincoln had (1) included non-mortality factors in determining the COI rate, (2) loaded administrative fees and expenses into the COI rate, and (3) failed to reduce the COI rate in response to improving mortality rates.

In August 2012, Lincoln filed a motion to dismiss the complaint. The trial court denied the motion as to all three counts.

In September 2013, Bezich filed a motion to certify a national class of Ensemble II policyholders. In February 2014, the trial court held a one-day evidentiary hearing on the motion. In June 2014, the trial court denied class certification on Counts One and Two, and granted class certification on Count Three. (See Bezich v. Lincoln, Allen County Circuit Court, State of Indiana, Case No. 02C01-0906-PL-73.)

The Indiana Court of Appeals
Lincoln appealed the class certification on Count Three, and Bezich cross-appealed the denial of certification on Counts One and Two. On June 2, 2015, a three-judge appellate panel ruled that class certification was proper for all three of Bezich's claims. Thus the panel reversed the trial court ruling on Counts One and Two, and affirmed the trial court ruling on Count Three. The panel sent the case back to the trial court for further proceedings. In its discussion of Count Three, the panel said:
Finally, we cannot help but comment upon the absurdity of Lincoln's own interpretation of the COI rate provision, which is that the Ensemble II allows Lincoln to unilaterally increase rates on customers to reflect a change in mortality factors but offers no parallel commitment to decrease rates despite an overwhelming improvement in mortality. We have grave doubts that any policyholder of average intelligence would read the COI rate provision to confer on Lincoln that sort of "heads we win, tails you lose" power. [Italics in original.]
The panel's decision was written by Judge Margret G. Robb. Judges L. Mark Bailey and Elaine B. Brown concurred. (See Lincoln v. Bezich, Indiana Court of Appeals, Cause No. 02A04-1407-P-319.)

The Indiana Supreme Court
In July 2014, Lincoln petitioned to transfer the appeal to the Indiana Supreme Court. In September 2015, the Indiana Supreme Court granted the petition to transfer. By that time, however, the parties had essentially completed their settlement negotiations.

The Settlement
After lengthy and intensive negotiations, including the participation of a mediator, Bezich and Lincoln entered into a settlement agreement that resolved the claims of a class of more than 78,000 policyholders. Lincoln agreed to provide level term life insurance coverage to each member of the class without cost and without underwriting.

The amount of term coverage for in-force policies ranged from 14.5 percent of the face amount of the original policy for insureds up to attained age 40 down to 11.75 percent for insureds over 65. The amount of term coverage for terminated policies ranged from 11 percent for insureds up to age 40 down to 9 percent for insureds over 65. The period of term coverage for in-force policies and terminated policies ranged from six years for insureds up to age 40 down to two years for insureds over 65.

The actuarial estimate of the value of the settlement was not less than $171.8 million. The estimated aggregate face amount of term coverage was $2.25 billion, with face amounts ranging from about $1,000 to $3.75 million, and an average face amount of $28,660.

On October 25, 2015, in the trial court, Bezich filed an unopposed motion for class certification and for preliminary approval of the settlement. On November 15, the trial court granted preliminary approval and ordered the parties to disseminate the class notice.

On February 4, 2016, after the settlement hearing, and after the filing of a motion for final approval, the trial court issued an order granting final approval of the settlement. The order included a finding that the requested plaintiffs' attorney fees of $24 million plus expenses of about $419,000 were "fair and reasonable." The trial court entered final judgment and dismissed the case with prejudice (permanently).

General Observations
The Bezich class action lawsuit ended in a long, hard-fought partial victory for the policyholders. Although the lawsuit did not go to trial, I think Lincoln saw the handwriting on the wall and decided to settle the case after the Indiana Appellate Court panel's unanimous ruling on the class certification issue.

Nonetheless, it should be recognized that the case depended heavily on the wording of the policy's COI clause. Life insurance companies have learned the hard way that the wording of the clause is critical. Thus the companies have rewritten COI clauses in more recently issued policies to provide the companies with maximum flexibility on the imposition of COI charges, while at the same time trying to minimize the likelihood of a successful legal challenge.

Available Material
I am making available a complimentary 26-page PDF containing the Indiana Court of Appeals decision. Email and ask for the June 2015 appellate decision in the case of Bezich v. Lincoln.