Friday, April 7, 2017

No. 212: Lincoln National and Consolidation of Four Cost-of-Insurance Class Action Lawsuits

Lincoln National Life Insurance Company (Fort Wayne, IN) acquired Jefferson-Pilot Life Insurance Company (Greensboro, NC) in 2006. Lincoln's parent company, Lincoln Financial Group, is based in Radnor, Pennsylvania, a Philadelphia suburb.

In September 2016, Lincoln wrote to owners of "Legend series" universal life insurance policies that Jefferson-Pilot issued in and around 2002. The letters notified the policyholders that Lincoln was implementing cost-of-insurance (COI) increases effective in October 2016. Since the notification, affected policyholders have filed four COI class action lawsuits against Lincoln in the federal court in Philadelphia. (See Bharwani v. Lincoln, Mukamal v. Lincoln, US Life v. Lincoln, and Rauch v. Lincoln, U.S. District Court, Eastern District of Pennsylvania, Case Nos. 16-cv-6605, 17-cv-234, 17-cv-307, and 17-cv-837.)

The cases have been assigned to U.S. District Judge Gerald J. Pappert. President Obama nominated him in June 2014, and the Senate confirmed him in December 2014.

Sequence of Events
The plaintiffs filed their complaints on December 23, 2016, January 17, 2017, January 20, 2017, and February 22, 2017. In January, the plaintiffs in the first three cases filed motions for an order consolidating the cases. On March 13, after discussions with Lincoln about the terms of a consolidation order, the plaintiffs in the four cases filed an unopposed motion for a consolidation order. On the same day, Lincoln filed a statement that it does not oppose a consolidation order.

On March 20, 2017, Judge Pappert issued an order consolidating the cases. He appointed four law firms (one from each case) as interim class counsel and as a plaintiffs' steering committee, named one of the law firms in the first case to chair the steering committee, and listed the responsibilities of the steering committee. He ordered the interim class counsel to file a consolidated class action complaint within 30 days of the order. He said that, pending the filing of the consolidated complaint, Lincoln will not be required to respond to any of the four complaints or any other related complaints that may be filed. He said the order applies to any related cases that may be filed subsequently in the same court.

I considered waiting until the consolidated complaint is filed to discuss the cases. However, I decided to describe them here in general terms and write a follow-up after the consolidated complaint is filed.

General Comments about the Cases
Some of the named plaintiffs are individuals and some are trustees of trusts that own the policies. The insureds are residents of states such as New Jersey, New York, and North Carolina. Some of the insureds are now elderly—in their 80s or 90s. The COI increases are large, resulting in large increases in the monthly COI deductions from the account values. The COI increases also result in large increases in the premiums that policyholders would have to pay to prevent rapid depletion of the account values, early lapsation of the policies, and early termination of the death benefits.

The notifications are form letters that say nothing about the size of the COI increases or the size of the premiums that would be necessary to prevent rapid depletion of the account values. Instead, the letters mention that policyholders may request in-force illustrations. For those who request illustrations, their complexity makes it difficult for policyholders to understand the size and the full implications of the COI increases.

The "Cost of Insurance Rates" provision in the policies raises serious questions that are discussed in the complaints. As has happened in other COI cases, there probably will be a major controversy over the precise meaning of the provision. It reads:
The monthly cost of insurance rates are determined by Us. Rates will be based on Our expectation of future mortality, interest, expenses, and lapses. Any change in the monthly cost of insurance rates used will be on a uniform basis for Insureds of the same rate class. Rates will never be larger than the maximum rates shown on page 11. The maximum rates are based on the mortality table shown on page 4.
An Earlier Lawsuit against Lincoln
In No. 157 (posted April 20, 2016), I wrote about an earlier COI class action lawsuit against Lincoln. The plaintiff, who owned an "Ensemble II" Lincoln variable universal life insurance policy, filed his complaint in an Indiana state court in 2014. He alleged three counts of breach of contract. The judge denied Lincoln's motion to dismiss the complaint. After the plaintiff's motion for class certification, the judge ruled in favor of Lincoln on the first two counts and in favor of the plaintiff on the third count.

Lincoln appealed the class certification on the third count, and the plaintiff cross-appealed the denial of class certification on the first two counts. In June 2015, a three-judge Indiana appellate court panel ruled unanimously that class certification was proper for all three counts. The panel sent the case back to the trial court for further proceedings. The panel's 26-page ruling included these comments:
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.]
Lincoln petitioned the Indiana Supreme Court to hear an appeal. The Indiana Supreme Court granted the petition. By that time, however, the plaintiff and Lincoln, following intensive negotiations and with the participation of a mediator, had entered into a settlement agreement that resolved the claims of a class of more than 78,000 policyholders. Lincoln agreed to provide some level term life insurance coverage to each member of the class without cost and without underwriting. The trial court approved the settlement and permanently dismissed the case.

General Observations
It is too early to speculate on what will happen in this litigation, which began only a few months ago. At this stage, however, I have four general comments. First, it is important to determine whether Lincoln's COI increases are for the purpose of recouping losses caused by low market interest rates during the past decade. I mention this because it is my understanding that COI increases are not supposed to be used to recoup past losses. Second, it is important to determine whether the company took improvements in mortality experience into account. Third, it is important to determine whether the COI increases undermine the guaranteed interest rate of 4 percent in the policies. Fourth, it is important to determine whether the company implemented the COI increases to induce elderly insureds to surrender their policies shortly before their deaths and thereby forfeit the death benefits. I plan to post a follow-up after the plaintiffs file their consolidated complaint.

Available Material
I am offering a complimentary 23-page PDF consisting of a sample of Lincoln's notification letter to policyholders including frequently asked questions (3 pages), a sample of Lincoln's in-force illustrations sent to policyholders who request them (9 pages), the plaintiffs' unopposed motion for a consolidation order (4 pages), Lincoln's statement of no opposition to a consolidation order (3 pages), and Judge Pappert's consolidation order (4 pages). Email and ask for the April 2017 package relating to the COI complaints against Lincoln.