Thursday, July 27, 2017

No. 227: Long-Term Care Insurance—A Major Ruling in a Lawsuit against CalPERS

Los Angeles Superior Court Judge Ann I. Jones recently handed down a major ruling in a class action lawsuit against the California Public Employees' Retirement System (CalPERS). The case relates to large premium increases CalPERS imposed on owners of long-term care (LTC) insurance policies.

The Complaints
On August 6, 2013, the plaintiffs filed the original complaint after CalPERS notified them of an 85 percent increase in the premiums for their LTC insurance policies. On January 10, 2014, the plaintiffs filed an amended complaint. (See Sanchez v. CalPERS, Superior Court of California, County of Los Angeles, Case No. BC517444.)

The Parties
The plaintiffs in the original complaint were Alma Sanchez and Holly Wedding. The plaintiffs in the amended complaint are Sanchez, Wedding, Richard M. Lodyga, and Eileen Lodyga. Sanchez is no longer a class representative because of her advanced age and incapacity; she was born July 5, 1925.

The defendant in the original complaint was CalPERS. The defendants in the amended complaint are CalPERS, eight current and former members of its administrative board (Rob Feckner, George Diehr, Michael Bilbery, Richard Costigan, J. J. Jelincic, Henry Jones, Priya Mathur, and Bill Slaton), and the actuaries who initially helped set the premiums (Towers Watson and two predecessor firms).

The Causes of Action
The amended complaint asserts six causes of action: (1) breach of fiduciary duty, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) rescission, (5) declaratory and injunctive relief, and (6) professional negligence. The sixth cause of action was against Towers Watson, with whom the plaintiffs have settled.

The Defendants' Motion
On March 10, 2017, the defendants filed a motion for summary judgment or, in the alternative, summary adjudication. Here are a few comments (selected and edited) from the defendants' motion:
In accordance with the Public Employees' Long Term Care Act adopted by the California legislature in 1995, CalPERS provides the nation's only self-funded, voluntary, and not-for-profit LTC insurance program. In 1995, LTC insurance was a relatively new product and robust actuarial data were not available to assist insurers in pricing. CalPERS retained a leading LTC actuarial firm, Towers Perrin, and a leading LTC administrator, Long Term Care Group, to assist in designing the LTC program, developing a premium rate schedule, and administering the LTC program.
CalPERS is a government entity, not a for-profit corporation. Accordingly, when it set its pricing, CalPERS did not incorporate a profit margin or the cost of commissions for insurance brokers. In addition, because the LTC program is not subject to insurance regulations, CalPERS enjoyed flexibility in investing the LTC fund.
CalPERS retained Coopers & Lybrand to review Towers Perrin's initial pricing model and provide an actuarial second opinion. Coopers did not recommend that CalPERS make any changes to the premium schedule for the LTC program, nor did Coopers recommend that any changes be made to the pricing assumptions made by Towers Perrin.
The actuarial assumptions used by CalPERS, like those used by the rest of the fledgling LTC insurance industry, did not prove to be accurate. In addition to substantial deviations relating to policy lapse rates and claims experience, financial market crashes in 2002 and 2008 led to premium increases throughout the LTC industry. Many private insurers exited the LTC insurance business: decreasing from over 100 private LTC carriers in 2002 to only about a dozen today. Other private insurers went into receivership. To address this industry-wide problem, CalPERS instituted substantial premium increases in 2003 (30 percent increase) and 2007 (41.7 percent increase), and 5 percent thereafter in 2010, 2011, 2012, and 2013. In early 2013, CalPERS advised policyholders of a further rate increase of 85 percent spread out over two years, beginning in 2015.
The Plaintiffs' Opposition
On April 28, 2017, the plaintiffs filed an opposition to the defendants' motion. Here are a few comments (selected and edited) from the plaintiffs' opposition:
In 1995, CalPERS decided to compete in the LTC insurance market by offering LTC insurance to CalPERS' members and their families. To sell its policies, CalPERS aggressively marketed the program through written materials, seminars, and word of mouth. CalPERS' advertising stated that, as a trusted, non-profit entity, it could offer rates that were 30 percent less than those of commercial carriers. Class Members were also repeatedly told that premiums were "designed to remain level" throughout the life of the program and to enroll at a young age. By 2003, CalPERS' aggressive marketing campaign led to more than 175,000 people enrolling in its LTC program. Compared to private insurance, CalPERS' LTC plan was initially cheaper, provided excellent benefits, and was purportedly managed by CalPERS, who the Class Members thought they could trust.
That trust was misplaced. After several years advising Class Members that the LTC trust fund was a "great success," in 2003, CalPERS announced a 30 percent rate increase for all policyholders as "a direct result of the LTC fund's lower than expected investment earnings related to the prolonged downturn of the stock markets." CalPERS raised premiums again in 2007 and 2010. But in 2013, CalPERS announced that, on top of all other rate increases, it was increasing premiums for LTC policyholders with certain benefits by another 85 percent!
The 2013 rate increase resulted from three failures by CalPERS. First, at the outset of the program, CalPERS mispriced certain policies that included a benefit known as "inflation protection." Second, at the beginning of the program, CalPERS adopted a highly aggressive investment strategy. In 2012, when CalPERS decided to change this investment strategy, it had to increase premiums. Third, CalPERS' pricing model did not include any reserves. In 2012, CalPERS decided to incorporate a 10 percent reserve into its pricing model and that too resulted in increased premiums.
In 1996, CalPERS retained Coopers & Lybrand to examine its LTC program and provide recommendations regarding its investment strategies and pricing. Coopers warned CalPERS that its conduct would likely lead to "criticism that it had 'low-balled' premiums to attract sales, with the intent—or at least willingness—to make future increases." But CalPERS ignored those warnings.
The Ruling
On June 15, 2017, Judge Jones handed down her ruling. She denied the defendants' motion for summary judgment. With regard to the defendants' motion for summary adjudication, she granted the motion as to the first cause of action (breach of fiduciary duty) and the fourth cause of action (rescission). However, she denied the motion as to the second cause of action (breach of contract), the third cause of action (breach of the implied covenant of good faith and fair dealing), and the fifth cause of action (declaratory and injunctive relief). Thus she allowed the case to proceed with three of the causes of action, and the case may go to trial early in 2018.

General Observations
The Sanchez case is reminiscent of a personal experience I had 20 years ago. In No. 144 (posted February 16, 2016), I said I had seen an LTC insurance promotional letter distributed by a predecessor of Genworth. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes to your health." I wrote to the company expressing the opinion that, although the sentence was technically correct, it was deceptive because the company had the contractual right to increase premiums on a class basis. A company officer said he understood my concern, because some companies had increased premiums, but he provided reasons why the sentence was not deceptive. One reason, for example, was that the company had never increased premiums and had an "internal commitment to rate stability." Later I saw a promotional letter virtually identical to the earlier letter except that the company had quietly removed the sentence about which I had expressed concern. I say "quietly" because the company did not inform me it had made the change. Now the plaintiffs in the Sanchez case allege, in paragraphs 35 and 37 of the amended complaint, that CalPERS in 1995 said the premiums for its LTC insurance were "set," the "rates do not increase simply because of age or illness," and the rates are "locked in for the life of your coverage."

I plan to report on the results of the trial. I also plan to report on any settlement agreement that the parties may reach.

Available Material
I am offering a 120-page complimentary PDF consisting of the text of the amended complaint (39 pages), the defendants' motion (33 pages), the plaintiffs' opposition to the defendants' motion (33 pages), and the judge's ruling (15 pages). Email and ask for the July 2017 package about the Sanchez/CalPERS case.