Monday, October 23, 2017

No. 239: Transamerica's Cost-of-Insurance Increases and an Important Class Action Lawsuit

In 1989 Gordon Feller, a California resident, purchased a $500,000 universal life policy from a California-based predecessor of Transamerica Life Insurance Company that later redomesticated to Iowa. In February 2016 Feller and several others filed a class action lawsuit against Transamerica in a federal court in California. The case relates to large cost-of-insurance (COI) increases Transamerica imposed recently on owners of universal life policies. The plaintiffs filed an amended complaint in June 2016 and a second amended complaint in August 2017. Here I report on the progress of the case. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

Senior U.S. District Judge Christina A. Snyder is handling the case. President Clinton nominated her in January 1997, the Senate confirmed her in November 1997, and she took senior status in November 2016.

The Plaintiffs' Views
The plaintiffs include several individuals, some of whom are named in their capacities as trustees of trusts. The opening four-paragraph "Nature of the Action" section of the second amended complaint describes the plaintiffs' views. Here is that section, with my light editing:
  1. In the late 1980s and early 1990s, Transamerica sold hundreds of millions of dollars in universal life insurance policies under which it agreed to credit interest on policyholders' accounts at guaranteed annual rates generally ranging between 4.0 and 5.5 percent. Plaintiffs and the class members bought these policies so that they and their families would be protected as they entered their senior years. Beginning in August 2015 Transamerica suddenly, unilaterally, and massively began increasing the monthly deductions withdrawn from the policies' account values by as much as 100 percent, falsely stating that the increase was permitted by the terms of the policies. Transamerica's true reasons for imposing the drastic increase, however, were to (a) subsidize its cost of meeting its interest rate guarantees under the policies, (b) recoup past losses in violation of the terms of the policies, and (c) induce policy terminations by elderly policyholders.
  2. To maximize the number of elderly policyholders who would surrender their policies and lose their insurance coverage, Transamerica sent letters to policyholders directing them to contact a designated Transamerica hotline with any questions about the increase, rather than the agents they had dealt with for many years. Transamerica has also begun refusing to provide policyholders with illustrations showing how their policies will perform as a result of the increase. Instead, Transamerica will now only provide policy illustrations depicting how the policies would perform if the monthly COIs were raised to a level even higher than the rates imposed by the increase. Transamerica hopes that by showing elderly policyholders the most pessimistic policy performance possible, they will surrender their policies. As a result of Transamerica's actions, thousands of class members are faced with the imminent harm of either paying the exorbitant and unjustified new charges, or forever losing the benefits for which they have dutifully paid premiums for many years.
  3. Plaintiffs in this action seek injunctive and equitable relief, and ancillary damages, to halt and reverse Transamerica's massive increase in the monthly deduction withdrawn from their accounts each month. This increase has already injured plaintiffs and, if allowed to proceed, will continue to cause irreparable injury to plaintiffs and other class members.
  4. As further described below, Transamerica's sudden and unilateral increase in the monthly charges constitutes a breach of its express and implied obligations under each and every policy, a violation of the unlawful and unfair prongs of California's Unfair Competition Law, and a violation of California's Elder Abuse Law.
Transamerica's Views
Later I discuss Judge Snyder's denial of Transamerica's motion to dismiss the case. Here are a few of Transamerica's views as mentioned there, with my editing:
  1. Transamerica says a prior class action settlement bars all of plaintiffs' claims based on policies issued before June 30, 1996. The prior case is Natal v. Transamerica, where a California state court approved a settlement in 1997. The company says the Natal settlement bars all future claims based on COI rate changes, whether the changes occurred before or after the Natal settlement.
  2. Transamerica says the policies give it discretion to set COI rates anywhere below the maximum rates guaranteed in the policies.
  3. Transamerica says the policies permit the company to set COI rates based upon any factors it chooses so long as it does not do so to recoup past losses.
  4. Transamerica says the plaintiffs' claim that the company breached their policies by raising COI rates to recoup past losses is insufficiently plausible.
  5. Transamerica says its COI rate changes were to mitigate future losses from persistently low interest rates rather than to recoup past losses.
  6. The plaintiffs claim that Transamerica violated the implied covenant of good faith and fair dealing through the COI rate increases. The company says the claim is duplicative of the breach of contract claim, and that the implied covenant does not prohibit a party from doing what a contract expressly permits.
  7. Transamerica says plaintiffs' claim for declaratory relief should be dismissed as duplicative of plaintiffs' other claims.
  8. Transamerica says the plaintiffs have failed to state a claim for relief under any prong of California's Unfair Competition Law.
  9. Regarding plaintiffs' elder abuse claim, Transamerica says plaintiffs must allege specific targeting of elders rather than unfair practices directed at elders and non-elders.
The Motion to Transfer the Case to Iowa
In July 2016 Transamerica filed a motion to transfer the case to Iowa, where the company is now based. In August 2016 Judge Snyder denied the motion to transfer the case to Iowa.

The Motion to Dismiss the Case
In August 2016 Transamerica filed a motion to dismiss the case. In November 2016, after a conference, Judge Snyder denied Transamerica's motion to dismiss. Here in brief is what she said about some of the plaintiffs' claims for relief, according to the minutes of the conference:
  1. Plaintiffs allege Transamerica attempted to use COI increases to offset its guaranteed interest obligations. Transamerica's motion to dismiss plaintiffs' breach of contract claim is denied.
  2. Plaintiffs allege Transamerica increased COIs to recoup past losses. Transamerica's motion to dismiss plaintiffs' breach of contract claim is denied.
  3. Plaintiffs allege Transamerica violated California's Unfair Competition Law (UCL) by systematically and excessively increasing COIs to induce forfeiture of elderly policyholders' benefits or compel payment of higher premiums. Transamerica's motion to dismiss the plaintiffs' UCL claim is denied.
  4. Plaintiffs allege Transamerica violated California's Elder Abuse Law by increasing COIs on policies held by the elderly, thus appropriating property from elderly plaintiffs in bad faith and with intent to defraud them. Transamerica's motion to dismiss the plaintiffs' elder abuse claim is denied.
The Motion for a Preliminary Injunction
In May 2016 the plaintiffs filed a motion for a preliminary injunction. They consider an injunction essential to prevent Transamerica from sharply increasing COI rates during the litigation and thereby forcing policyholders to lapse their policies. The motion is on the agenda of a hearing currently scheduled for November 13, 2017.

The Motion for Class Certification
In May 2016 the plaintiffs filed a motion for class certification, appointment of a class representative, appointment of class counsel, and issuance of a class notice. In February 2017 they filed a corrected motion. The motion is on the agenda of the November 13 hearing. The class would consist of:
All persons who own an in-force Policy for which the Monthly Deduction Rate increases imposed by Transamerica beginning August 1, 2015, have resulted or will result in higher Monthly Deduction charges than those applicable under the rate schedule in effect before that date.
The Redactions
In June 2016 Transamerica filed the first of many documents that relate to protective orders. Many documents are sealed, and some of them are designated "Highly Confidential—Attorneys' Eyes Only." Some documents are so heavily redacted that they are meaningless to the reader.

General Observations
This is an important case. It survived Transamerica's motion to dismiss, but it still has a long way to go. Judge Snyder's rulings at or soon after the hearing scheduled for November 13, 2017 may indicate the future timetable for the case.

Meanwhile, Feller and other COI cases with which I am familiar have led me to believe that universal life policies are fundamentally defective unless they are managed with extreme care. In other words, the planned premium should be reviewed at least once a year for adequacy. Moreover, the annual reports that companies send to policyholders are so complex that the average policyholder—or even a sophisticated policyholder—will have difficulty performing the management function. A skilled and highly professional agent may be able to perform that function, but many policyholders do not have access to the services of such agents. I plan to write further on this subject in the near future.

Available Material
I am offering a complimentary 70-page PDF consisting of the minutes of the conference in which Judge Snyder denied Transamerica's motion to dismiss the case (27 pages) and the text (without exhibits) of the second amended complaint (43 pages). Email and ask for the October 2017 package relating to the case of Feller v. Transamerica.


Monday, October 16, 2017

No. 238: Lincoln National Life's Cost-of-Insurance Increases—An Important Recent Development in an Ongoing Lawsuit

In No. 212 (posted April 7, 2017), I discussed four class action lawsuits filed in the federal court in Philadelphia against Lincoln National Life Insurance Company (Fort Wayne, IN) relating to cost-of-insurance (COI) increases imposed on owners of certain universal life insurance policies. In No. 215 (April 28, 2017), I discussed the consolidation of the four cases. Here I report on developments relating to a similar case that has been transferred to the same court and the same judge.

In September 2016 Lincoln notified the owners of certain universal life insurance policies that the company was implementing COI increases effective in October 2016. In the next several weeks, affected policyholders filed four class action lawsuits against Lincoln in the federal court in Philadelphia, where Lincoln's parent is based. In March 2017 U.S. District Judge Gerald J. Pappert issued an order consolidating the four cases.

The EFG Bank Lawsuit
In February 2017 EFG Bank AG (Cayman Branch) and six other entities filed a lawsuit against Lincoln in the federal court in Los Angeles relating to the same COI increases. The other six entities are DLP Master Trust, DLP Master Trust II, DLP Master Trust III, GWG DLP Master Trust, Greenwich Settlements Master Trust, and Palm Beach Settlement Company. In March 2017 the plaintiffs filed a first amended complaint. (See EFG Bank v. Lincoln, U.S. District Court, Central District of California, Case No. 2:17-cv-817.)

In May 2017 Lincoln filed a motion to dismiss the case and a motion to transfer the case to the federal court in Philadelphia. In June 2017 the federal judge in California denied the motion to dismiss and granted the motion to transfer the case, which was then assigned to Judge Pappert. In July 2017 the plaintiffs filed a second amended complaint that included four counts:
  1. Breach of Contract, relating to all policies.
  2. Implied Covenant of Good Faith and Fair Dealing (Contractual Breach), relating to policies issued in Arizona, California, Florida, Georgia, Massachusetts, New Jersey, North Carolina, and Wisconsin.
  3. Implied Covenant of Good Faith and Fair Dealing (Tortious Breach), relating to policies issued in California.
  4. Declaratory Relief, relating to all policies.
The plaintiffs sought compensatory damages, punitive damages, pre- and post-judgment interest, attorney fees, and costs. On August 9, 2017, Lincoln filed a motion to dismiss the case.

The September 2017 Order
On September 22, 2017, Judge Pappert issued a memorandum and an order. He denied Lincoln's motion to dismiss the first three counts of the second amended complaint and granted Lincoln's motion to dismiss the fourth count. Here are excerpts (citations omitted) from the memorandum relating to each of the four counts:
  1. Plaintiffs claim that Lincoln breached the Policies' terms "[b]y imposing excessive costs of insurance rates." Lincoln argues that the allegation is deficient because Plaintiffs do not cite a "metric by which the new COI rates can be adjudged "excessive." Lincoln also claims the Policies establish a maximum rate that Lincoln may charge and Plaintiffs did not allege that the new COI rate exceeded that maximum rate. Lincoln has the better of this argument but that does not preclude Plaintiffs from having stated, overall, a breach of contract claim. 
  2. Plaintiffs have adequately alleged that Lincoln breached the implied covenant by exercising its limited discretion under the Policies in an unreasonable and unfair manner with the bad faith intent of inducing lapses, frustrating policyholders' expectations and depriving them of the benefit of the agreement. 
  3. Here, Plaintiffs allege that Lincoln is forcing Plaintiffs to "pay exorbitant premiums that Lincoln knows would no longer justify the ultimate death benefits" or "lapse or surrender their Policies and forfeit the premiums they have paid to date, thereby depriving policyholders of the benefits of their Policies." They further contend that Lincoln's "breaches were conscious and deliberate acts, which were designed to...frustrate the agreed common purposes of the Plaintiffs' Policies" and that Lincoln was trying to circumvent the guaranteed minimum interest rate. The court will not dismiss the punitive damages claim at this stage; Lincoln will have the opportunity to renew its argument at summary judgment. 
  4. In response to Lincoln's contention that the declaratory relief sought requires adjudication of precisely the same issues as Plaintiffs' breach of contract claim, Plaintiffs state that "[a] declaratory relief claim that seeks alternative relief is not duplicative of other claims even if it involves allegations that support Plaintiffs' other claims." The Court nevertheless fails to see how the Plaintiffs' claim is not duplicative of the resolution of the breach of contract claim. The Court therefore declines to exercise its discretionary jurisdiction and grants Defendant's Motion with respect to this claim.
General Observations
Judge Pappert's denial of Lincoln's motion to dismiss three of the four counts in the second amended complaint is important. However, even more important will be his rulings on the parties' motions for summary judgment. I plan to report further developments in this case and in the related consolidated class action lawsuit.

Available Material
I am offering a complimentary 48-page PDF consisting of EFG Bank's second amended complaint (26 pages), Judge Pappert's September 22, 2017 memorandum (21 pages), and his accompanying order (1 page). Email and ask for the October 2017 package relating to the case of EFG Bank v. Lincoln.


Tuesday, October 10, 2017

No. 237: Country Life—A Confidential Settlement Avoids a Likely Court Defeat Over a Disability Insurance Claim

In No. 236 (posted September 28, 2017), I discussed a federal jury award of $6.5 million to Benjamin McClure, an Arizona plaintiff in a lawsuit against Country Life Insurance Company (Bloomington, IL). The case involved a disability insurance claim. A reader immediately informed me of an earlier lawsuit against Country Life involving a disability insurance claim. In this follow-up, I discuss the earlier case. After a legal battle that was going badly for the company, the earlier case ended in a confidential settlement shortly before the anticipated jury trial.

In September 2000 Brian Keith Sell, an Arizona resident, purchased a disability insurance policy from Country Life. The policy initially provided benefits of $2,500 per month, and was later increased to $3,100 per month. The benefit period was to age 65. "Disability" was defined as:
Continuous inability to perform all of the substantial and material duties of your regular occupation because of your injury, sickness, or mental disorder. After benefits (including benefits for partial disability) have been paid for two years, disability means continuous inability to engage in any occupation because of your injury or sickness.
The policy defined "regular occupation" as "your occupation at the time disability begins." The policy defined "any occupation" as "any occupation in which you could be expected to engage," and "consideration is given to your education and training or experience." The policy contained a "recurrent disability" clause which stated that "disability or partial disabilities separated by six months or less are considered one disability." The policy also contained a waiver-of-premium benefit. 

Sell is a certified public accountant. He worked for government agencies and engaged in internet technology consulting work for private clients. The medical problems he encountered are described in excruciating detail in the complaint he filed later.

In January 2010, due to severe pain, Sell underwent an anterior cervical disc fusion of C5-C6. After that procedure his pain was largely resolved and he was able to continue his employment duties.

In June 2011, while getting ready for work one day, Sell suddenly experienced extreme pain in his neck and upper back. An MRI revealed he was suffering from a new moderate left paracental disc protrusion at T7-T8, which was indenting his spinal cord, as well as a broad-based disc osteophyte complex at C4-C5 mildly indenting the thecal sac.

In July 2011 Sell underwent a second neck surgery, this time an ACDF at C4-C5. He continued to suffer from debilitating pain.

In January 2012 Sell underwent a Thoracic 6-7 laminectomy and the placement of a dorsal spinal cord stimulator and internal pulse generator. He suffered and continues to suffer from several co-morbid chronic medical conditions including chronic abdominal pain; chronic diarrhea; irritable bowel syndrome; chronic pain of the lower back, mid back, and neck; chronic pain syndrome; depression; anxiety; and other conditions.

The Claim
In October 2011 Sell filed a claim for disability benefits with Country Life. The company gathered Sell's medical records and certifications of disability by his treating physician.

In February 2012 Country Life notified Sell that his claim had been approved and sent his February check. The company said it had requested additional medical records and other information to approve his claim after February, and later paid his March benefit. The company said that "consideration for continued benefits will be pended," and that "further payments have been placed on hold."

In October 2012 Country Life terminated the claim. The company informed Sell by letter that there was no "medical reason to physically restrict you from performing your occupation."

The Lawsuit
In October 2014, in state court in Arizona, Sell filed a lawsuit against Country Life. The two claims for relief were for breach of contract and for insurance bad faith (breach of the covenants of good faith and fair dealing). Sell sought, among other things, damages for failure to pay benefits, emotional damages for pain and suffering, punitive damages, pre- and post-judgment interest, attorney fees, and costs. In February 2015 Country Life removed the case to federal court. (See Sell v. Country Life, U.S. District Court, District of Arizona, Case No. 2:15-cv-353.)

The case was assigned to U.S. District Judge Diane J. Humetewa. President Obama nominated her in September 2013, and the Senate confirmed her in May 2014.

Sell's state court complaint is attached to the notice of removal to federal court. Country Life's letter terminating Sell's claim is also attached to the notice.

On March 4, 2016, Sell filed a motion for sanctions against Country Life. On June 1, 2016 Judge Humetewa issued an order that was devastating to the company. The "Findings and Analysis" section of the order included discussions of "conduct regarding discovery requests," "credibility of deposition and evidentiary hearing testimony," "defendant's systemic deficiencies regarding discovery obligations," and "appropriate sanction." In the order she granted Sell's motion for sanctions against the company. Here are two portions (without citations) of the final section of the order:
Plaintiff has presented substantial and compelling evidence that demonstrates serious misconduct by Defendant and its counsel in this case. Testimony from the evidentiary hearing, deposition testimony, and documentary evidence, as described above, combine to show a concerted effort to wrongfully withhold evidence, misrepresent the facts, and mislead Plaintiff and the Court to comport with Defendant's and counsels' false narrative. Defendant and its counsel withheld relevant and discoverable evidence by essentially ignoring requests for production of documents and then by frivolously asserting the documents were privileged. They misrepresented the facts surrounding their conduct during discovery by asserting they had conducted reasonable searches in response to Plaintiff's  requests when they had not. They misrepresented the facts of the case by redacting highly relevant information and making false assertions of privilege. They then presented false deposition and hearing testimony to align with their fabricated account of what occurred. By doing so, Defendant and counsel sought to prevent Plaintiff and the Court from learning the truth about the circumstances surrounding the termination of Plaintiff's disability claim, thereby misleading Plaintiff and the Court into accepting their narrative. The Court finds that the evidence amply demonstrates that Defendant's and counsels' misconduct was willful and done in bad faith....
Defendant's and counsels' misconduct in this case goes directly to the heart of Plaintiff's claims of whether Defendant breached the terms of the disability insurance contract and breached its duty of good faith and fair dealing in its handling of his claim. Had Defendant not been required to disclose the redacted portions of the emails and letters, the evidence would reflect only that Ms. Payne, Plaintiff's claim adjustor with thirty years of experience, agreed with the termination of Plaintiff's physical disability claim. As the evidence now shows, that is simply not the case. Under these circumstances, it is difficult for this Court to see how Defendant's conduct merits anything less than the imposition of severe sanctions....
The Settlement
On April 24, 2017, Judge Humetewa scheduled the final pretrial conference for June 28 and ordered the parties to file a joint proposed final pretrial order by June 7. On May 18 Sell notified the Court that the parties had reached a settlement. On July 6 Country Life filed a stipulation of dismissal of the case in its entirety with prejudice (permanently), and with each party to bear its own attorney fees and costs. The same day the judge dismissed the case in its entirety with prejudice, and with each party to bear its own attorney fees and costs.

General Observations
As indicated at the outset, the Sell case was going badly for Country Life. One of the most significant setbacks—but not the only significant setback—was Judge Humetewa's June 1, 2016 order. Thus Country Life's decision to settle the case confidentially rather than allow the case to go to trial is understandable. Sell had a strong position and Country Life had a weak position in settlement negotiations. For those reasons, the settlement probably was large.

I do not understand why Country Life allowed the McClure case (discussed in No. 236), which also had been going badly for the company, to go to trial shortly after the confidential settlement was reached in the Sell case. Surely the company could have made an offer large enough to persuade McClure to settle the case on a confidential basis rather than allow the case to go to trial and result in a $6.5 million public verdict against the company.

Available Material
I am offering a 42-page complimentary PDF containing Sell's complaint (10 pages), Country Life's letter terminating Sell's claim (3 pages), and Judge Humetewa's June 1, 2016 order (29 pages). Email and ask for the October 2017 package about the case of Sell v. Country Life.