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.