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 Beginning in August 2015 Transamerica suddenly, unilaterally, and massively began increasing the monthly deductions withdrawn from the policies' account values by as much as 100 percent, falsely stating that the increase was permitted by the terms of the policies.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.