Wednesday, May 30, 2018

No. 268: Bitcoin and Other Cryptocurrencies—A Report from the Texas State Securities Board

In No. 34 (March 3, 2014) found here, I discussed Bitcoin, the most prominent example of virtual currencies, or cryptocurrencies. In the final sentence of the post I said I would not touch Bitcoin or any other virtual currency with a ten-foot pole.

On April 10, 2018, the Texas State Securities Board (TSSB) announced publication of an enforcement report entitled "Widespread Fraud Found in Cryptocurrency Offerings." Examples of other cryptocurrencies, besides Bitcoin, are Ethereum, Litecoin, and Ripple. Because the 14-page report is copyrighted, I asked TSSB for permission to offer it without charge to my readers. A spokesman expressed a preference for me to provide a link. The report may be found here.

A Few Findings
Over four weeks beginning December 18, 2017, the enforcement division of TSSB began 32 investigations. Here are some findings:
  • No promoters were registered to sell securities in Texas, a violation of the Texas Securities Act;
  • 30 promoters were broadly using websites, social media, and online advertising to market to Texans;
  • Seven promoters were offering securities tied to a new cryptocurrency;
  • At least five promoters all but ignored investing risks by guaranteeing returns, some as high as 40% per month;
  • Only 11 promoters provided potential investors with a physical address;
  • At least six promoters were actively recruiting sales agents without verifying they were registered with the Securities Commissioner; and
  • Six of the offerings involved payment of a commission to investors who recruited new investors into the scheme.
Two Emergency Actions
On May 8, 2018, TSSB announced actions taken against two cryptocurrency firms. TSSB said the orders bring to nine the number of actions taken since the beginning of the investigation.

One of the recent actions is an emergency cease and desist order directed at Bitcoin Trading & Cloud Mining Ltd. (BTCRUSH) and four principals. BTCRUSH and three principals are based in London, England, and the other principal is based in Panama City, Panama.

The other recent action is an emergency cease and desist order directed at Forex EA & Bitcoin Investment LLC (Forex) and two principals. Forex and its principals are based in New York City.

The Reaction from BTCRUSH
On May 11 TSSB reported a development immediately following the cease and desist order directed at BTCRUSH. TSSB said the firm amended the terms of service on its website to say that "use of its current Platform by U.S. citizens and permanent residents is strictly prohibited."

A Third Emergency Action
On May 15 TSSB announced an emergency cease and desist order directed at Wind Wide Coin Inc. and three principals. Wind Wide and its principals are based in Houston, Texas and Lake City, Florida.

Available Material
I urge readers to familiarize themselves with the TSSB report, to which I have provided a link above. I am also offering a complimentary 22-page PDF consisting of the emergency cease and desist order directed at BTCRUSH (8 pages), the emergency cease and desist order directed at Forex (6 pages), and the emergency cease and desist order directed at Wind Wide (8 pages). Email and ask for the May 2018 package about the TSSB cryptocurrency investigation.

Wednesday, May 23, 2018

No. 267: Long-Term Care Insurance—A New and Different Type of Cost-of-Insurance Lawsuit

On May 9, 2018, Carlton F. Gunn filed a long-term care (LTC) cost-of-insurance (COI) class action lawsuit against CNA Financial Corp. (CNA) in federal court in Illinois. He is a California resident but filed the complaint in Illinois, CNA's principal place of business and state of domicile for regulatory purposes. (See Gunn v. CNA, U.S. District Court, Northern District of Illinois, Case No. 1:18-cv-3314.)

The case has been assigned to U.S. Senior District Court Judge Charles P. Kocoras. President Carter nominated him in June 1980, and the Senate confirmed him in September 1980. He served as chief judge from 2002 to 2006 and assumed senior status in June 2006. Magistrate Judge Sheila M. Finnegan has also been assigned to the case.

The Unusual Nature of the Lawsuit
On December 1, 1999, CNA issued an LTC insurance group policy to the Federal Judiciary Group Long Term Care Insurance Trust (Washington, DC). Gunn's certificate of coverage became effective on January 1, 2000. At that time he was an attorney in the federal public defender's office in Tacoma, Washington. According to the complaint, the policy and the certificate contain this language:
We cannot change the Insured's premiums because of age or health. We can, however, change the Insured's premiums based on his or her premium class, but only if We change the premiums for all other Insureds in the same premium class.
The policy and the certificate are not attached to the complaint. According to the complaint, however, the policy contains no additional definition of "premium class."

At the point of sale, CNA also provided a promotional brochure about the coverage. The brochure is not attached to the complaint. According to the complaint, however, the brochure contains this statement about premium changes:
Premiums may change. But for premiums to change, CNA would have to change premiums for everyone in your age category who has the kind of coverage plan that you do.
The Notification Letter
Gunn's policy originally carried an annual premium of $737.52. In a letter dated November 9, 2017, according to the complaint, CNA notified him that his premium would increase by 25 percent, to $921.90, at the beginning of 2018. CNA also said it intends to implement increases of 25 percent in each of the next two years, amounting to a cumulative premium increase of 95.3 percent, to $1,440.38. The letter mentioned options for reducing benefits rather than accepting the premium increases. The notification letter is not attached to the complaint.

According to the complaint, CNA acknowledged in the notification letter that the premium increases may differ by state. The comments are under a heading entitled "Will the premium rate increase be effective for everyone?" The comments allude to Continental Casualty Company (CCC), the CNA subsidiary that wrote the coverage. Here are the comments:
Since CCC must receive approval or authorization from certain states prior to implementing an increase, it is possible that these states will not approve or authorize the same percentage increase or authorize an increase at the same time. It is also possible some states may deny CCC's request for an increase, or require it be reduced or spread over multiple years. In addition, impacted certificate holders have different premium due dates and have different premium billing mechanisms. Premium increases will be staggered in accordance with the timing of regulatory approvals or authorizations and method of premium payment.
The Nature of the Complaint
The nature of the complaint is described in the first two paragraphs of the "Nature of the Case" section of Gunn's complaint. They read:
1. Plaintiff purchased a certificate for LTC insurance offered to those covered by the Federal Judiciary's LTC group policy. LTC insurance covers the costs of assistance with the activities of daily life due to disability or old age, costs not generally covered by health insurance. Insurers selling coverage tout the benefits of purchasing this coverage before reaching old age to guarantee the lowest possible premiums. When an insurance company markets and sells coverage for LTC, it must honor promises made in the policy documents about future premium increases and not misrepresent how premiums will be increased. When marketing materials and the policy state that premiums will not be increased unless they are changed for everyone in the same age group, an insurance company must not increase premiums at different times, and in different amounts, for insureds within the same age group. Similarly, an insurer must not promise that it will change premiums only by age group or premium class when it knows that it will vary future premium increases state-to-state. LTC coverage buyers are buying long-term financial security, and they count on their insurer to accurately describe the process and the commitments it makes and to honor its promises made in touting the policy and in the contract language.
2. CNA has broken these rules. While its marketing materials and policy promise that insureds will never be singled out for a rate increase, and that premiums will not change unless they change for all insureds in the same age category, CNA has done the opposite. CNA has imposed rate increases at different times and in different amounts from one state to the next. As a result, insureds within the same age group find themselves paying completely different premiums from one another, even though they are members of the same age group, premium class, and risk pool. CNA's decisions to seek and implement rate increases that vary from one state to the next blatantly violate its promises of uniform premium increases across the Class. Further, CNA knew its promises of uniform rate increases were false because state regulatory requirements vary. Plaintiff's rates will increase by 95% over three years, an increase far greater than rates charged insureds in other states.
The Allegations
Gunn alleges six causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, violation of the District of Columbia's Consumer Protection Procedures Act, fraud, fraudulent concealment, and declaratory and injunctive relief. Gunn seeks, among other things, class certification, appointment as class representative, rescission and return of all premiums paid, disgorgement of ill-gotten gains, declaratory and injunctive relief, compensatory and punitive damages, and attorney fees and costs.

General Observations
I have seen many lawsuits involving COI increases for LTC insurance policies. The policies are "guaranteed renewable," meaning the company may not single out policyholders for premium increases. However, the company is allowed to increase premiums on a "class" basis. The crucial question is how "class" is defined.

I think a "class" consists of policies issued by a company to persons of the same age, gender, health, occupation, and state. Gunn alleges in his complaint that CNA does not have the right to increase premiums on a state basis. This is important because there are wide differences in the timing and amounts of state insurance department approvals of company requests for LTC insurance premium increases.

A possibility in the Gunn case is that CNA made errors in drafting the policy, the certificate, and the promotional brochure. Another possibility is that I have an erroneous understanding of the meaning of the word "class" in the context of guaranteed renewable LTC insurance policies. Either way, I plan to follow developments in the case.

Available Material
I am offering a complimentary PDF containing Gunn's 26-page complaint. Email and ask for the May 2018 complaint in the case of Gunn v. CNA.


Wednesday, May 16, 2018

No. 266: Phoenix's Cost-of-Insurance Increases—A Pair of New Lawsuits

Phoenix Companies, Inc. (Phoenix) was a publicly owned company with shares traded on the New York Stock Exchange. In June 2016 Nassau Reinsurance Group Holdings, L.P. (Nassau), a private equity firm based in New York City, acquired Phoenix, which became a privately owned company. PHL Variable Life Insurance Company (PHL) and Phoenix Life Insurance Company (PLIC) are Phoenix subsidiaries.

Over the years Phoenix and its subsidiaries were defendants in many lawsuits relating to cost-of-insurance (COI) increases on Phoenix Accumulator Universal Life (PAUL) policies. They were large policies often used in stranger-originated life insurance (STOLI) arrangements. All the lawsuits were settled.

For further background on Phoenix's litigation relating to COI increases, I suggest readers review my article in the November 2013 issue of The Insurance Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 26 (January 29, 2014) found here, and my No. 103 (June 15, 2015) found here.

The Fan Lawsuit
On February 13. 2018, Derek Fan and Robert Putz filed a class action lawsuit against PLIC, Nassau, and PHL. On May 1 the plaintiffs filed an amended complaint. Here are four paragraphs (lightly edited) from the "Nature of the Action" section of the amended complaint:
2. This case arises from Defendants' breach of express and implied contractual obligations contained in Phoenix's universal life insurance policies and whole life policies.
4. Plaintiff Fan and the other universal life policyholders in the proposed class purchased these universal life policies so that they and their families would be protected in the event that the policyholder died. However, beginning in 2017, Defendants PHL and Nassau suddenly and unilaterally began increasing the cost of insurance charged to universal life policyholders and began withdrawing those costs from the cash value of the universal life policies of Plaintiff Fan and the Class, falsely stating the increases were permitted by the terms of the policies.
8. As described in detail below, Defendants' conduct is unlawful. While the universal life policies permit PHL and Nassau to adjust the COI rates periodically, they allow PHL and Nassau to do so based only on certain specified factors and they prevent those Defendants from changing the rates to recoup prior losses. As numerous courts have recognized, insurers are legally prohibited from basing COI increases on anything other than the factors specified in the policies.
9. Despite their representations to policyholders, Defendants' true reasons for imposing the drastic increases were to: (a) subsidize PLIC's cost of meeting its interest rate guarantees under the policies; (b) recoup past losses in violation of the terms of the policies; (c) induce policy terminations by policyholders; and (d) allow Defendant Nassau to recoup its costs for its 2016 acquisition of PLIC and PHL (and other Phoenix-related businesses) and the capital contributions that Nassau made to strengthen the financial condition of the Phoenix-related businesses.
The Advance Trust Lawsuit
On April 19, 2018, Advance Trust & Life Escrow Services (Waco, TX) filed a class action lawsuit against PHL. Advance Trust is suing in its capacity as nominee of the Life Partners Position Holder Trust, which owns eleven PAUL policies with a combined face amount of $43 million. Here are the first four paragraphs (lightly edited) from the "Nature of the Action" section of the complaint:
1. This is a class action brought on behalf of Plaintiff and similarly situated owners of life insurance policies issued by PHL. Plaintiff seeks to represent a class of PHL policyholders who are being subjected to an unlawful and excessive COI increase by PHL in violation of their insurance policies.
2. This COI increase represents the newest attempt by PHL to financially abuse its policyholders and induce lapses. PHL and its New York sister company PLIC first implemented a COI increase in 2010 on a subset of PAUL policies. The New York Department of Financial Services, California Department of Insurance, and Office of the Commissioner of Insurance of Wisconsin concluded that the 2010 increase was illegal.
3. Undeterred, PHL and PLIC then announced a second COI increase in 2011, also on a subset of PAUL policies. A class action lawsuit was filed by plaintiffs represented by the undersigned law firm, after which PHL and PLIC ultimately settled for more than $130 million in monetary and non-monetary benefits. Among the prospective relief agreed to by PHL and PLIC was a COI rate increase freeze, in which PHL and PLIC agreed not to increase the COI rate schedule any further on class members through and including December 31, 2020. The release in that settlement specifically carved out and "does not include any future COI rate adjustments assessed by" PHL.
4. In June 2016, PHL and PLIC were sold to a private equity firm, Nassau, with the immediate priority of "improving the company's profitability." Fourteen months later, in August 2017, PHL and PLIC sent cryptic letters to policyholders notifying them of a new, third COI rate increase on "certain PAUL and Phoenix Estate Legacy policies," including the prior settlement class. The amount of the new COI rate increase and the actuarial justification for it were not disclosed. PHL disclosed only that "There will be an overall increase to cost of insurance rates, as well as progressive increases to cost of insurance rates beginning when an insured reaches age 71 thorough age 85." [Blogger's note: The August 21, 2017 notification letter is in the complimentary package offered at the end of this post.]
The Judge
The Fan and Advance Trust cases are related, and both have been assigned to Senior U.S. District Judge Paul A. Crotty. President George W. Bush nominated him in February 2005, and the Senate confirmed him in April 2005. He assumed senior status in August 2015. (See Fan v. PLIC and Advance Trust v. PHL, U.S. District Court, Southern District of New York, Case Nos. 1:18-cv-1288 and 1:18-cv-3444.)

The Life Partners Connection
Life Partners, Inc. (Waco, TX) was for many years an intermediary in the secondary market for life insurance policies and the primary operating subsidiary of Life Partners Holdings, Inc. (LPHI). Although LPHI shares traded publicly on NASDAQ, the company was totally controlled by Brian D. Pardo, its chief executive officer, because he owned a majority of the outstanding shares. The company's main business was acquiring policies in the secondary market and reselling to investors fractional interests in those policies.

In January 2012 the Securities and Exchange Commission (SEC) filed a civil lawsuit in federal court against LPHI, Pardo, and two other officers alleging civil violations of federal securities laws and regulations. The SEC later dismissed the charges against one of the two other officers.

In January 2014 the case went to trial. The jury found LPHI, Pardo, and one other officer guilty of some and not guilty of other civil violations of federal securities laws and regulations.

In December 2014 the federal district court judge issued an order imposing huge civil monetary penalties against LPHI, Pardo, and one other officer. The penalty imposed against LPHI was more than twice the company's total assets, prompting me to refer to the penalty as a "death sentence" for the company.

In January 2015 LPHI filed for protection under Chapter 11 of the federal bankruptcy law. Following complex and lengthy proceedings in federal bankruptcy court, arrangements were made for the handling of LPHI's assets to protect those who had invested in fractional interests in the life insurance policies that had been acquired originally by LPHI. The plaintiff in the Advance Trust case now owns some policies that once were owned by LPHI.

For further background on Life Partners, I suggest readers review my article in the April 2012 issue of the Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 29 (February 10, 2014) found here, and my No. 84 (February 26, 2015) found here.

General Observations
The Fan and Advance Trust cases have a long way to go, but I think they will be settled eventually. Earlier cases about Phoenix's COI increases on large universal life policies survived motions to dismiss and then bogged down into long battles before settling. The Fleisher case, for example, was settled almost literally on the courthouse steps. The parties to these cases usually decide it is simply too expensive to continue through a trial and the inevitable appeals process.

Available Material
I am offering a complimentary 74-page package consisting of the amended complaint in the Fan case (39 pages), the complaint in the Advance Trust case (28 pages), the August 2017 Phoenix notification letter (2 pages), and my articles in the April 2012 and November 2013 issues of the Forum (5 pages). Email and ask for the May 2018 package about Phoenix's recent COI increase.


Tuesday, May 8, 2018

No. 265: Long-Term Care Insurance—A Review of Policyholder Complaints in Indiana in 2015-2018

In recent years, in response to my several blog posts about long-term care (LTC) insurance, I received many emails from policyholders disgruntled with their LTC insurance companies. Most of the emails related to claim problems or premium increases. In April 2018, to learn more about the subject, I contacted the insurance department in Indiana, my home state. I asked for information about LTC complaints filed with the department in 2015, 2016, 2017, and thus far in 2018. In response, the department sent me a list of 132 complaints: 44 in 2015, 39 in 2016, 38 in 2017, and 11 thus far in 2018. Here I comment on the information the department provided.

Structure of the List
The list has six columns. The first column is "type." All but one of the complaints related to "LTC." The odd complaint related to "Medi." The second column is "category." All the complaints are categorized as "claim handling," "policyholder service," or "underwriting." I believe that there were complaints about "premium increases," and that such complaints are in the "policyholder service" category. The third column is "respondent," and shows the name of the insurance company.

The fourth column is "complaint confirmed." Each complaint is shown as "Y" or "N." In answer to my inquiry, a department spokesperson said a complaint is confirmed as "Y" (or "Yes") if the department determines that the company violated a statute, violated a policy provision, or made an error. The fifth column shows the date the complaint was filed. The sixth column shows a complaint identification number.

Distribution by Company
The list identifies 31 companies. Those with five or more complaints filed against them during the multiyear period (the number of complaints filed against each company is shown in parentheses) are Bankers Life & Casualty (20), Genworth (15), John Hancock (14), Senior Health Insurance Company of Pennsylvania (14), Continental Casualty (10), Transamerica (10), Pyramid Life (7), and Constitution Life (5).

An Extrapolation
I have written extensively about Senior Health Insurance Company of Pennsylvania (SHIP). My blog posts have dealt with SHIP's worsening financial condition and litigation over claim practices. I decided to extrapolate from the number of complaints against SHIP filed in Indiana to the number of complaints filed against SHIP nationally. I selected SHIP for two reasons: it was near the top of the list above, and it is running off only LTC business.

According to Schedule T on page 49 in SHIP's statutory statement for the year ended December 31, 2017, SHIP's 2017 national premium volume, including premiums waived, was $99.48 million. SHIP's 2017 Indiana premium volume was $2.36 million. Thus the national figure was 42 times the Indiana figure, and the extrapolation suggests that about 588 complaints may have been filed nationally against SHIP during the multiyear period.

General Observations
No tabulation of complaints filed with state insurance departments can scratch the surface of the dissatisfaction level among consumers. In the first place, many individuals do not know an insurance department exists in every state, and many individuals who know about insurance departments do not know the departments accept complaints. In the second place, it requires considerable effort to prepare a formal written complaint and assemble the relevant documents that should accompany the complaint. To add to the problem, it is rare for a consumer to receive satisfaction as a result of filing the complaint. About all a consumer can reasonably expect from the filing of a complaint is a more detailed explanation of the position taken by the company. In short, if there were indeed almost 600 complaints filed nationally against SHIP alone in the past few years, I think it demonstrates a high level of dissatisfaction among consumers regarding LTC insurance.

Available Material
I am offering a complimentary 7-page PDF consisting of the tabulation that the Indiana insurance department provided to me (6 pages) and Schedule T in SHIP's statutory financial statement for 2017 (1 page). Email and ask for the May 2018 package about LTC complaints.