Friday, September 20, 2019

No. 333: Universal Life and Numerous Cost-of-Insurance Lawsuits Against Transamerica

Over the years Transamerica Life Insurance Company has been the defendant in numerous lawsuits stemming from substantial increases in cost-of-insurance (COI) charges in universal life (UL) policies issued by the company. I have written about a few of such cases. Here I discuss several of them, including two on which I had not written previously.

The DCD Lawsuit
On April 30, 2015, Transamerica removed to federal court from a state court in California an individual lawsuit filed by DCD Partners, LLC (DCD), Personal Involvement Center, LLC (PIC), and Reverend Dr. J. Benjamin Hardwick (JBH). DCD owns the policies at issue in this case. PIC is a Nevada LLC. JBH is the founder and trustee of PIC. I have not written previously about this case. (See DCD v. Transamerica, U.S. District Court, Central District of California, Case No. 2:15-cv-3238.)

The case was assigned to Senior U.S. District Judge Christina A. Snyder. President Clinton nominated her in January 1997. The Senate confirmed her in November 1997. She assumed senior status in November 2016.

On June 19, 2015, DCD filed an amended complaint. On July 20, 2015, Transamerica filed a motion to dismiss the amended complaint. On September 8, 2015, DCD filed a second amended complaint. Here are some lightly edited excerpts from the second amended complaint (the full second amended complaint is in the complimentary package offered at the end of this post):
4. Historically, inner-city African-Americans have experienced difficulties in obtaining life insurance. Therefore, JBH, pastor of the Praise of Zion Baptist Church, worked with Transamerica to develop a race-neutral life insurance program that would provide benefits to the members of the congregation to, for example, pay burial expenses. Pursuant to the program, an investor, in exchange for a portion of the benefits, would pay the premiums on the policies issued on members of the congregation who chose to take part in the program. The remainder of the benefits would be provided to the named insured's designated beneficiary and non-profit entities that provide services to youth and families while improving the quality of life in the South Los Angeles community. In March 2004 Transamerica issued 1,229 policies (Pool 1) under the program. In November 2004 Transamerica issued an additional 1,171 policies (Pool 2).
5. For nearly a decade, Transamerica collected millions of dollars in premiums on these charitable life insurance policies, and the policies provided benefits to their insureds, their families, and various non-profit entities. The payment of the life insurance benefits enabled the families of the insureds to pay for funeral and other expenses upon the deaths of their loved ones. Unfortunately, Transamerica recently more than doubled the amounts charged for the policies.
25. Each policy provides a death benefit totaling $275,000. Upon the death of an insured, Transamerica makes three payments: (1) $15,000 to the insured's beneficiary for funeral and other expenses; (2) $35,000 to PIC (which is distributed among various non-profit entities and projects); and (3) $225,000 to the investor paying the premiums.
28. The aggregate cash value of the policies at the time of the increase in rates was approximately $260,000.
48. On February 18, 2014, Transamerica delivered a notice of payment due for Pool 1 that increased the projected remittance amount by an additional 62.5 percent. In the fall of 2014, Transamerica delivered a notice of payment due for Pool 2 that increased the projected remittance amount by an additional 64.8 percent.
49. Prior to the increases in the projected remittance amounts, Plaintiffs paid approximately $1,831,589 in annual premiums for the policies. As of January 2015, projected annual premium payments were $4,318,873, representing a 135.8 percent increase in annual premiums.
The second amended complaint includes six claims for relief. They are breach of written contract, breach of the covenant of good faith and fair dealing, tortious breach of the duty of good faith and fair dealing, unfair competition, declaratory relief, and negligent misrepresentation.

On October 8, 2015, Transamerica filed a motion to dismiss portions of the second amended complaint. On December 23, 2015, the judge denied the motion.

On March 7, 2016, the judge set the trial to begin May 6, 2017. On January 27, 2017, Transamerica filed a motion for summary judgment. On February 25, 2017, the judge postponed the trial until August 29, 2017. On August 9, 2017, the judge granted in part and denied in part Transamerica's motion for summary judgment.

The trial was in two parts. The first part, before a jury, was on DCD's claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The second part, before the judge, was on DCD's claims relating to unfair competition and declaratory relief.

The jury portion of the trial began September 5, 2017 and ended September 13 after five trial days. The jury found in favor of the plaintiffs. (The jury verdict form is in the complimentary package offered at the end of this post.)

The bench portion of the trial began February 6, 2018. On December 13, 2018, the judge handed down a final judgment. She said DCD is entitled to recover from Transamerica $9,761,403.89 (including prejudgment interest), postjudgment interest, and injunctive relief. She denied Transamerica's motion for a new trial, and its motion for judgment as a matter of law. She also denied the following: DCD's claim for violation of California's Unfair Competition Law, DCD's request for declaratory relief, DCD's claim for tortious breach of the duty of good faith and fair dealing, DCD's claim for negligent representation, DCD's claim for attorney fees, and the claims of the other two plaintiffs. (The final judgment is in the complimentary package offered at the end of this post.)

On January 8, 2019, Transamerica filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. The case number there is 19-55037. At this writing, the appellate docket is lengthy.

The Gail Thompson Lawsuit
On June 18, 2018, Gail Thompson, a California citizen in her late 60s, filed a complaint in this class action lawsuit. The case was assigned to Judge Snyder. I have not written previously about this case. (See Gail Thompson v. Transamerica, U.S. District Court, Central District of California, Case No. 2:18-cv-5422.)

Thompson is owner and primary beneficiary of a TransSurvivor 115 UL policy issued around July 1, 2000, with a face amount of $500,000. On September 19, 2018, Transamerica filed a motion to dismiss the case. On December 26, 2018, the judge denied the motion.

On May 8, 2019, Thompson filed an amended complaint that included eight additional named plaintiffs. They are residents of Colorado, Michigan, New York, Pennsylvania, and Texas. The additional named plaintiffs own policies with a total face amount of $8.2 million. The complaint refers to "monthly deduction rates" (MDRs) rather than "cost-of-insurance" (COI) rates.

The complaint alleges that Transamerica "suddenly, unilaterally, and massively" increased MDR rates on various policies. As examples, some of the increases were 47 percent or 58 percent. Others were 39 percent followed by another 39 percent in each of the following two years "effectively ratcheting the compounded increase to 169% after the third contemplated increase." Here are the final three paragraphs of the "Nature of the Action" section of the amended complaint:
6. In its notices to Policyholders announcing the MDR Increases, Transamerica stated that the increases are "in addition to the customary increases that are associated with age," and attributed them to Transamerica's "current expectations about our future costs to provide this coverage." Transamerica's true reasons for imposing the drastic MDR Increases, however, were (a) to increase its own projected future profits at the expense of the Policyholders, thereby contravening the contractual prohibitions against recouping past losses or imposing MDR Increases for reasons other than legitimate cost factors, (b) to avoid its own contractual obligations to pay guaranteed interest under the Policies and to provide no-lapse coverage under the No-Lapse Endorsement, thereby contravening its duty to treat Policyholders in good faith, and (c) to induce policy terminations by elderly Policyholders, also in bad faith.
7. As a direct result of the MDR Increases, the largely elderly Policyholders are now suddenly facing termination of their life insurance at a time when they can no longer obtain replacement coverage.
8. As alleged below, the MDR Increases violate the express and implied terms of the Policies and were imposed on the Policyholders in bad faith and in contravention of California's Unfair Competition Law ("UCL"), and a violation of California's Elder Abuse Statute. Plaintiffs in this action seek injunctive and equitable relief, and ancillary damages, to halt and reverse Transamerica's massive MDR Increases. These increases have already injured Plaintiffs and, if allowed to proceed, will continue to cause irreparable injury to Plaintiffs and other members of the putative classes (collectively "Class Members").
The three classes of policyholders are a National Class, California Subclass I, and California Subclass II (Senior Policyholders.) The six causes of action are: (1) Breach of Contract—All Classes, (2) Contract Breach of the Implied Covenant of Good Faith and Fair Dealing—Plaintiff Thompson and California Subclass I, (3) Tortious Breach of the Duty of Good Faith and Fair Dealing—Plaintiff Thompson and California Subclass I, (4) Injunctive and Restitutionary Relief Pursuant to UCL—Plaintiff Thompson and California Subclass I, (5) Declaratory Relief—All Plaintiffs and All Classes, and (6) Elder Abuse—Plaintiff Thompson and California Subclass II. (The amended complaint is in the complimentary package offered at the end of this post.)

On May 20, 2019, the judge referred the case to a private mediator. On August 13 the judge extended to September 24 the deadline for the plaintiffs to file a motion for class certification.

The Lebbin Lawsuit
I have posted six items about this individual lawsuit. The most recent post was No. 331 (September 6, 2019). I expect to write more about the case, which relates to UL in the instance of an insured who recently reached age 102. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. (9:18-cv-80558.)

The Feller Lawsuit
I have posted three items about this class action lawsuit. The most recent was No. 302 (March 1, 2019). The case was handled by Judge Snyder. I discussed her granting of final approval to a $195 million settlement in February 2019. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

The Hill Lawsuit
I discussed this state court lawsuit briefly in No. 245 (December 21, 2017). On February 2, 2018, the Alabama Supreme Court, in a split decision, denied a petition for a writ of mandamus. I am attempting to find out more about what transpired in this case. (See Hill v. Transamerica, Circuit Court, Jefferson County, State of Alabama, Case No. 2016-6000401.)

Other Lawsuits Against Transamerica
In the course of preparing this post, I encountered seven other lawsuits against Transamerica. I have not reviewed them, but I list them here for anyone who might be interested. Each is or was in the U.S. District Court for the Central District of California, and each is or was assigned to Judge Snyder. Here, as of this writing, are the names, case numbers, and dates of the first and last entries on each docket:
Brighton Trustees v. Transamerica, 2:19-cv-4210, 5/15/19-9/6/19
Hamra v. Transamerica, 2:18-cv-6262, 7/19/18-6/26/19
Lois Thompson v. Transamerica, 2:16-cv-3238, 5/16/16-7/10/17
Lyons v. Transamerica, 8:16-cv-973, 5/26/16-6/28/16
Wells Fargo Bank v. Transamerica, 2:19-cv-6478, 7/25/19-9/6/19
Wells Fargo Bank v. Transamerica, 2:19-cv-6791, 8/5/19-9/6/19
White v. Transamerica, 2:16-cv-3578, 5/23/16-6/28/16
General Observations
My purpose in preparing this post is to report on the DCD and Gail Thompson lawsuits, which I had not discussed previously. This is by no means an exhaustive discussion of the subject of COI rate increases associated with UL policies. I have written not only several blog posts but also earlier articles on the subject in The Insurance Forum, a monthly newsletter I published from January 1974 through December 2013.

I have written extensively about problems associated with UL and have offered suggestions on how to address the problems. In No. 294 (November 8, 2018), I identified "the administrative problem" as one of the most important. With regard to that problem, I made several suggestions. One was that state insurance regulators should expand the requirements imposed prior to approval of UL policies, such as the filing of sample annual reports to be issued to policyholders and agents explaining the policies. A second suggestion was that state insurance regulators should require prior approval of COI increases, just as they require prior approval of increases in the premiums for long-term care insurance policies.

Available Material
I am offering a complimentary 87-page PDF consisting of the second amended complaint in the DCD case (32 pages), the jury verdict form in the DCD case (2 pages), Judge Snyder's final judgment in the DCD case (4 pages), and the amended complaint in the Gail Thompson case (49 pages). Email and ask for the September 2019 package about the Transamerica UL COI litigation.