Monday, June 18, 2018

No. 271: A Nationwide Cost-of-Insurance Lawsuit Ends in a Confidential Settlement

In No. 202 (posted February 6, 2017 and available here), I discussed a lawsuit filed against Nationwide Life Insurance Company relating to cost-of-insurance (COI) increases on variable universal life insurance policies. Here I provide an update about the confidential settlement of the case. (See Palumbo v. Nationwide, U.S. District Court, District of Connecticut, Case No. 3:16-cv-1143.)

Background on the Case
In July 2016 two plaintiffs filed a lawsuit against Nationwide about COI increases on variable universal life insurance policies. The lawsuit has an extra dimension that transformed the case into a strange one.

One plaintiff is Laura L. Palumbo, a Connecticut resident. She is the trustee of an irrevocable insurance trust created in 1994. The other plaintiff is William J. Palumbo. He is the grantor of the trust, the insured in the two policies the trust owns, and Laura's father.

Both policies are variable universal life, each with a $500,000 death benefit. They were issued in 1994 and 1996 by Provident Mutual Life Insurance Company. William was aged 57 when Provident issued the first policy. The initial planned annual premium for the first policy was $9,800. In 2002 Provident demutualized under the sponsorship of Nationwide, and the policies became Nationwide policies.

The plaintiffs said they obtained updated illustrations in September 2014 and were shocked to learn the account values of the policies had declined sharply. They said they were also shocked to learn that in the first policy, for example, the new planned annual premium—about $29,000 compared to the $9,800 initial planned annual premium—made the policies unaffordable. The plaintiffs said that, when Laura wrote to Nationwide asking how the monthly mortality charges were calculated, the company's compliance office said it was "unable to get that question answered."

The Extra Dimension
Laura had long been a registered representative authorized to sell securities such as variable life insurance policies, and she was involved in the sale of the policies to the trust. In April 2015 she wrote to Nationwide alleging the company had made misrepresentations and omissions relating to the COI charges.

In May 2015 Nationwide filed a U5 (the termination notice used in the securities industry) with the Financial Industry Regulatory Authority (FINRA) saying a complaint had been made against Laura by the Palumbo Trust alleging misrepresentations and omissions in the sale of variable life insurance. Laura contacted FINRA disputing the U5. In January 2017, when I looked at the BrokerCheck report about Laura on FINRA's website, I found no mention of the U5 or any other "disclosure event." I therefore concluded that the U5 had been deleted.

The Allegations
The plaintiffs alleged Nationwide made misrepresentations and omissions of material facts to the plaintiffs regarding the COI charges in the two policies. Among the first seven of the ten allegations in the original complaint were breach of contract and violations of certain Connecticut statutes. The other three allegations related to Laura and the U5.

In August 2016 Nationwide filed a motion to dismiss the first seven claims. In that filing Nationwide said the parties were discussing the possibility of an amicable resolution of the final three claims.

In December 2016 the judge ordered the plaintiffs to file an amended complaint adding FINRA as a nominal defendant. The plaintiffs thereupon filed the amended complaint adding FINRA as a nominal defendant. In the amended complaint the plaintiffs made clear FINRA was not accused of wrongdoing and was added as a nominal defendant only to facilitate relief with respect to the final three claims. In February 2017 the parties filed stipulations dismissing the final three claims.

The Settlement
On March 20, 2018, the judge stayed all case deadlines in anticipation of settlement.  On May 10 he said the parties reported the case has settled, and he dismissed the case.  He directed the clerk "to administratively close the file without prejudice to re-opening on or before 6/10/18." He said the parties may file a stipulation of dismissal prior to that date if they wish to do so.  On June 8 the parties filed a joint motion for a one-month extension until July 10.  They said: "Good cause exists for this request because the parties are still working together to effectuate the terms of the settlement reached between the parties before filing a Stipulation of Dismissal."  On June 14 the judge granted the motion.  The court file contains no information about the terms of the settlement.

General Observations
Usually the focus in a COI case is on the question of whether the mortality charges imposed upon the policyholders are implemented in a manner consistent with the precise language of the policy. In this case I was not able to deduce the answer to that question.

In its motion to dismiss the first seven claims, Nationwide attached not only the policies but also a few of the quarterly statements sent to Laura in her capacity as trustee of the trust. The statements show beginning account values and ending account values. If the plaintiffs had reviewed the statements, it should have come as no surprise that the account values had declined significantly.

An important question is whether Nationwide should have routinely provided each year, without a request from Laura, updated illustrations showing the future planned annual premiums needed to prevent substantial erosion of the account values. A company may say it has no contractual or other legal obligation to provide updated illustrations. However, I think a company should provide updated illustrations at least once a year to reduce the likelihood of policyholder disappointment.

As indicated at the outset, the "extra dimension" made this a strange case and was the primary reason for my decision to report on the case. I had never heard of a case in which a U5 was filed against a person who submitted a complaint to the company.

In No. 202 I predicted the case would be settled quietly. I say "quietly" because this was not a class action lawsuit, and the terms of settlements in individual lawsuits usually remain confidential.

Available Material
In No. 202 I offered a complimentary 10-page PDF containing a few case documents. The package is still available. Email and ask for the February 2017 package about the Palumbo/Nationwide case.


Tuesday, June 12, 2018

No. 270: Company Division Laws—A Major Defeat and a Minor Victory for Insurance Policyholders

In No. 220 (June 1, 2017) I discussed the enactment of a Connecticut law allowing a Connecticut-domiciled insurance company to divide itself into two or more insurance companies. I explained why I think the law violates the constitutional rights of insurance policyholders. In No. 262 (April 16, 2018) I discussed the Georgia legislature's adoption of similar legislation. To access those two posts, click on the links in this paragraph. Here I provide updates on recent developments in both states.

Connecticut Developments
On April 17, 2018, in a Form A filing, Hopmeadow Acquisition and several related entities sought the approval of Connecticut Insurance Commissioner Katherine L. Wade for the proposed acquisition of control of Hartford Life Insurance Company and three affiliated companies. On May 17, Timothy Curry, who Commissioner Wade appointed as hearing officer, held a public hearing on the proposal. On May 24, Curry concluded in a 19-page proposed final decision that the "Proposed Acquisition is not likely to be hazardous or prejudicial to those buying insurance," and he recommended that Commissioner Wade issue an order approving the proposed acquisition. On the same day, Commissioner Wade issued a two-page order approving the proposed acquisition.

Georgia Developments
In April 2018 a reader sent me a news story that reported on the Georgia legislature's approval of House Bill 754, which is similar to the Connecticut legislation. Here is one sentence of the news story:
Georgia legislation that lets insurers divide and opens a path for run-off transactions involving legacy books of business will become law by 1 July, even if Governor Nathan Deal fails to sign the measure.
In May 2018, through an alert from the Federation of Regulatory Counsel, I was surprised to learn that Governor Deal vetoed HB 754. Here is his veto message:
House Bill 754 would allow insurers domiciled in Georgia to divide into two or more insurers. Any plan of division must be submitted to and approved by the Commissioner of Insurance, giving the Commissioner broad discretion to decide on a case by case basis if the company meets the requirements to divide. If a company was deemed acceptable by the Commissioner to divide and one of the resulting insurers stopped turning a profit, issues could arise as to how to distribute the liability. I am unaware of the need for the division process provided for in HB 754 and am unconvinced that the appropriate safeguards are provided for in the proposed legislation. For the foregoing reasons, I VETO HB 754.
Commissioner Hudgens
Prior to posting No. 262, I wrote to Georgia Insurance Commissioner Ralph T. Hudgens. I sent him No. 220 about the Connecticut division law, said I was planning to post an item about HB 754, and asked for a statement from him to be included in the item. An insurance department spokesman said it was not an insurance department bill. He also said the department did not oppose the bill. However, I did not receive a statement from Commissioner Hudgens.

After learning of Governor Deal's veto of HB 754, I tried again to obtain a statement from Commissioner Hudgens. The department spokesman said there will be no such statement.

The Sponsors
In No. 262 I said two lead sponsors of HB 754 were Representative Jason Shaw (R-Lakeland) and Senator P. K. Martin IV (R-Lawrenceville). Shaw is a member of the House insurance committee and owns an insurance agency. Martin is a member of the Senate insurance and labor committee and is an insurance agent. They were quoted in the news story from which I first learned of HB 754, and I showed the quotes. Shaw and Martin did not return my calls.

After learning of Governor Deal's veto of HB 754, I tried again to reach Shaw and Martin, but they did not return my calls. My primary reason for trying to reach them was to learn the identity of the insurance company or companies behind HB 754.

General Observations
In Nos. 220 and 262 I explained in some detail my objections to company division laws. In a nutshell, I have two major objections. First, such laws allow insurance companies to transfer their obligations to other insurance companies without the consent of the affected policyholders, and therefore the laws violate the constitutional rights of those policyholders. Second, the laws place on the insurance commissioner the burden of proving that the plan adversely affects policyholders, and requires the commissioner to approve the plan if he or she is unable to meet that burden of proof. At the very least, I think the burden should be on the companies to prove that the plan does not adversely affect the policyholders.

I think Connecticut Insurance Commissioner Wade's approval of the transfer of Hartford's policyholders—without their consent—to a private equity firm is a major defeat for those policyholders. I also think Georgia Governor Deal's veto of HB 754 is a minor victory for the policyholders of whatever company was responsible for the introduction and legislative passage of the bill.

Available Material
The packages I offered in Nos. 220 and 262 are still available. Now I offer a complimentary 21-page PDF consisting of the Connecticut insurance commissioner's order approving the Hopmeadow-Hartford proposal (2 pages) and the Connecticut hearing officer's recommendation that the proposal be approved (19 pages). Email and ask for the June 2018 package about company division laws.


Wednesday, June 6, 2018

No. 269: The Age 100 Problem—An Update on a Lawsuit and Comments on My Upcoming Survey

I first wrote about "the age 100 problem" in cash-value life insurance 17 years ago, in the January 2001 and May 2001 issues of The Insurance Forum. More recently, on my blog, I posted three items: No. 141 (February 1, 2016), No. 226 (July 20, 2017), and No. 241 (November 17, 2017), each of which may be found by clicking on the post number. In each of those posts I offered complimentary packages that included my 2001 articles and other documents relevant to the subject.

In this post I provide an update on a federal court lawsuit filed in 2017 by Gary Lebbin, an elderly insured, against Transamerica Life Insurance Company. I also describe a company survey I am planning.

Background on the Lebbin Case
Lebbin was born in September 1917 in Germany, came to the U.S. in 1938 to escape Nazi persecution, and married in 1944. His wife died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he created a trust that purchased two second-to-die universal life policies from Transamerica with a total face amount of $3.2 million. When his wife died, the policies became single-life universal life policies. His two children are the trustees of the trust.

On July 20, 2017, two months before Lebbin reached the policies' terminal age of 100, he and the trust filed a lawsuit against Transamerica. They alleged the company had falsely represented the policies as "permanent insurance" for his "whole life," the company had refused his request to extend the policies beyond their terminal age, and he was facing a potentially serious income tax problem. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

The case was assigned to U.S. District Judge Theodore D. Chuang. President Obama nominated him in September 2013, and the Senate confirmed him in May 2014.

In September 2017 Lebbin reached the policies' terminal age. On October 2, 2017, Transamerica filed a motion to transfer the case from the federal court in Maryland, where the trust and one of the trustees are located, to a federal court in Florida, where the policies were originally sold, one of the trustees is located, and other potential witnesses are located. The motion to transfer was fully briefed by early November 2017.

Recent Developments in the Lebbin Case
On April 30, 2018, Judge Chuang issued a memorandum opinion and a brief order. He granted Transamerica's motion and transferred the case to Florida. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

In Florida the case was assigned to U.S. District Judge Donald M. Middlebrooks. President Clinton nominated him in January 1997, and the Senate confirmed him in May 1997. U.S. Magistrate Judge Dave Lee Brannon was also assigned to the case.

On May 22, Judge Middlebrooks issued an order setting a trial date of January 22, 2019, referring the case to Magistrate Judge Brannon, and alluding to the possibility of mediation and settlement. On May 23, Magistrate Judge Brannon issued a detailed scheduling order indicating, among other things, that all discovery is to be completed by October 29.

General Observations on the Lebbin Case
I think the Lebbin case will end with a confidential settlement before the trial. I say "confidential" because the lawsuit is not a class action, and there is no requirement for the settlement terms to be made public. The last thing Transamerica wants is publicity about this type of case.

General Observations on the Age 100 Problem
In my writings about the age 100 problem, I have said the bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. Yet there is no guidance on how policyholders who reach the terminal age of 96 (in whole life policies based on the American Experience mortality table) or the terminal age of 100 (in whole life policies based on the 1941 CSO, 1958 CSO, or 1980 CSO mortality tables) can avoid a serious income tax problem.

Some insurance companies offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age. However, the policyholder who accepts such an offer could be deemed as having constructive receipt of the death benefit at the terminal age.

Companies who offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age tell their policyholders to "consult your tax advisor" before accepting the offer. However, in the absence of guidance, there is no way for a tax advisor to assist the policyholder in deciding whether to accept the offer.

My Upcoming Survey
After this item is posted, I will send it to some life insurance companies. I will set up a hypothetical case involving a traditional dividend-paying whole life insurance policy based on the 1958 CSO mortality table with its terminal age of 100. I will ask the company to explain how it would respond to an elderly policyholder who seeks the company's help in dealing with the potentially serious income tax problem should the insured survive to the terminal age. I plan to publish a blog post describing the survey results.

An Interesting Idea
Harold D. Skipper, Professor Emeritus of Risk Management and Insurance at Georgia State Universiy and a longtime reader of my blog, recently presented an interesting idea. He suggested that, some years prior to the terminal age, the company offer the policyholder a 1035 exchange to a policy based on the most recent mortality table, which has a terminal age of 121. In my survey I will ask the companies what they think of the idea.

Available Material
In my three previous posts about the age 100 problem (see the links at the beginning of this post), I offered complimentary packages that are still available. In No. 141 I offered a January 2016 package, in No. 226 a July 2017 package, and in No. 241 a November 2017 package.

Now I offer a complimentary 26-page PDF consisting of Judge Chuang's memorandum opinion (12 pages), his order (1 page), Judge Middlebrooks' order (3 pages), and Magistrate Judge Brannon's order (10 pages). Email and ask for the June 2018 package about the age 100 problem.


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.