Insurance Class Actions Insider -

Preliminary injunctions in insurance class actions are relatively rare, which is why the recent decision granting such an injunction in Yue v. Conseco Life Ins. Co., 2012 U.S. Dist. LEXIS 46565 (C.D. Cal. Apr. 2, 2012), caught my attention.  The case involves life insurance products sold by Conseco Life that apparently became a particularly bad deal for the company.  There were fewer policy terminations than projected, and the death benefits projected to be paid out would result in substantial losses to the company.  (The business lesson here may be not to rely on such an assumption that many people will not continue to hold their policies.)  The policy had the following provision allowing a change in cost of insurance (COI) charges, which the company tried to take advantage of:

Current monthly cost of insurance rates will be determined by the Company based on its expectation as to future mortality experience.  Any change in such rates will apply uniformly to all members of the same age, sex, and premium class.

Id. at *2.  Conseco first tried to impose a future rate increase starting in the 21st year of policies, which would rein in its projected losses, but not result in any profits.  The court rejected that approach in a summary judgment decision, holding that the policy provision only allowed immediate, “current” changes, not future changes in rates, and that “expectation as to future mortality experience” was limited to increases in the rate of deaths, not increases in the payment of death benefits due to lower policy termination rates.

Conseco then tried another approach in 2011, implementing immediate and substantial rate increases for the vast majority of policyholders.  If, for example, the mortality rate for a particular class of policyholders was 47.466 per 1000 policyholders, the rate would become $47.466 per $1000 of coverage.  These rate increases were implemented notwithstanding that morality rates for the vast majority of policyholders had decreased.

The court came down hard on Conseco’s second attempt to implement a rate increase.  It certified a class of those policyholders who had not surrendered their policies, finding Rule 23(b)(2) certification proper because the class was seeking only injunctive and declaratory relief preventing implementation of the rate increase.  The court concluded that “[a]ny monetary relief sought by the class, such as the return of any additional COI charges deducted after the rate increase, would be incidental to the equitable relief sought by Plaintiff.”  Id. at *27.  The court also indicated that it would consider certification of a class of policyholders who had surrendered their policies if an appropriate representative of that proposed class joined the suit. 

The court went on to grant a preliminary injunction.  It found a likelihood of success on the merits because it concluded that the policy provision quoted above likely did not allow a rate increase where it was the insurer’s expected losses, not actuarial mortality rates, that were increasing.  The court explained that “in order to ‘base’ COI rates on expected mortality rates, Conseco must consider the relationship between current and past expected mortality rates and determine how those rates have changed.”  Id. at *35.

What I found most significant was the court’s finding of imminent irreparable injury in a manner that seems to have potentially broader application:

The Court finds that without a preliminary injunction, policyholders are likely to suffer imminent irreparable harm. It is common knowledge that people purchase insurance policies for "security" and "peace of mind." See Weinberger v. Wiesenfeld, 420 U.S. 636, 642, 95 S. Ct. 1225, 43 L. Ed. 2d 514 (1975) (comparing social security benefits to insurance because they provide "security" and "peace of mind"). In the context of life insurance, the "security" being purchased is the knowledge that the policies' designated beneficiaries will be left with some degree of financial support when the insured passes away. When policyholders face large, unanticipated increases in charges, the "peace of mind" they paid for is irreparably lost — instead, they are left with stress, anxiety, and uncertainty regarding the state of their life insurance.

 . . .

If a policyholder surrenders her account while this case is pending, she may never be made whole, even if Plaintiff is ultimately successful in this case. Some surrendered policyholders may pass away without life insurance, resulting in their having suffered an emotional injury — failure to provide for their loved ones — that no monetary award could ever compensate. Others may be eligible for reinstatement but may have purchased a policy with another insurer, making it difficult to calculate damages. Still others may have invested their accumulation accounts elsewhere, making reinstatement impossible. These are but some of the irreparable injuries that may result. The Court recognizes that the aforementioned injuries are speculative, but these are not the injuries that warrant a preliminary injunction here. The immediate irreparable threat common to all class members is that without a preliminary injunction, they will be deprived of the opportunity to make an informed decision that would help them avoid the above scenarios. In other words, if Plaintiff is correct, policyholders are currently being forced to make a choice that they should not have to consider in the first place. Monetary damages cannot turn back time and return to any class member the right to be free from being compelled to make a choice that would prevent irreparable harm. It is precisely this type of situation that warrants preserving the status quo until a decision is made on the merits.

Id. at *40-43 (boldface added).

What troubles me is that, aside from bad faith claims, which the court is not dealing with here, the concept that people buy insurance for “security” and “peace of mind” is not something that the law of contracts generally finds to be relevant to judicial analysis, let alone grounds for a preliminary injunction.  There are all kinds of situations in which “security” and “peace of mind” are factors in consumer relationships with businesses.  When people put money in a bank they presumably do so because they have a sense of security that the bank is a better place than holding cash in a safe at home, and they have some sense of security in the bank they choose (and perhaps the FDIC).  When the court talks about people dying without life insurance and sustaining a non-compensable emotional injury (presumably pre-death?), again I’m wondering why that is not the kind of loss that money damages really can compensate – all the beneficiaries would be entitled to is money, i.e., the policy proceeds, and those can be paid later, with interest.  Difficulty in calculating damages also is typically not grounds for an injunction.  Preliminary injunctions are appealable as of right, and perhaps the Ninth Circuit will weigh in here.

Those readers who have followed my blog regularly will be familiar with my prior posts regarding class actions involving life insurers’ use of “retained asset” or “checkbook” accounts.  Under this arrangement, the insurer pays the proceeds of a life insurance policy to a beneficiary by providing a checkbook for an interest-bearing account from which the funds can be drawn at any time, rather than paying the benefits by a check for the lump sum.  (For prior posts on this, see my December 12, 2011 post and earlier posts cited in that one.)  On February 3, federal judges in the District of Maine and Eastern District of Pennsylvania issued significant new summary judgment rulings in these cases.  The Maine court granted partial summary judgment in favor of the plaintiffs and certified a class, while the Pennsylvania court granted summary judgment in favor of the insurer.  The inconsistent results here demonstrate that further appellate guidance will be necessary (to further that end, the Maine court certified its decision for interlocutory appeal to the First Circuit).

District of Maine Decision

In Merrimon v. UNUM Life Ins. Co., Docket No. 1:10-CV-447-NT, 2012 U.S. Dist. LEXIS 15516 (D. Me. Feb. 3, 2012), the Group Insurance Summaries of Benefits (GISB) explained in detail that life insurance benefits over $10,000 would be paid using a retained asset account, which would be an interest bearing account with an intermediary bank, from which the entire proceeds could be withdrawn at any time.  The GISB did not explain how the interest rate would be determined.  In fact, UNUM established the interest rate in its discretion, which it could change from time to time, and no money was transferred to the bank until a draft was presented to the bank for payment.  Cross-motions for summary judgment were filed regarding whether UNUM was acting as a fiduciary under ERISA in connection with the retained asset accounts, and whether it breached a fiduciary duty.  The issues were whether UNUM was a fiduciary under ERISA because it had: (a) discretionary authority or control of plan assets; or (b) discretionary authority or responsibility in the administration of the plan.  The court held that the funds backing the retained asset accounts were not “plan assets,” relying on a Second Circuit opinion and Department of Labor advisory opinion, and distinguishing a First Circuit decision.  The court also held, however, that UMUM had a fiduciary duty in administration of the plans and it breached that duty by not ensuring that the interest rate it was paying was the best available on the market:

The plans provide that payment will be by RAAs, which are defined as interest-bearing accounts established through an intermediary bank in the name of the beneficiary. When Unum chose to award itself the business of administering the Plaintiffs' RAAs and chose to retain the assets backing these accounts, Unum was exercising its discretionary authority and responsibility in the administration of the Peabody and St. Joseph's Plans.

In doing so, Unum chose to maximize its own profits by setting the RAAs' interest rate just high enough to forestall mass withdrawal of the funds backing these accounts. The Court is unaware of whether there are banks or other institutions which would have bid on Unum's book of RAA business, offering no-fee demand accounts on better terms than those offered by Unum. What is clear, however, is that Unum managed the RAAs to optimize its own earnings and not to optimize the beneficiaries' earnings. Unum is not required to place its pool of funds with a third party. However, Unum-the-fiduciary is under an obligation to look at Unum-the-RAA-service-provider with a critical eye. If Unum wished to retain the RAA business for itself, as a fiduciary it was under an obligation to offer terms comparable to the best terms available on the market. Unum's own research revealed that the 1% rate it provided was low compared to its competitors, which offered an average rate of about 2%, with some as high as 4%. Although further factual development would be required to determine the reasonableness of the interest rate at any particularly point in time, this evidence of competitors' rates suggests that Unum was acting in its own self-interest, not solely in the interest of the beneficiaries, in setting the interest rate. Accordingly, Unum has breached its fiduciary duty to the Plaintiffs under ERISA Section 404(a), and the Plaintiffs are entitled to partial summary judgment as to liability on this claim.

Id. at *23-25 (emphasis added).  Judge  Torresen further explained that the plans would pass muster, in her view, if the plan documents had explained how the interest rate would be calculated, such as by tying the interest rate to a specific index.  Id. at *26 & n.3.

The court also granted certification of a class of beneficiaries under ERISA plans administered by UNUM with the same contract language.  It concluded that UNUM’s decision to set the interest rate in a manner that would serve its own interest “affected all of the beneficiaries in a similar manner,” and thus “the Plaintiffs’ varying motivations for leaving money in these accounts are not relevant to Unum’s liability or to the calculation of damages.”  Id. at *40.  The court further concluded that the viability of individualized statute of limitations defenses would require additional discovery, and might result in subclasses.  The court certified its entire order for interlocutory appeal to the First Circuit under 28 U.S.C. § 1292(b).

Eastern District of Pennsylvania Decision

In Edmonson v. Lincoln National Life Insurance Company, Civ. A. No. 10-4919, 2012 U.S. Dist. LEXIS 14142 (E.D. Pa. Feb. 3, 2012), the retained asset accounts operated in essentially the same fashion as in Merrimon – no funds were transferred to the bank until a check was drawn on the account, and until that happened the funds would be kept in the insurer’s general asset account.   The Lincoln National policy in this case was silent with respect to the use of a retained asset account.  The policy provided for payment of death benefits “immediately” upon receipt of satisfactory proof of claim.  The court rejected the plaintiff’s argument that “immediately” meant in a lump sum, concluding that “[f]or the Court to construe the term ‘immediately’ as the equivalent of ‘lump sum’ would not only be a stretch; it would essentially be a reformation of the Policy.”  Id. at *38.  The court granted summary judgment in favor of Lincoln National, concluding that, because plaintiff could withdraw the full benefits from the account at any time after it was opened, “by shifting practical control over Plaintiff’s death benefits to her directly, Lincoln discharged its fiduciary obligations under ERISA.”  Id. at *42.  The court further concluded that the funds that backed the retained asset accounts were not “plan assets” because the employee benefit plan did not have any interest in them when they were placed into the retained asset accounts.  Id. at *54.

The bottom line I see here is that, given the disparate results courts have reached thus far, until there is more appellate guidance, life insurers are going to have difficulty structuring their plans in a manner that they can be confident will pass muster throughout the country.  The approach Judge Torresen of the District of Maine suggests – laying everything out in the policy and using an indexed interest rate – may make some sense, but even if that method is used there is of course no guarantee it will satisfy every court.

Avid readers of this blog who follow developments in life insurance class actions will recall my posts earlier this year about cases claiming that life insurers improperly used “checkbook” accounts whereby, instead of issuing a check to a beneficiary for the full amount of the policy proceeds, they provide an interest-bearing account from which the beneficiary can withdraw some or all of the benefits at any time.  Earlier this year, courts in Nevada and Massachusetts denied motions to dismiss in these types of cases, and a Massachusetts federal court granted class certification.  For more on this, see my prior posts on May 4, 2011 (denial of motion to dismiss in case against MetLife in Nevada), May 12, 2011 (denial of motion to dismiss in suit against Prudential in Massachusetts) and June 30, 2011 (grant of class certification in suit against the Life Insurance Company of North America in Massachusetts).

The pendulum has recently swung a bit in the other direction, with Prudential prevailing on a motion to dismiss in the Southern District of Illinois.  In Phillips v. Prudential Insurance Company of North America, 2011 U.S. Dist. LEXIS 135982 (S.D. Ill. Nov. 28, 2011), the plaintiff made a claim under a life insurance policy and was provided with a claim form that offered her a number of options for how the payment would be made (a lump sum, installment payments for a fixed period, life income, an interest-bearing “Alliance Account,” etc.).  The form stated that if no option was selected, the claim would be paid using the “Alliance Account.”  The plaintiff signed the form without making any selection for how payment would be made, and she was provided with a checkbook for the “Alliance Account,” from which she could withdraw at any time any amount up to the full amount of the proceeds with any interest that had accrued.  The relevant policy provision stated:

You may choose to have any death benefit paid in a single sum or under one of the optional modes of settlement described below (emphasis added).  If the person who is to receive the proceeds of this contract wishes to take advantage of one of these optional modes, we will be glad to furnish, on request, details of the options we describe below or any others we may have available at the time the proceeds become payable.

Id. at *9. 

The court found no breach of contract because:

When [plaintiff] left the Claim Form blank without specifically stating that she wished to receive the benefits she was due under the Policy, she changed the method by which she would receive those benefits from a single sum to an Alliance Account.  There can be no breach of contract where the contract, by its express terms, allowed plaintiff to elect to receive the benefits in a different manner than specified by [plaintiff].  Prudential thereby distributed the insurance proceeds in accordance with the contract. 

Id. at *11.  The court also concluded that the “Alliance Account” was expressly authorized by an Illinois statute, and that there was no breach of a confidential relationship because under Illinois law there is no fiduciary relationship between an insurer and insured.  Id. at *13-17.  The court distinguished the Nevada case (Keife) on the grounds that the court there concluded that the policy in that case had an entire agreement clause and could not be modified by a separate document.  The Massachusetts case (Lucey) was distinguished on the grounds that the beneficiary in that case had chosen a “lump sum payment” and was provided with an Alliance Account.  See id. at *7-8 n.3.

The bottom line I see here is that, as I’ve predicted in prior posts on this issue, the outcomes in these cases are likely to depend heavily on the particular terms of the insurance contract and any documents that might be considered incorporated into the contract or an amendment thereto.  Whether the contract and any amendments comply with basic contract law also are likely to be central issues.  Life insurers that have this type of program in place and have not revisited it recently may want to have in-house and/or outside counsel take another careful look at their contract terms and other relevant documents that are used.  Having a solid contract in place, or amending it in a legally-defensible way (as well as ensuring compliance with any applicable state statute or regulation), can potentially make a big difference if a company is sued on this issue.  It also may not be too late to “fix” a potential problem depending on the particular circumstances.

In seeking to certify multistate and nationwide class actions against insurance companies, plaintiffs’ attorneys often argue that the law of breach of contract is essentially the same nationwide, and therefore class certification is proper.  This argument has some appeal to some judges, at least at first blush.  As I think back to my contracts class in the first year of law school (with E. Allan Farnsworth), I don’t recall a lot of discussion about differences in state law.  At the 30,000 foot level, when you are learning the fundamentals, the basics of the law of contract formation and breach are fairly uniform.  But what courts don’t always recognize in class actions is that, when it comes to important nuances, such as what constitutes an ambiguity or what rules the court follows if it finds an ambiguity, there is substantial variation in state law.  It’s also not uncommon that even under what are nominally the very same rules on ambiguity, two judges in two different states applying their own state precedents will reach the opposite result. 

In Krueger v. Northwestern Mutual Life Insurance Company, 2011 U.S. Dist. LEXIS 79440 (N.D. Fla. July 21, 2011), the court held that differences in state law on breach of contract precluded certification (along with other grounds).  The plaintiff alleged that Northwestern Mutual entered into annuity contracts that promised to pay dividends from its surplus, and then later changed its practice and paid interest on a short-term bond instead, allegedly in breach of the contracts.  Id. at *1-2.  In a single-state class action that was certified in Wisconsin, the case went to trial and the court found a breach of contract and breach of fiduciary duty.  Id. at *4.  The plaintiff in the Florida case sought to certify a class of purchasers of these annuities who resided in Florida either at the time of purchase or currently.  Id.  The parties agreed that Wisconsin’s choice of law rules governed, but under those rules, the law of the state where the contract was entered into generally would apply, and that would vary because the class included people who purchased the annuities in various states and then moved to Florida (given Florida’s popularity as a retirement destination, not an uncommon occurrence).  Id. at *10-11.

The court denied certification on typicality, predominance and manageability grounds.  It found that the plaintiff had failed to meet her burden of showing uniformity or near-uniformity of state law.  The court explained that states have different standards for ambiguity, and different standards for admissibility of extrinsic evidence.  Id. at *11-13.   

Another key deciding factor in this decision was that the defendant intended to assert defenses of waiver, notice and estoppel, where available under state law, and these defenses would require a factual inquiry into the facts surrounding the purchase of the annuities.  Id. at *15-16.  As I’ve noted before on this blog, defenses are often key to defeating class certification in insurance class actions.  The Supreme Court made clear in Wal-Mart v. Dukes (see my prior blog post) that the class action device cannot be used in a manner that strips a defendant of its defenses that require introduction of individual facts.  That part of Wal-Mart was unanimous, and was something Justice Sotomayor was stressing during oral argument.  In opposing class certification, these defenses should be demonstrated with evidence of concrete examples from the putative class.  Sometimes it can be hard work to find the evidence to demonstrate those examples, but they are powerful.

I previously posted about new class actions against life insurance companies alleging that they should be required to determine whether their insureds have died where no claim for policy proceeds has been made, through searching the “Death Master File” of the Social Security Administration.  I raised a number of issues about the viability of these cases, and have not seen any court decisions on that yet.  But in the meantime, a posting on the Life Insurance Compliance & Regulation Law Blog alerted me to a press release issued by the New York Insurance Department, indicating that it has issued letters to insurers instructing them to check the “Death Master File” and take steps to ascertain if policy proceeds are due, as well as provide certain documents to the department.  The department indicates it is working on a formal regulation on this issue. 

This regulatory action in New York may result in more class action filings on this issue, and life insurers may want to take a look at what they are doing on this issue nationwide.  Although there has not even been a formal regulation and it is unlikely that such a regulation could be made retroactive, I would expect plaintiffs’ attorneys to try to argue that life insurers should have been doing this all along now that an insurance department in a prominent state has taken action.  Whether this issue has any legs as a class action, given the issues raised in my prior post (among others) remains to be seen.

Do life insurers have an obligation to check databases to determine whether their insureds have died?  I recently came across a new class action filing in Stevenson v. Western & Southern Mutual Holding Company, No. CV 11 755966 (Ohio Court of Common Pleas, Cuyahoga County) that makes such a claim. (E-mail me if you would like a copy of the complaint.)  The plaintiff alleges that she is an insured under a life insurance policy and is 79 years old, and therefore her actuarial probability of mortality is purportedly 74%.  She seeks to sue on behalf of a class of policyholders under life insurance policies issued by the defendant, who have an actuarial probability of death of 70% or higher, or alternatively, on behalf of a class of policyholders who have died but no claim has been made for policy proceeds.  She seeks declaratory and injunctive relief ordering the defendants to check the “Death Master File” maintained by the Social Security Administration on an annual basis to determine whether policyholders in the putative class are deceased, and also seeks interest on policy proceeds due to putative class members but not yet paid, and other relief.  She also claims that the failure to conduct research on whether insureds have died is a breach of the implied covenant of good faith and fair dealing. 

I found following paragraph in the complaint a bit humorous: 

Upon death and/or upon the instances of dementia, Class Members themselves become incapable of conveying the fact of death or often even of impending death, to the Defendants. 

Even in litigation, presumably there can be no dispute that a person who has died cannot convey the fact of death to the insurer.  And how can someone really know for sure whether a notice of “impending death” would be accurate?  People with a 70% probability of death might live another 20 or 30 years.  For as long as life insurance policies have existed the task of providing notice of death has necessarily fallen on the beneficiaries.

Some interesting issues I see here are:  

• How does a policyholder who is still alive and has the capacity to file a lawsuit (and presumably the capacity to inform her beneficiaries of the existence of her life insurance policy) have any standing to bring this kind of suit?  Simply because she would like to help out others who might not be able to inform their beneficiaries of the existence of a policy? 
• Even if an insurer were deemed to have an obligation to check the Social Security Administration database, what if the database is wrong about whether someone is alive or dead?  The government is not infallible.  How far would an insurer have to go to determine the accuracy of the information?  Would next-of-kin sue for emotional distress if they received a letter from a life insurance company indicating that mom or dad had died when that was not true?  What if the beneficiaries’ contact information is outdated or inaccurate – would an insurer have to try to track them down? 
• Imagine if this were extended to other kinds of insurance.  Does a homeowners’ insurer have an obligation to check on your house every year to see if you have any damage?  Does an automobile insurer have an obligation to check on your car to see if it has damage?  Should a health insurer be pestering you if you did not go to your physical?  Does a title insurer need to check on whether your neighbor’s garage is encroaching on your property?  The answer to all of these questions seems to be obviously “No,” but why should life insurance be different? 

I previously posted on class actions involving life insurance “checkbook” accounts, where an insurer, instead of paying the proceeds of a life insurance policy in one payment, provides a beneficiary with a “checkbook” from which they can draw on the policy proceeds all at once or over time.  On April 27, 2011, a Nevada federal court recently denied MetLife’s motion to dismiss in one of these class actions, Keife v. Metropolitan Life Insurance Company. 

MetLife calls these accounts “Total Control Accounts.”  The court concluded that the agreement governing these accounts was not part of the insurance policy because the policy contained  provisions stating that the policy was the entire contract and could be amended only in a writing signed by the policyholder and the insurer.  The policy provided that:

Upon receipt by the Office of satisfactory proof, in writing, that any Employee shall have died while insured hereunder, the Office shall pay, subject to the terms hereof, the amount of Life Insurance, if any (plus interest, if any, as determined by the Insurance Company) in force hereunder on account of such Employee in accordance with Section 4 hereof, at the date of his death. Payment shall be made to the Beneficiary of record of the Employee or otherwise as provided in Section 11 hereof immediately after receipt of such proof and of proof that the claimant is entitled to such payment.  (emphasis in court opinion)

The court concluded that this provision required MetLife to pay the benefits “(1) immediately, and (2) in one sum.”  The court found that MetLife had not complied with that obligation by providing a checkbook “because MetLife maintained possession and control of the funds,” relying on the First Circuit decision in Mogel v. UNUM Life Ins. Co.  The court found that the plaintiff had adequately alleged damages based on the difference in the interest rate paid by MetLife and the interest rate that he could have obtained elsewhere.

The bottom line here is that the growing number of putative class actions being filed on this issue should be of some concern to life insurance companies.  Of course, each policy’s provisions will have to be examined separately by the courts, and a denial of a motion to dismiss does not mean that the case will be appropriate for class certification.  But any life insurance company using these “checkbook” accounts should carefully review its policy terms and any other agreements pertaining to the use of these accounts.