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Insurance Class Actions Insider

Life Insurance Class Action on Cost-of-Insurance Rates in Universal Life Policies: Wisconsin Federal District Court Applies Wal-Mart and Denies Class Certification

Posted in Life Insurance

A recent decision on class certification in a case involving ratemaking for universal life insurance policies illustrates where the rubber is meeting the road in insurance class actions post-Wal-Mart.  It also reminds class action lawyers of the importance of considering carefully whether the putative class members would actually want the relief being sought by the putative class representative.

In Thao v Midland National Life Insurance Company.pdf, Case No. 09-C-1158, 2012 U.S. Dist. LEXIS 72277 (E.D. Wisc. May 24, 2012), the plaintiff contended that Midland did not calculate cost-of-insurance rates in accordance with a provision of its universal life policies stating that “Cost of Insurance rates are based on the Issue Age, completed Policy Years, Sex, Specified Amount, and Premium Class of the Insured.”  Midland’s premium calculations used, as a starting point, a base scale that was an approximation of Midland’s pricing mortality rates (which were based on the factors described in the policy provision).  The base scale was then adjusted to meet company objectives, so that rates for particular classes of policyholders would not be too low or too high.  An “Add-On” was then used to adjust the calculation so that premiums would be higher in earlier policy years and lower in later policy years, because many policyholders prefer that type of structure for tax reasons or other reasons (e.g., because available cash flow is smaller once policyholders are in retirement).  The plaintiff contended that the use of the “Add-On” in calculating the premiums was contrary to the policy provision quoted above, and sought a remedy whereby the use of the “Add-On” would be prohibited in the future, and prior “overpayments” resulting from the “Add-On” would be refunded to putative class members.

The plaintiff sought certification of a 33-state class of purchasers of policies on certain specific policy forms.  (The opinion does not explain whether the 33 states were all of the states where Midland sells this type of coverage, or were chosen by plaintiff’s counsel due to purported similarity of state law in the selected states.)  The court concluded that, because the policy language involved was essentially identical for the entire putative class, there was a common question of law on which a common answer would apply to the entire class.  The court found that “differences in state law and extrinsic evidence will likely not result in different meanings for different class members.”  Id. at *9.  However, the court further explained that, under Wal-Mart, “before the class proposed by Thao may be certified, Thao must prove – not merely assert – that if Midland had set its cost-of-insurance rates using only the five factors listed in the policy, then all of the numerical values in all of Midland’s tables would be either lower than they are now or unchanged.”  Id. at *12.  The court found that the plaintiff did not meet this burden of proof for two reasons.  First, if the “Add-On” were removed from the premium calculation as plaintiff sought, the resulting rates would not be based exclusively on the five factors set forth in the policy provision.  This is because the base scale was only loosely based on mortality expectations, modified by actuaries during the pricing process so that rates for particular classes of policyholders would not be too low or too high.  Secondly, the court found that, if the rates were adjusted so that they were based exclusively on mortality rates, many policyholders would not want that result because they prefer to pay higher rates in earlier years in exchange for paying lower rates later in life.  Because class members would have different preferences in this regard, there was no “common grievance” appropriate for certification.

This case is a good illustration of how plaintiffs’ attorneys are structuring and developing their insurance class action cases to try to satisfy Wal-Mart, and how district courts are handling motions for class certification post-Wal-Mart.  A common strategy for plaintiffs post-Wal-Mart is to focus on a narrow, simple issue of policy interpretation that does not require application of the policy terms to particular factual circumstances.  This policy interpretation issue might not ultimately be meritorious, but it could be a close enough call that an insurer may not want to litigate its merits pre-certification (the plaintiff’s strategy is to try to encourage settlement if the insurer does not want to risk losing the policy interpretation issue on a classwide basis).  This opinion also demonstrates how, in adjudicating class certification post-Wal-Mart, district courts are delving deeply into the facts and requiring the plaintiff to demonstrate a viable theory, in detail, on the merits.  Here, the court explored deeply the details of how Midland calculated its cost-of-insurance rates (with charts and a graph in the opinion to illustrate the analysis), the impact that the plaintiff’s proposed remedy would have, and the impact that using strictly mortality-based rates would have.  Ultimately the outcome appeared to turn on the fact that the result the plaintiff was advocating was not one that many policyholders would want, something that is always worth thinking about in developing a strategy to defend a class action.