A little over a year ago we posted a blog about a Lincoln Financial cost of insurance (COI) increase on Legend Series Universal Life policies issued between 1999 and 2007 that originated at Jefferson Pilot (Lincoln Financial purchased Jefferson Pilot in 2006). Earlier this year we reported on a class action lawsuit filed in in the Eastern District of Pennsylvania against Lincoln. Other lawsuits soon followed, and in May we reported that four suits were combined in the Pennsylvania court into a Consolidated Class Action Complaint.
After the consolidated complaint was filed, Lincoln filed a Motion to Dismiss on June 8th. The Plaintiffs’ response was filed on July 28th, and Lincoln’s reply on August 17th. On August 22nd the court held oral arguments, and on September 11th Judge Gerald J. Pappert issued a Memorandum in which the court ruled on Lincoln’s Motion to Dismiss, which he denied in part and granted in part. As you will see, he mostly denied Lincoln’s requests, and the case will move forward.
According to the Memorandum, the policies in question, “give Lincoln discretion to determine the COI rate based on its expectation of future mortality, interest, expenses and lapses.” The Plaintiffs alleged that Lincoln was attempting to “recoup past losses” with the increases. The court found that the Plaintiffs “adequately supported” their allegation that Lincoln “subjected the Plaintiff owners to unlawful [cost of insurance] increases” and can proceed “with their contract-based claims.”
According to the Memorandum, Lincoln did “appear to acknowledge” that if they did raise the COI “based on non-enumerated factors, it would constitute a breach of contract.” But the Memorandum goes on to say that Lincoln denies this. The Plaintiffs point to Lincoln statements that show the “COI rate increase was based on impermissible, backward-looking considerations.” For example, they cite a notice from Lincoln that references “nearly a decade of persistently low interest rates, including recent historic lows, and volatile financial markets” and states “in response to the persistent low interest rates, including the recent historic lows (emphasis theirs), there will be pricing increases.”
The Plaintiffs also referenced an interview with the President/CEO of Lincoln Financial Group that occurred around the time of the COI increases in which he said the carrier saw in force pricing as a way to dampen the negative effect of the low interest rate environment. The court decided that the Plaintiffs’ allegations were “sufficient to state a claim for breach of contract.”
The Plaintiffs contended that “lower investment income,” because of the low interest environment, was not a permissible consideration for a COI increase, and that the higher reinsurance rates that Lincoln referenced as a reason for the increase was not a future expense that the carrier could consider. The court ruled that the Plaintiffs, “adequately alleged that Lincoln’s admitted consideration of lower investment income and higher reinsurance costs constituted breaches of the Policies terms.”
The Plaintiffs asserted that mortality, which is the “driving factor in setting the COI rate,” had improved since the policies were issued and was expected to continue to improve. Lincoln responded that “general nationwide mortality improvement does not mean that mortality has improved for insureds of all ages and rate classes and, in any event, is not necessarily consistent with Lincoln’s own mortality assumptions or experience.” The Plaintiffs claimed the carrier had “filed interrogatories with the National Association of Insurance Commissioners in each year from 2010 to 2014 stating its expectation that mortality will improve in the future.” The court affirmed that the Plaintiffs had “stated a claim.”
The Plaintiffs claimed Lincoln “breached the policies terms by failing to apply the COI rate increase uniformly across policyholders in the same rate class,” citing rates on one insured “higher when the insured is 98 years old than when she is 99 years old.” The court wrote that the allegations were “sufficient to state a claim.”
The Plaintiffs claimed the defendants “breached the contract by refusing to provide policyholders with illustrations during the Policy’s grace period.” After a review of contract language concerning this right, the court wrote that they cannot say that the contract language “is unambiguous or plainly inconsistent with Plaintiffs’ reading at this stage, and Plaintiffs have stated a claim.”
The Plaintiffs argued for a claim of “breach of the implied covenant of good faith and fair dealing” which they said, requires the carrier to “act in a manner that does not frustrate policyholders’ reasonable expectations under the Policies, and—to the extent it has limited discretion to set the COI rates—to exercise that discretion reasonably and in good faith.” Lincoln countered by saying that claim was “defective” since it was based “on the same facts as the breach of contract claim and therefore duplicative and cannot be adequately alleged that Defendants breached the implied covenant brought as a separate cause of action.” The court ruled that the Plaintiffs had “adequately alleged that Defendants breached the implied covenant.”
The Plaintiffs requested “relief resolving the parties’ obligations under the Policies, the factors on which Lincoln may base a COI rate increase, the lawfulness of the COI increases and whether the policyholders must continue to pay the allegedly unlawful COI charges.” Again, Lincoln countered that the claim should be dismissed “because it is duplicative of the breach of contract claim.” After a review of the facts, the court granted the “Defendants’ Motion with respect to this claim.”
The Plaintiffs contended that Lincoln violated the “consumer protection laws of various states,” including California, North Carolina, Texas, New Jersey, New York, and the court wrote that these claims could move forward.
This outcome ensures that the case will move forward, and the clear majority of the Plaintiffs’ claims will be heard. As the case moves forward we will provide additional updates. For a copy of the Memorandum, please email email@example.com.