Insurance Litigation Developments

ACLI Compliance & Legal

Sections Annual Meeting

Insurance Litigation

Developments

July 2013 Michael Mulvaney

Retained Asset

Accounts

RAA

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Phillips v. Prudential Financial Inc., 2011 WL 5915148 (S.D. Ill.

Nov. 28, 2011)

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May 6, 2013

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Seventh Circuit affirmed the district court's order granting Prudential's motion to dismiss a RAA putative class action that alleged breach of contract, vexatious and unreasonable delay under an Illinois statute, and breach of fiduciary duty.

● "Prudential's establishment of the [RAA] as the default option, and its enrolling [the beneficiary] in an [RAA] rather than providing her a lump-sum payment, did not breach the insurance policy.“

● “Whether this practice is disreputable is open to debate – state insurance regulators are entitled to conclude that the practice should be limited or restricted – but for present purposes it suffices to say that the practice did not breach the life insurance policy, did not effect a vexatious and unreasonable delay under 215 ILCS 5/155, and did not breach any fiduciary duty.”

RAA

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Keife v. Metropolitan Life Insurance Company, No.

0546-LRH-VPC, and Simon v. Metropolitan Life Insurance Company, No.

3:10-cv-0916-LRH-VPC

● March 8, 2013 - Court granted MetLife’s motions for summary judgment in the consolidated, putative class actions.

● Court held that MetLife did not breach the FEGLI Policy ● “Payment” was ambiguous under Policy

● Crediting the Total Control Account was “immediate” and “one sum” ● Plaintiffs could not establish they were entitled to damages

RAA

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Garrison v. Jackson National Life Insurance Company, No.

2:11-cv-00327-WCO (N.D. Ga. December 20, 2011)

● Purported nationwide class action alleging four claims: breach of contract, breach of the contractual covenant of good faith and fair dealing, failure to pay the statutorily-required interest rate on the proceeds, and unjust enrichment. ● Court denied Jackson National’s motion to dismiss other than as to the unjust

enrichment claim.

● Court rejected the insurer’s argument that the “deposit” of one sum “into an account from which the beneficiary may immediately withdraw the entire amount” constituted payment of the proceeds.

● The court relied principally on the First Circuit’s decision in Mogel v. Unum Life Insurance Co., 547 F.3d 23 (1st Cir. 2008).

RAA

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Patel v. New York Life Insurance Company, No.

1:11-cv-04895-JPO (S.D.N.Y. July 15, 2011).

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Class action alleging:

(1) that NY Life’s payment through an RAA violated policy provisions concerning alternate settlement options that require at least a 3.5% interest rate; and

(2) that NY Life’s disclosure regarding plaintiff’s settlement options were insufficient.

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Court denied New York Life’s motion to dismiss, holding that “the amended complaint alleges that Defendant breached the policy by paying Plaintiff less interest than was due. Nothing in the amended complaint or the documents attached to it shows that Plaintiff or her husband agreed to ‘some other method of payment instead’ with lesser interest. Accordingly, Plaintiff has sufficient alleged that Defendant breached the Policy.”

•

April 4, 2013 – Court approved stipulation of voluntary dismissal.

412(i) Retirement Plan

& 419 Welfare Benefit

Plan Abusive

Tax-Shelter Litigation

•

Plaintiffs claim that defendant carriers and

their agents represented that life insurance

policies used to fund 412(i)/419 plans would be

valid plans and subject to favorable future tax

treatment

•

Mixture of rulings on breach of contract, and

fraud/misrepresentation claims

412(i)/419 Litigation

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Berry v. Indianapolis Life Ins. Co., 600 F.Supp. 2d 805 (N.D. Tex.

2009)(“Berry I”); Berry v. Indianapolis Life Ins. Co., 638 F.Supp. 2d 732

(N.D. Tex. 2009)(“Berry II”); Berry v. Indianapolis Life Ins. Co., 2010

WL 3422873 (N.D. Tex. Aug. 26, 2010)(“Berry III”)

● Action filed by residents of several different states concerning 412(i) plans subsequently disqualified by the IRS.

● “As a matter of law, any representation or prediction by any alleged [insurance company] agent as to how the IRS would treat the 412(i) plans, and the funding thereof, in the

future is either an unactionable opinion or was unjustifiably relied upon.”

●

Brakke v. Econ. Concepts, Inc., 153 Cal. Rptr. 3d 1, 7 (Cal. Ct. App.

2013)

● “Plaintiffs failed to allege statements by insurer’s agents concerning favorable tax

treatment of plaintiffs' 412(i) plan were false when made and, to the extent they could be so construed, it was not reasonable for plaintiffs to rely on representations concerning how the IRS would treat their pension plan in the future.”

412(i)/419 Litigation

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Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 06-CV-0921

IEG (JMA), 2008 WL 1925248 (S.D. Cal. Apr. 29, 2008) case dismissed,

367 F. App'x 792 (9th Cir. 2010)

● “[R]eliance on a misrepresentation is not reasonable when the plaintiff could have, through the exercise of reasonable diligence, ascertained the truth of the matter. Requiring reasonable investigation by the party claiming fraud is

particularly appropriate in cases where, as here, the explicit language of the contract directly contradicts the alleged misrepresentation. We see no

unfairness in expecting parties to read contracts before they sign them…The written disclaimers signed by [plaintiffs] clearly explained plaintiffs should not rely on defendants for legal and tax advice, and they should consult their own legal and tax advisors. The contents of the disclaimers were specific and by reading them, plaintiffs would have understood defendants were not providing tax advice.”

412(i)/419 Litigation

Chau v. Aviva Life - N.D. Tex. July 25, 2011

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Courts dismissed with prejudice plaintiffs’ misrepresentation claims due to plaintiffs’ failure to satisfactorily re-plead claims in response to prior leave of court.

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On December 14, 2012, the court granted Aviva’s motion for summary judgment and dismissed Plaintiff’s breach of contract claim and third

amended complaint with prejudice. Plaintiff filed a notice of appeal to the Fifth Circuit on January 16, 2013.

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While appeal was pending, dismissal was granted on June 28, 2013 - parties had agreed to terms of a settlement agreement.

STOLI

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PHL Variable Insurance Company v. Bowie 2008 Irrevocable

Trust, No. 12:-cv-2243 (February 19, 2010)

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Equitable action filed by PHL Variable Insurance Company seeking a

declaratory judgment that the policy was null, void and rescinded ab initio due to the Trust’s fraudulent misrepresentations.

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District court granted PHL’s motion for summary judgment, and allowed PHL to retain the policy premium paid by the Trust in order to offset PHL’s losses and to return the parties to the status quo ante.

STOLI-

PHL Variable Insurance Company v. Bowie

2008 Irrevocable Trust

● On May 13, 2013, First Circuit affirmed summary judgment grant:

(1) insurer was not required to return premiums to the trust during the pendency of the lawsuit;

(2) “tender back” requirement did not flatly prohibit district court from using policy premium to offset life insurer’s consequential damages;

(3) insurer’s retention of premiums paid as special damages was appropriate equitable remedy;

(4) court order allowing retention of premiums paid as special damages did not violate Rhode Island’s election of remedies rule;

(5) insurer did not have an adequate remedy at law required to defeat equity jurisdiction;

(6) evidence justified an equitable award of special damages to insurer based on trust’s unclean hands.

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On June 14, 2013, the First Circuit refused to reconsider its holding allowing PHL to keep the premiums.

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First Circuit joins Sixth and Eighth Circuits and numerous trial courts in letting insurers keep premiums on fraudulently procured manufactured life insurance policies.

STOLI

Halberstam v. United Life Insurance Company in the City of New York, 945

N.Y.S. 2d 513 (Sup. Ct. 2012)

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Trust applied for the policy using an imposter to take the medical exam - then shortly after policy was issued - transferred its interests to another trust.

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Court granted trust’s motion for summary judgment against the insurer, holding that the challenge was barred by the two-year contestability period.

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May 13, 2013 - the Supreme Court of New York denied Defendant’s motion for renewal and re-argument as to the Court’s prior order granting summary judgment to plaintiffs.

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Court held family trust - rather than the alleged imposter - was the original policyholder. Thus – the court reasoned – plaintiff had standing to assert the incontestability clause as a bar to US Life’s challenge to the policy because it became the policyholder through an assignment.

Contrast - Lincoln National Life Ins. Co. v. Joseph Schlanger 2006 Ins.

Trust, 28 A.2d 436 (Del. 2011).

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Delaware Supreme Court held that “a life insurance policy lacking an insurable interest is void as against public policy and thus never comes into force, making the incontestability provision inapplicable.”

STOLI

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WML Gryphon Fund, LLC, et al, v. Wood, Hat &

Silver, LLC, No. 12-CV-1704 (Wisconsin Circuit Ct.

December 11, 2012)

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Douglas Elliot and Patsy Elliot v. Transamerica Life

Insurance Co., et al, No.

30-2013-00636046-CU-CO-CJC (Cal. Superior Ct. March 8, 2013)

Annuity

Maxine Derry et al v. Jackson National Life

Insurance Company (N.D. Cal.)

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California Class – violation Cal. Business Code § 17200 – failure to disclose

surrender charges and penalties

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Remember: Kennedy v. Jackson National Life Insurance Company (N.D. Cal.) – similar

claims – court granted defendant’s motion for summary judgment – dismissed claims October 6, 2010. March 12, 2012, case was sua sponte transferred to Kennedy Court (N.D. Cal).

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N.D. Court denied motion to dismiss on June 4, 2012, finding that statute of limitations defense did not bar plaintiffs’ claims.

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April 30, 2013 – while summary judgment motion was pending - parties

submitted a stipulation indicating that the parties had settled the case on a

class wide basis.

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According to settlement terms, Jackson National will pay up to $25 million to settle the class action.

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Jackson National will make cash payments equal to 22% of the past surrender charges and reduce the annuities future surrender charges by 22%.

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Court to rule on the preliminary approval request and a conditional settlement class certification August 1, 2013.

In re National Western Life Deferred

Annuities Litigation (S.D. Cal)

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Court certified national class on RICO claims regarding unsuitable sales to

seminars, but not breach of fiduciary duty claim.

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Denied National Western’s motion to decertify the class in February 2013,

holding that

(1) at least one common issue existed with regard to whether the sales materials included false representations; and

(2) Plaintiffs could demonstrate reliance on a class wide basis given the prominent nature of the alleged misrepresentations, the fact that seniors were required to sign an acknowledgement, and the availability of class wide proof connecting alleged

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