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Class Action Lawsuits Challenge Cost of Insurance Charges

As we recently reported, life insurers across the U.S. continue to face legal action from policyholders who are filing class action lawsuits based on fast-rising, allegedly unjustified cost-of-insurance increases. (Read more about why some policyholders are suing their universal life insurers.)

Life insurance has long been considered a safe investment for people who want to protect their loved ones against future uncertainties, and many policies also offer a low-risk method of saving for retirement. However, some insurers have taken steps to raise premiums in such as way that the investment aspect of these policies has been compromised. In doing so, these insurers have come under considerable scrutiny. And the heightened attention has not let up.

A Question of Terms

Several pending litigation matters revolve around whether certain insurers have behaved in accordance with terms laid out in policyholders’ universal life insurance contracts.

Of specific interest is how the periodic cost of insurance (or COI) charge is calculated. As one article published on reports, several lawsuits have focused on whether lists of factors enumerated in certain contracts as providing the basis for calculating cost of insurance rates can be considered exhaustive.

For example, as the article explains, “COI is typically not defined in the policy. Instead, the policy prescribes guaranteed maximum COI rates and the insurer reserves discretion to set COI rates below these maximums. The rates themselves are set by actuaries in a complex process that considers a number of factors.”

Many policies typically also include a section describing what the COI rates are based on, factors such as the insured’s gender, issue age, issue year, current mortality rates, payment class, among other variables specific to each policy and company.

Plaintiffs’ lawyers have asserted that such “based on” lists are exhaustive, versus illustrative, and therefore the insurer should not have the ability to increase COI rates due to any other factor. In some instances, the plaintiffs have also questioned why their insurer would only raise COI rates in response to poor mortality rates, but not lower them to reflect improved mortality.

In the matter of Lincoln National Ins. Co. v. Bezich (June 2015), an Indiana Court of Appeals held that the policy language was exclusive and did restrict the insurer from raising the COI rate based on any expenses unrelated to mortality expectations. The court also ruled that it was unfair for Lincoln to use its provisions only to increase COI rates to reflect worse-than-expected mortality, but not reduce those rates in the event of mortality improvement.

Vinas & Deluca is working with Rivero Mestre to prosecute cost of insurance increase cases against Principal Life Insurance Company. If you or someone you love has a policy with Principal and has seen their cost of insurance rates increase dramatically, please give us a call.