Second Circuit policyholder lawsuits challenging captive reinsurance disclosures

by Dentons
Contact

Dentons

On February 23, 2017, the United States Court of Appeals for the Second Circuit affirmed the rulings of several US district courts, shutting down a series of policyholder class actions that had been filed against Metropolitan Life Insurance Company and AXA Equitable Life Insurance Company challenging the companies’ disclosures surrounding captive reinsurance transactions. See attached order in the cases captioned Ross et al. v. AXA Equitable Life Ins. Co., Robainas et al. v. Metropolitan Life Ins. Co., Yarbrough et al. v. AXA Equitable Life Ins. Co. and Intoccia et al. v. Metropolitan Life Ins. Co. The order is a strong signal from the Second Circuit that plaintiffs who fail to demonstrate concrete, non-speculative injury lack Article III standing to sue, and also dashes future putative plaintiffs’ hopes of leveraging New York’s insurance laws to support lawsuits by policyholders who are not personally affected by the conduct they challenge.

In the decided cases, all putative class actions, the plaintiffs, holders of term life insurance and variable annuities with guaranteed benefit riders, had seized upon rhetoric in a June 2013 policy report issued by the New York Department of Financial Services (NYSDFS) to challenge the defendant insurers’ failure to disclose certain details of captive reinsurance transactions. Specifically, the plaintiffs alleged that each insurer had misrepresented its financial strength by failing to disclose in its statutory annual statement that affiliated reinsurers used parental guarantees from the insurer’s holding company parent, in support of evergreen letters of credit from banks backing their reinsurance obligations.

According to the plaintiffs, these “shadow insurance” transactions were a kind of “financial alchemy” that created the appearance of reducing risk, but had the effect of making insurers’ capital reserves “appear larger and rosier than they actually are,” allegedly leaving policyholders with less protection. The complaints, all of which were filed in the US District Court for the Southern District of New York, did not challenge the captive transactions themselves—which are routinely used in the industry, are perfectly legal and were specifically approved by the NYSDFS. Nor did they allege violations of any specific disclosure requirement regarding captives. Instead, the plaintiffs charged that the defendants had violated New York Insurance Law Section 4226(a)(4), which prohibits insurers from making “any misleading representation, or any misrepresentation of the financial condition of any such insurer or of the legal reserve system upon which it operates.” Based on this claim, the plaintiffs asserted that the nationwide classes they sought to represent were entitled to penalties afforded by Insurance Law Section 4226(d), in the amount of all of the life insurance premiums (and/or contributions to annuity benefit riders) that they had paid, i.e., a claim for free life insurance and guaranteed benefits.

The insurers moved to dismiss these cases on multiple grounds, including the plaintiffs’ failure to allege injury-in-fact sufficient to confer Constitutional Article III standing. In 2015, all three district court judges dismissed the complaints for a lack of standing.1 The plaintiffs appealed.

On appeal, the Second Circuit considered three theories of injury raised by the plaintiffs. First, the plaintiffs' argument that they faced an increased risk that claims would not be paid, because the insurers’ reserves were compromised and lower than represented. Second, the plaintiffs' claim that they were injured by holding policies that were less valuable than represented. And third, the plaintiff's contention that a violation of the insurance law was enough to confer standing, because they had been deprived of their “right to truthful information” from the insurers.

The last theory had been weakened by the US Supreme Court’s 2016 decision in Spokeo v. Robins, issued just before this appeal was briefed. In that decision, the Supreme Court clarified that a statutory violation, without more, is not sufficient to confer Article III standing, reaffirming that a plaintiff must always suffer a concrete injury. Following the Supreme Court’s lead, the Second Circuit held that plaintiffs could not rely on a violation of the insurance law alone to supply standing. The Court reasoned that while a statutory violation that necessarily creates a risk of harm could conceivably be a sufficient injury—assuming it meets all of the other elements of the Supreme Court’s test (i.e., concrete, particular, not conjectural or hypothetical, fairly traceable to defendants’ conduct, etc.) —a misleading representation does not, by itself, create that risk. Indeed, in this case, the plaintiffs did not even allege, much less demonstrate, that they, or any other policyholders would not have purchased the products but for the alleged omissions.

Plaintiffs’ other two theories of injury were also rejected by the Second Circuit. In order for the allegedly increased risk that claims would not be paid to manifest itself into an actual injury, an extended series of hypothetical events, including an economic downturn and a bank failing to honor the letter of credit, would have to occur. Thus this theory travelled “too far down the speculative chain of possibilities to be ‘clearly impending,’” and was rejected. Addressing the plaintiffs’ decreased-value theory of injury, the Second Circuit explained that “the value of a life insurance policy or an annuity rider is the amount that will be paid by the policy in the future.” As plaintiffs had only alleged that the amount that will be paid out might decrease in the future, they had not alleged a current injury.

Since the plaintiffs lacked Article III standing, the dismissal of their case was affirmed.

Although a summary order, the Second Circuit’s opinion is a strong signal from the Court regarding Article III standing. It also dashes future potential plaintiffs’ hopes of leveraging Insurance Law 4226 to support a cause of action for policyholders who are not affected by the alleged misrepresentation or omission over which they sue.


1

The cases against Metropolitan Life Ins. Co. were both before Judge Denise Cote. The cases against AXA Equitable Life Ins. Co. were before Judge Jesse Furman (life insurance) and Judge Richard Sullivan (annuities). 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:

Dentons
Contact
more
less

Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.