Cost of Insurance Litigation -- District Court Says Stick to Enumerated Factors

by Eversheds Sutherland (US) LLP

In a class action challenging a cost of insurance (COI) rate increase, a New York federal district court has stated that an insurer may only consider factors specifically enumerated in the policy when raising COI rates on a life insurance policy. This decision specifically rejected the reasoning of a recent Seventh Circuit decision going the other way. Notwithstanding its narrow interpretation of the policy at issue, the district court found that the insurer had not considered any impermissible factors in raising COI rates and therefore granted the insurer’s motion for summary judgment on that issue. The court also held that there were material issues of fact as to whether the insurer unfairly discriminated by applying the rate increase to only a subset of policyholders and whether the rate increase sought to recoup past losses in violation of the policy. Fleisher v. Phoenix Life Insurance Company, No. 1:11-cv-8405 (S.D.N.Y. Apr. 29, 2014) (click here for a copy of the opinion).

The Fleisher action is the lead case in a series of cases currently pending against Phoenix Life Insurance Company challenging a COI rate increase on a subset of the company’s universal life policies. Of the various cases pending, most allege, among other theories, that a COI rate increase was a breach of contract because the insurer considered impermissible factors when deciding to raise rates. The complaints also allege the rate increase was discriminatory and in breach of contract because COI rates were not raised equally for all members of a class. Most of the cases were filed by investors who purchased the policies on the secondary market. The Fleisher case has been certfied as a class action, and the rest are individual cases.

In Fleisher, the plaintiffs primarily contend that the insurer breached the contract by raising COI for groups of policyholders who maintained a low cash value, specifically policyholders age 68 or older with face amounts of $1 million or more. The court said it was undisputed that in resetting COI, the insurer “analyzed funding ratios [i.e. policy values] . . . in the process of defining the ‘class’ that would be subject to the 2011 COI Rate Adjustment.” The plaintiffs contend this was a deliberate effort to impermissibly target investors who had purchased policies on the secondary market. By raising COI based on “funding level,” the plaintiffs allege the insurer breached the contract by (i) basing the COI increase on factors not permitted by the policy, and (ii) imposing an increase that was not uniform for all members of the same class.

The Court States That Only Enumerated Factors Can Be Considered When Raising COI Rates

The Fleisher court devoted much of its opinion to an analysis of what factors could be considered in raising COI under the policy at issue. The policy specifically enumerated six factors, stating: “The Cost of Insurance Charge for a specific Policy Month . . . will be based on our expectations of future mortality, persistency, investment earnings, expense experience, capital and reserve requirements, and tax assumptions.” The court rejected the insurer’s argument that it was implicitly entitled to consider other factors. According to the court, “it would be perfectly plausible—and certainly not unreasonable—for an average insured to conclude . . . that when [the insurer] says it will calculate the COl rate for a particular Policy Month ‘based on’ six specifically enumerated factors, those are the only six factors it will take into account when adjusting the rate.” Because the court believed that the plaintiffs’ interpretation was reasonable, it believed the contract was at least ambiguous, and “[a]pplying New York’s doctrine of contra proferentem in the insurance context, if there are two or more reasonable interpretations of a phrase in an insurance contract, the Court must prefer the one advanced by the insured to the one advanced by the insurer.”

The New York district court expressly rejected the reasoning of the Seventh Circuit’s recent decision in Norem v. Lincoln Benefit Life Company, 737 F.3d 1145 (7th Cir. 2013). (Click here for Sutherland’s Legal Alert on Norem.) In Norem, the Seventh Circuit considered the “plain and ordinary meaning” of the phrase “based on.” The court noted that the dictionary definition of “based on” is the “main ingredient” or “the fundamental part,” but that the term “based on” did not imply exclusivity. By analogy, the Norem court stated: “[N]o one would suppose that a cake recipe ‘based on’ flour, sugar, and eggs must be limited only to those ingredients. Thus, neither the dictionary definitions nor the common understanding of the phrase ‘based on’ suggest that [the insurer] is prohibited from considering factors beyond [the enumerated factors of] sex, issue age, policy year, and payment class when calculating its COI rates.”

In rejecting the reasoning in Norem, the Fleischer court took issue with the cake analogy. “In the cookbooks I read, recipes are exhaustive lists of all the ingredients needed to bake a cake . . . . There is nothing in either policy to suggest that the listed factors are merely a starting point for the rate calculation, and that the insurance company is free to add a dollop of Undisclosed Factor A and a dash of Undisclosed Factor B in order to ‘season’ the COl rate to its liking.” Instead, the court said it found more persuasive the opinions in Jeanes v. Allied Life Ins. Co., 168 F. Supp. 2d 958 (S.D. Iowa 2001) and Yue v. Conseco Life Ins. Co., No. CV 08-1506, 2011 WL 210943 (C.D. Cal. Jan. 19, 2011) (Yue I), in which courts held that “based on” should be interpreted as “solely based on.” The court also noted that Norem was decided under Illinois law and suggested that New York law was different.

Despite rejecting the insurer’s interpretation of the contract, however, the court ultimately found that the insurer had not considered impermissible factors, and therefore granted the insurer’s motion for summary judgment on this claim. The court held that policy values were a logical component of “expectations of . . . investment earnings,” one of the enumerated factors. In so holding, the court agreed with the insurer that policy values could be taken into account because “Policy Values impact the amount of money the company has available for investment.” The court rejected the plaintiffs’ argument that “investment earnings” referred only to the “spread” the insurer was earning on its investments, finding this interpretation to be “convoluted.”

The Court’s Analysis of Unfair Discrimination Claims

On the unfair discrimination claims, the court provided very little analysis and instead found that it was “clear enough” that there were factual disputes that precluded summary judgment. The issue before the court was whether the insurer breached the contract by “discriminat[ing] unfairly within any class of insureds” when it subdivided the policies based on age and face amount, and then imposed the COI rate increase only on a subset of policyholders. The court held that there was a genuine issue of material fact concerning whether what the insurer did could be justified under accepted actuarial principles, given the differing opinions of the experts.

A key issue on the discrimination claim is when a class can be defined. The plaintiffs contend that the insurer was required to define any “class of insureds” at the time of policy issuance. The plaintiffs argue that the groupings the insurer identified at issuance constitute the relevant “classes” under the policy. The plaintiffs further contend that the insurer “was not permitted to further subdivide the existing policy series classes [after issuance] by age and face amount and to treat each subdivision differently.” The court indicated its uncertainty on how this issue should be decided and suggested the need for guidance from the New York regulator:

The New York General Counsel has recognized that an insurance company “may” define all policies within a certain policy series as a class, although no authority has stated that insurance companies must do so. See N.Y. Gen. Counsel Op. No. 12-13-2000 (#2). I have no idea whether this is something that may only occur upon issuance or whether definitions can be modified after issuance (as [the insurer] did by adding age and face amount components to the classes that were identified at issuance). Nothing in the record helps me to determine this issue; it would be very useful to have the views of the Superintendent of the New York Department of Financial Services.

Finally, the court held that there were genuine issues of material fact on the issue of whether the insurer sought to recoup prior losses and on any damages issues.


Litigation has been percolating in a number of cases across the country challenging COI rates in life insurance policies. Courts have reached different conclusions on COI issues, though some of the variation may be the result of specific contract language and other facts pertaining to individual cases. Sutherland has previously reported on decisions where lower courts reached different conclusions on COI issues in a Legal Alert entitled “Recent Rulings Diverge on the Scope of Insurer Discretion to Set Rates.” (Click here.) The Seventh Circuit’s decision in Norem was the first federal appellate case to consider these issues; however, the district court’s opinon in Fleisher shows that courts continue to disagree on the proper interpretation of COI policy language. A number of cases are still pending in various courts, and further developments are expected in 2014.

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.

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