Cost of Insurance Litigation – Recent Ruling on Meaning of “Mortality Experience” and Other Developments

by Eversheds Sutherland (US) LLP

Last month, a federal district court in California ruled on a dispute over the meaning of a life insurance policy provision stating that the “[c]urrent monthly cost of insurance rates will be determined by the Company based on its expectation as to future mortality experience.” The court held that the phrase “expectation as to future mortality experience” encompassed only changes in the “rate of death” and did not permit the insurer to consider expected changes in persistency or the expected average amount of benefits to be paid. Yue v. Conseco Life Insurance Company, CV08-1506 (C.D. Cal. 2011). (Please click here for the opinion.) This Legal Alert discusses the Yue decision and reports on other developments in litigation challenging cost of insurance charges.

Yue v. Conseco

On January 19, 2011, the federal district court in Yue v. Conseco Life Insurance Company granted summary judgment for plaintiff on claims for declaratory relief in a class action challenging the insurer’s announced increases in current monthly cost of insurance (COI) rates. The increases, adopted in 2002, would have taken effect beginning in the 21st year of the policies, and some policyholders would have been charged the increased rates beginning in 2010. On December 7, 2009, the court certified a nationwide class. In 2010, the insurer sought to have the case dismissed as moot on the ground that it had “definitively” decided not to implement the challenged COI increase it had adopted in 2002. The court, however, held that the decision not to implement the rate increase did not moot the claim for declaratory relief, because the insurer maintained that the methodology it used to calculate the challenged COI rate increase was permissible under the policy.

In its January 19, 2011 ruling, the court held that the insurer’s methodology for calculating the 2002 COI increases was impermissible under the policy. The “Cost of Insurance Rates” section of the policy provided that “[c]urrent monthly cost of insurance rates will be determined by the Company based on its expectation as to future mortality experience.” The insurer argued that “its expectation as to future mortality experience” included three factors: (1) the expected rate of death or “mortality rates,” (2) the number of policyholders expected to continue being insured (i.e., persistency), and (3) the average amount of death benefits the insurer expected to pay for those insureds who died while their policies remained in force. The court agreed with the plaintiff, however, that the insurer’s approach was impermissible because it took into account factors other than “mortality,” which the court defined as meaning only the “rate of death.” The court granted summary judgment for the plaintiff on the declaratory relief claim, further stating that “‘expectation as to future mortality experience’ . . . does not mean something that would allow COI rates to be based on a comparison of the cost of projected death claims against the amount of revenue derived from the COI charges to be received from Policyholders.” Judgment was entered on February 2, and the insurer has announced that it will appeal the decision.

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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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