Monthly LRA Update: July 2020

JUDICIAL DEVELOPMENTS

COI Litigation Update – Vogt v. State Farm Jury Verdict Upheld upon Appeal

On June 26, the US Court of Appeals for the Eighth Circuit issued an opinion on State Farm’s appeal of a $34 million jury verdict in a class action alleging that State Farm violated the terms of its insurance contracts by using non-enumerated factors within its Cost of Insurance (COI) charges.

The Appeals Court affirmed all of the District Court’s rulings in this matter and also agreed that the plaintiffs were entitled to additional pre-judgment interest. Of note, this controversy highlighted the differences in interpretation of COI provisions, which state that rates will be “based on” an enumerated list of factors. In the State Farm policies, the provision was written as follows (emphasis added):

Monthly Cost of Insurance Rates. These rates for each policy year are based on the Insured’s age on the policy anniversary, sex, and applicable rate class. A rate class will be determined for the Initial Basic Amount and for each increase. The rates shown on page 4 are the maximum monthly cost of insurance rates for the Initial Basic Amount. Maximum monthly cost of insurance rates will be provided for each increase in the Basic Amount. We can charge rates lower than those shown. Such rates can be adjusted for projected changes in mortality but cannot exceed the maximum monthly cost of insurance rates. Such adjustments cannot be made more than once a calendar year.

At the District Court level, State Farm sought summary judgment, arguing that the policy language did not limit State Farm to calculating the COI based on the specified factors only. The court denied State Farm’s motion, concluding that no reasonable person would understand that State Farm would use non-listed factors to calculate COI when the policy stated that the COI would be “based on” enumerated factors.

It is worth noting that this determination differs from rulings from the 7th Circuit in 2013 (Norem v. Lincoln Benefit Life; and Thao v. Midland National). However, the 8th Circuit concluded that at a minimum, the phrase was ambiguous; and, therefore, had to be construed against the carrier.

State Farm appealed various other aspects of the proceedings and verdict; however, the 8th Circuit affirmed the outcomes in all instances. Surviving this appeal appears to be a big win for policyholders challenging insurers’ discretion under COI provisions that are “based on” an enumerated list of factors. Of course, some provisions identify factors that include terms like “expenses” and “interest”, which likely make policyholder challenges more difficult to prevail.

REGULATORY DEVELOPMENTS

American General Settlement with Massachusetts re Death Claim Interest

On May 13, the Massachusetts Attorney General’s office (“MA AGO”) reported a settlement with American General Life Insurance Company, resolving allegations that American General failed to calculate interest payments on death claims correctly.

According to the settlement, the MA AGO conducted an investigation relating to the administration of American General’s life insurance policies involving Massachusetts residents since January 1, 2015. As a result of the investigation, the MA AGO alleged that American General failed to calculate the payment of interest pursuant to M.G.L. c. 175, § 119C for death benefits. The statute is as follows (emphasis added):

Section 119C: Interest on proceeds payable under policy of individual life insurance upon death of insured

Upon the death of an insured, the proceeds payable under any policy of individual life insurance which is in force on the date of death shall include the payment of interest at the rate for proceeds left on deposit with the insurer beginning thirty days after the death of the insured and shall not be payable until receipt by the insurer of proof of the insured’s death. In the event the insurer does not pay interest on proceeds left on deposit with the insurer, the rate of interest shall be six per cent. If the beneficiary brings an action to enforce such payments and prevails, the court shall award interest in accordance with the provisions of section six C of chapter two hundred and thirty-one, in lieu of any interest payment contained in this section.

American General neither admitted nor denied the MA AGO’s allegations. Under the terms of the settlement, American General will pay ~$184 thousand to the state and agreed to provide restitution to affected consumers in the amount of the statutorily required death claim interest. According to a press release from the MA AGO, the restitution will be over $180 thousand.

The settlement impacted a small number of policies owned by our clients, and the restitution has been processed. The applicable death benefit proceeds were paid interest at a rate of 1%.

Financial Regulators Finalize Changes to Volcker Rule

On June 25, the five federal regulatory agencies announced a final rule to modify the Volcker rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds. According to the press release, the final rule is similar to the proposed rule released in January.

We have not fully reviewed the 214 page final rule publication. However, this final rule does not appear to impact the Separate Account BOLI exception or the exemption afforded to investments that support deferred compensation arrangements.

California Consumer Privacy Act (CCPA) – Proposed Regulations Package Submitted to Office of Administrative Law

On June 1, the Office of the California Attorney General submitted the final proposed regulations package under the CCPA to the California Office of Administrative Law (“CA OAL”).

While we have closely monitored CCPA rulemaking process, the applicability (or inapplicability) of the CCPA to data related to the issuance, administration and settlement of BOLI and COLI programs remains uncertain. We recommend that clients consult with qualified legal advisors as to the applicability. We would be happy to share our findings and observations.

OTHER DEVELOPMENTS

Effects of Experience Rating on COLI/BOLI Programs – Publication

In June, the Society of Actuaries’ Product Matters! published an article titled Effects of Experience Rating on COLI/BOLI Programs. The article for policyholders, authored by Matt Schoen and James Van Etten, provides an overview of the differences between experience rated and non-experience rated product designs, and describes ways to ascertain and measure exposures to excess mortality related costs.

The articles in this series were designed to provide institutional purchasers and sponsors of life insurance with knowledge about the mortality costs, benefits and risks associated with COLI/BOLI programs. Articles in the original series that are not expected to appear in Product Matters! include “Risk Transfer Considerations,” which addresses these considerations from a variety of perspectives, and “Common COLI/BOLI Misconceptions,” which concludes with a discussion that debunks common misconceptions that have been used to criticize the purchase of COLI/BOLI programs.

NAIC Releases Update on State Insurance Regulatory Response to COVID-19

On June 23, the NAIC released a report on the current pandemic and the insurance industry’s response. The report chronicles state insurance regulators’ actions from January 1 through May 31 and how those actions have helped mitigate the impacts the pandemic is having on insurance consumers.

The report includes an interesting timeline of global, pandemic-related events during the first half of the year, along with actions taken by the NAIC and insurance regulators.

Financial Solvency

Insurance regulators have worked to identify and evaluate insurers’ exposure to COVID-19, including monitoring the capital markets and evaluating the potential impact of the economic downturn on insurance company assets.

Life Insurance Sector

To our knowledge, the regulatory response has not had any direct impact on the BOLI industry. The report notes that several states have required life insurers to defer premium payments and suspend cancellations and non-renewals. Life insurers have also been instructed to waive late fees and penalties.

The report also notes that state insurance regulators have worked with life insurers to evaluate the impact of the economic stresses on their liquidity.