Life, health and disability insurers, whether governed by ERISA or state insurance bad faith laws, often do not have your best interests in mind, despite what the law requires of them. Insurers, like other businesses, are motivated by profits. Sometimes that drive leads to crossing legal, ethical or moral lines to improve the bottom-line. That is what occurred in a recent pro-policyholder Ninth Circuit Court of Appeal case, Burnett v. Conseco Life Insurance Company, 2017 WL 1828145 (9th Cir. May 4, 2017) (reversing the district court decision found at 87 F. Supp. 3d 1238 (N.D. Cal. Apr. 9, 2015)). In that case, applying California state insurance bad faith laws, the Ninth Circuit held a life insurer cannot completely absolve itself from further liability under a whole life insurance policy by terminating it. If it breaches the policy before termination, the life insurer is liable for damages caused by that breach, even if the policy is later surrendered. While that is the legal principle gleaned from the case, and it is an important one, what is far more interesting is the look into the life insurer’s boardroom and corporate decision-making the case facts provide.
Jeffrey Burnett, Joe Camp and many other class action plaintiffs had purchased whole life insurance policies from a life insurer in the 1980s and 1990s, which policies were later assumed by the defendant, Conseco Life Insurance Company. The policies provided a death benefit, investment income to the insured during his lifetime (including a guaranteed rate of interest on the policy’s account value), and a cash value payable upon the policy’s surrender. The policies had explicit provisions governing the amount of premiums that could be charged, and even included a “vanishing premium” after five years if certain policy formulas were met.
By the early 2000s, Conseco was losing money on the policies. In 2008, it substantially raised the premiums on the product to all policyholders in breach of the policy’s premium provisions and formulas. Conseco expected and intended thousands of policyholders would respond to the shock of massive premium increases by surrendering their policies or letting them lapse because they were no longer economically worth keeping, thus saving Conseco tens of millions of dollars on a money-losing product line. The strategy worked. Mr. Burnett, Mr. Camp and several other class members surrendered their policies in 2009 and 2010 because they were too expensive. In short, Conseco forced its policyholders to surrender their whole life insurance policies by improperly raising the premiums in violation of the terms of the contract. The company was driven by greed and profit, not its policyholders’ interests, contractual rights and benefits as the law requires.
The policyholders entered surrender agreements with Conseco whereby their policies were terminated in exchange for it paying the cash surrender value of the policies. That was far less than the death benefit. For example, one of the class action members, Mr. Camp, received a little over $89,000 when he surrendered his policy, but the death benefit, which was no longer available because the policy terminated upon surrender, would have been $500,000.
Burnett, Camp and other class members, now former policyholders of their terminated policies, sued Conseco for breach of contract, alleging it had forced them to surrender their policies by raising premiums in breach of the policy’s terms. The former insureds sought consequential damages caused by Conseco’s breach, such as the difference between the premiums they had been paying to Conseco and the premiums they would have to pay to another insurer in the marketplace for a like amount of whole life insurance, i.e. the replacement cost of the life insurance policies they had surrendered.
Conseco filed a motion to dismiss the Complaint for failure to state a claim, arguing that a former policyholder cannot sue on a terminated life insurance contract. The plaintiffs argued that they were entitled to consequential damages for Conseco’s breaches of contract because the breaches occurred while their policies were still in effect (even though the policies were later surrendered). The district court agreed with the insurer and dismissed the case, reasoning that because the plaintiffs received cash value upon the termination of their life insurance policies which were now surrendered, their claims were no longer “legally cognizable.”
The Ninth Circuit reversed the district court, siding with the former policyholders. The Ninth Circuit cited California law that “generally permits pre-termination breach of contract claims, including claims involving insurance contracts.” And, where “a contract is terminable at will, liability attaches for breaches occurring prior to the termination of the contract.” In other words, because Conseco breached the terms of the policies before the policies terminated (by illegally raising premiums), the now former policyholders could sue for those pre-termination breaches even post-termination of the contracts. They were entitled to recover the consequential damages caused by the pre-termination breaches – the replacement cost of the surrendered policies – but not the death benefit. The Ninth Circuit also pointed out that in the surrender agreements between the plaintiffs and Conseco, the plaintiffs did not expressly waive their right to sue for breach of contract.
Our take: The life insurer did not fare too badly. It lost the legal battle but won the profitability war. While it was found liable for breach of contract, it is economically better off for breaching. It forced numerous insureds to surrender their policies by drastically raising premiums (when it did not have that right under the contract), which allowed it to get out from under having to pay the death benefit and ongoing investment income on thousands of policies. It was able to dump an unprofitable product for a fraction of what it would have cost had the policies remained in force. It only had to pay for the plaintiffs’ cost to replace their terminated policies in the marketplace instead of much higher policy benefits.
The Burnett case is just one example of how some life insurers use deceitful business practices to avoid paying policy benefits. The insurer was willing to breach the contract to get the profit it wanted. We have seen far worse in the way of insurers denying legitimate claims, especially when the insured has not hired an experienced ERISA or bad faith lawyer. Life, health and disability insurers love to take your premiums but they resist paying claims. Do not let your insurer do that. If you have a legitimate life, health or long-term disability insurance claim, you need an experienced attorney to fight hard for you. At McKennon Law Group PC, our lawyers have decades of experience litigating these types of claims, both under ERISA and state insurance bad faith laws. Let us try to win your case for you.