United States District Court, D. Maryland
LESLIE S. RICH, Plaintiff,
WILLIAM PENN LIFE INSURANCE COMPANY OF NEW YORK, Defendant.
L. Russell, III United States District Judge.
MATTER is before the Court on Defendant William Penn Life
Insurance Company of New York's (“William
Penn”) Partial Motion to Dismiss Plaintiff's First
Amended Complaint (ECF No. 38). Plaintiff Lesley S. Rich, trustee
for the Richard S. Wallberg Insurance Trust (the
“Trust”), brings this putative class action
against William Penn for breach of contract and fraud in
connection with certain universal life insurance policies
that the Trust and putative class members purchased. The
Motion is ripe for disposition, and no hearing is necessary.
See Local Rule 105.6 (D.Md. 2016). For the reasons
outlined below, the Court will grant in part and deny in part
The Class Policies
the trustee of the Trust, a trust organized under New York
law. (1st Class Action Am. Compl. [“Am. Compl.”]
¶ 1, ECF No. 35). The Trust is the designated owner of a
Longevity UL 100 life insurance policy, one of the Class
Policies discussed below, that Rich purchased in 2001 for the
benefit of his son. (Id. ¶ 14). William Penn is
a for-profit life insurer organized under New York law and
headquartered in Frederick, Maryland. (Id. ¶
1). William Penn's corporate parent is Banner Life
Insurance Company (“Banner”), a for-profit life
insurer organized under Maryland law. (Id.). Banner
is wholly owned by Legal and General America, Inc.
(“LGA”). (Id.). LGA is wholly controlled
by Legal and General Group Plc (“L & G”), a
United Kingdom company. (Id.).
Penn issues certain universal class policies: (1) Longevity
UL 100; (2) Penn UL; (3) Life Umbrella UL 120; and (4)
Advantra (collectively, the “Class Policies”).
The Class Policies differed from regular life insurance
policies. (Id. ¶ 23). Regular policies expire
or “lapse” if the cash value of the policy is
insufficient to cover the policy's insurance charges and
other expenses. (Id.). One such expense is the cost
of insurance (“COI”) fee, which William Penn
deducts monthly from the account value of each life insurance
policy, including the Class Policies. (Id.
¶¶ 27-28). Unlike regular life insurance policies,
the Class Policies were “no-lapse-guarantee”
policies, meaning the Class Policies were guaranteed to stay
in force for a certain period if the policyholders paid the
minimum monthly premium. (Id. ¶¶ 22-23).
Accordingly, the Class Policies would not lapse at any time
during the guaranteed period, even if their cash values-the
portion of the premiums policyholders paid that exceeded the
Class Policies' costs-were negative. (Id. ¶
specific policy featured a $500, 000.00 death benefit with a
ten-year no-lapse-guarantee, as long as Rich paid the minimum
premium. (Id. ¶¶ 22-23). Policyholders
could also choose to pay more than the required minimum
premium, and these excess premiums increased the Class
Policies' cash value. (Id. ¶ 57). Rich paid
both its minimum required premiums and excess premiums
throughout the course of the policy. (Id.
¶¶ 25, 289). Interest accrued at a rate of 4% on
the account values of the Class Policies. (Id.
¶¶ 24, 40).
15, 2015, Rich and the putative class members received a
letter from William Penn informing them that the monthly COI
rate would increase in August 2015 (the “COI
Notification Letter”). (Id. ¶ 27). The
COI rate increased dramatically over the next year.
(Id. ¶¶ 29, 31). In August 2015, Rich paid
a COI rate of $317.88 per month, and the policy's account
value was $34, 798.22. (Id. ¶ 28). In September
2015, Rich paid a COI rate of $342.31 per month.
(Id. ¶ 31). The COI rate continued to rise,
increasing to $555.39 in February 2016 and to $620.72 in
November 2016. (Id.). With these increases, the COI
fee began to exceed the minimum premium amount. (Id.
¶ 32). Accordingly, the deduction of the COI fee will
soon drain the cash value of the policy entirely so that
there will be insufficient cash value to fund the policy
beyond the guaranteed ten-year period. (Id.). As of
November 2016, the policy value had dropped to $29, 455.67.
the terms of the Class Policies, any COI rate changes must be
“based on the Company's expectations as to future
mortality, persistency, expenses and investment
earnings.” (Am. Compl. Ex. 2 [“Class
Policies”] at 11, ECF No. 35-2). The Class Policies
explicitly prohibit COI rate changes based on William
Penn's “past experience.” (Id.). The
COI Notification Letter stated that, in accordance with the
terms of the Class Policies, William Penn increased the
monthly COI rate “based on [its] expectations of the
future cost of providing this coverage.” (Am. Compl.
Ex. 4 [“COI Letter”] at 11, ECF No. 35-2). In
addition, before the COI increase, William Penn represented
that it was a “well-funded company, operating
efficiently, increasing profits and cash flows, and reducing
costs” in its corporate annual reports and on its
website. (Am. Compl. ¶ 279). William Penn also
“made material representations and omissions regarding
the pricing model and the policies performance” in its
annual policy statements (“Policy Statements”)
through 2015. (Id. ¶ 280).
The Captive and Affiliate Reinsurance
alleges the reason provided by William Penn for the COI rate
increase is specious. (Id. ¶ 35). According to
Rich, William Penn's financial instability was the real
reason for the increase. (Id.). Rich contends
William Penn has been concealing its financial instability
through “a captive and affiliate reinsurance
scheme.” (Id.). Rich maintains that William
Penn impermissibly increased COI rates based on past
experience “to appear financially sound.”
(Id.). The Amended Complaint's description of
this scheme is immensely detailed and is briefly summarized
it is unlikely that a life insurance policy will have to pay
out all death benefits for which it is obligated at the same
time, life insurance companies are required to hold only a
certain portion of their total contractual obligations in
reserves. (Id. ¶ 147). In 2000, lawmakers
enacted Regulation XXX, significantly increasing reserve
requirements for life insurers. (Id. ¶ 162). In
response, insurance companies began using reinsurance schemes
to work around the reserve requirements. (Id.
¶¶ 164-65). In a reinsurance transaction, one
company, the ceding company, cedes a block of life insurance
policies to another company, the assuming company or the
reinsurer. (Id. ¶ 145). The assuming company
then becomes responsible for paying the liabilities of the
ceded block of policies; the ceding company is no longer
responsible for the liabilities. (Id.). The
transaction allows the ceding company to drop the liabilities
of the block of policies from its financial statements and
improve its surplus. (Id.).
the reinsurer is financially solvent and highly capitalized,
reinsurance transactions can help a ceding company
legitimately spread risk. (Id. ¶ 152). Problems
arise, however, when the reinsurer is an undercapitalized,
wholly owned company of the ceding company. (See id.
¶ 155). In such transactions, known as “captive or
affiliate transactions, ” the ceding company does not
actually accomplish the valid purpose of spreading risk
because the company has simply ceded its liabilities to an
affiliated, undercapitalized company. (Id. ¶
155). As a result, the ceding company is still ultimately
responsible for the liabilities. (Id.). Put another
way, “pretending to transfer risk to an affiliate or
captive is similar to a husband handing off a debt he owes a
bank to his wife, purportedly to improve the family's
financial condition. It simply does nothing.”
(Id. ¶ 156).
Penn engaged in several captive reinsurance transactions.
(Id. ¶ 183). Although Rich acknowledges the
transactions were legal, Rich alleges William Penn has used
these transactions to make it appear financially stable and
to inflate its statutory surplus. (Id.). Through
these transactions, William Penn “misstate[d] its true
surplus, and mask[ed] its troubled financial condition to
regulators, rating agencies, and ultimately, its life
insurance customers.” (Id.). They
“allowed William Penn to misrepresent [its] financial
health by hiding liabilities and inflating assets, thereby
improving [its] risk profile and reducing the amount of cash
reserves [it was] required to maintain.” (Id.
The COI Increase
William Penn appeared to be financially stable on paper
because of these captive reinsurance transactions, it had
been facing financial difficulties for some time.
(Id. ¶ 52). After the Great Recession, William
Penn was suffering financially because of poor investment
performance and low interest rates. (Id. ¶
204). On January 15, 2013, LGA, Banner, and William Penn
released an agency communication stating, “We are
experiencing an investment environment where even the
guaranteed minimum interest rate on some in-force policies
cannot be achieved with new investments.” (Id.
¶ 54). William Penn knew since at least the time of this
agency communication that the COI fees would not adequately
account for future experience, but did not raise the rates at
that point. (Id. ¶ 57). Instead, “it
chose to lull policyholders into a false belief that their
policies were performing adequately and that they should
continue to pay excess premiums and build the polices'
cash values.” (Id.). During this time period,
analysts also released reports noting the financial problems
life insurers would face because interest rates were too low
and captive reinsurance transactions were inflating
surpluses. (Id. ¶¶ 204-06).
its financial problems, William Penn continued to
misrepresent itself as financially stable in its Policy
Statements, in its corporate annual reports (“Corporate
Reports”), and on its website. (Id.
¶¶ 279-80). “In fact, every public
representation William Penn, Banner, LGA, or L&G made
indicated . . . that the companies were performing strongly,
reducing costs, and outperforming the market.”
(Id. ¶ 47). Rich and the putative class members
“relied upon these statements, as indicated by their
continuing to pay premiums.” (Id.).
William Penn finally did decide to raise COI rates, the
increase was an attempt to recoup prior losses. (Id.
¶ 59). In an agency communication on July 14, 2015, one
day before the COI Notification Letter was sent to Rich and
the putative class members announcing the COI rate increase,
the companies stated they were experiencing
“significantly eroded profitability.”
(Id. ¶ 52). The agency communication explained:
an extended period of time
Credited interest rates have been much lower than those
reasonably assumed in pricing, at times decades
ago, resulting in lower cash values and less
(Id. ¶ 53). The agency communication went on to
state that, contrary to the reason it gave policyholders in
the COI Notification Letter, William Penn was increasing COI
rates in an “attempt to restore profitability in the
future.” (Id. ¶ 65).
agency communications and the analyst reports demonstrate
that William Penn knew it had been losing money on the
policies at issue for years. (Id. ¶¶
204-06). William Penn, therefore, knew the COI rate would
need to be increased to recoup its losses. (Id.
¶ 58). Despite this knowledge, William Penn never
notified policyholders of these problems, and it continued to
misrepresent itself as financially stable. (Id.). In
reliance on its misrepresentations, policyholders continued
to pay their premiums and excess premiums and refrained from
obtaining alternative life insurance. (Id. ¶
60). During this time, “William Penn took no action
regarding the Class Policies save to reduce the interest
rates to the minimum guaranteed rate of 4% in 2010.”
(Id. ¶ 207).
years after the Great Recession, on July 15, 2015, William
Penn sent the COI Notification Letter to its policyholders.
(Id. ¶ 286; COI Letter).
20, 2017, Rich filed suit against William Penn on behalf of
the Trust and putative class members. (ECF No. 1). William
Penn moved to dismiss on September 29, 2017. (ECF No. 30). In
response, Rich filed an Amended Complaint, alleging two
causes of action based on the COI rate increase: (1) breach
of contract (Count I) and (2) fraud (Count II). (Am. Compl.
¶¶ 271-92). Rich seeks compensatory and punitive
damages, restitution, declaratory and injunctive relief, and
attorney's fees and costs. (Id. at 80).
November 13, 2017, William Penn filed a Partial Motion to
Dismiss Plaintiff's First Amended Complaint. (ECF No.
38). Rich filed an Opposition on November 22, 2017. (ECF No.
39). On December 20, 2017, William Penn filed a Reply. (ECF