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Rich v. William Penn Life Insurance Co. of New York

United States District Court, D. Maryland

September 25, 2018

LESLIE S. RICH, Plaintiff,
v.
WILLIAM PENN LIFE INSURANCE COMPANY OF NEW YORK, Defendant.

          MEMORANDUM OPINION

          George L. Russell, III United States District Judge.

         THIS 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).[1] 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 Motion.

         I. BACKGROUND[2]

         A. The Class Policies

         Rich is 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.).

         William 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. ¶ 23).

         Rich's 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).

         On July 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. (Id.).

         Under 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).

         B. The Captive and Affiliate Reinsurance Scheme

         Rich 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 here.

         Because 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.).

         When 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).

         William 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. ¶ 203).

         C. The COI Increase

         Although 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).

         Despite 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.).

         When 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:

for 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 interest margin.

(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).

         These 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).

         Five years after the Great Recession, on July 15, 2015, William Penn sent the COI Notification Letter to its policyholders. (Id. ¶ 286; COI Letter).

         D. Procedural History

         On July 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).

         On 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 No. 42).

         II. DISCUSSION

         A. Stand ...


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