Insurer Gets Partial Victory In Colorado COI Lawsuit Verdict

A Colorado federal judge granted a partial summary judgement to a life insurer facing a cost-of-insurance lawsuit, but is allowing the case to continue.

Judge Daniel D. Domenico of the District of Colorado permitted the certification of a class action in his Jan. 6 decision. Advance Trust & Life Escrow Services filed the COI lawsuit against Security Life of Denver Insurance Company on July 26, 2018.

The lawsuit focuses on universal life insurance policies issued by Security Life under names such as Strategic Accumulator Universal Life (SAUL). The policies include a separate COI charge deducted monthly and meant to compensate Security Life for its mortality risk, the lawsuit noted.

Security Life, a subsidiary of Voya Financial until a recent sale to Resolution Life Holdings, did not base its COI charges on mortality costs, the plaintiff said, as is "typically required." The policyholder's contracts only state that Security Life's COI charges "will be determined by us from time to time," the lawsuit stated.

"Policyholders’ comfort with this arrangement is based on trust that the insurer will dutifully adjust COI rates to reflect only the pure costs of mortality coverage," the lawsuit said. "Security Life, however, has not only failed to live up to its end of the bargain in terms of decreasing rates as its mortality expectations improved—it has attempted to dramatically increase COI rates at the same time as it was projecting that mortality rates would continue to decline."

'Deliberately Cryptic'

According to the lawsuit, Security Life imposed a 42% COI increase on SAUL policies in September 2015. Letters explaining the COI hike were "deliberately cryptic," the lawsuit added.

"There was no sudden change for the worse in Security Life’s mortality expectations for the policies, as would be required to raise COI rates," the lawsuit reads. "Nationwide mortality rates have declined significantly over the past several decades and this trend is widely projected to continue. That trend of improving mortality expectations should have resulted in the lowering of COI rates, not a massive raise."

The complaint contains alleges a single count of breach of contract.

In its reply, Security Life noted that the COI increases were below the maximum allowed under the policies. The increases "were driven by adverse changes in future expectations of mortality costs, including impacts associated with the termination of certain reinsurance agreements," the company said.

Security Life requested a summary judgement, noting that while plaintiffs' claim that the insurer "breached the COI provision by raising rates on the basis of non-mortality factors, the contracts nowhere limit SLD to mortality factors only in its determination of COI rates."

Two Out Of Three

Judge Domenico granted summary judgement on this issue, ruling that "the cost-of-insurance provision, as explained, gives Security Life substantial discretion to set cost-of-insurance rates. Security Life 'referred to' the mortality factors the policies required it to, so Security Life did not breach the policies on this basis."

Plaintiffs raised a second issue, alleging that Security Life violated a "non-participation" provision by raising COI charges to recoup losses. Judge Domenico was not impressed with this argument either, calling it "too clever by half" in siding with the insurer.

"The policies use the term 'non-participating' to mean that the policies don’t share in Security Life’s 'surplus earnings,'" the judge noted. "The non-participation provision bars participation in profits only; the policies do not bar Security Life from raising cost-of-insurance rates to recoup past losses."

A third issue has Advance Trust alleging a breach of contract based on the uniformity requirement, which states that “any change in [cost-of-insurance] rates will apply to all individuals of the same premium class and whose policies have been in effect for the same length of time.”

The judge is permitting this claim to go forward to properly determine which group of policies must comply with the uniformity requirement.

In addition, the ruling permits a class of potential harmed clients to be certified. The judge's decision limits the class to owners of Strategic Accumulator Universal Life policies.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.