Courts Divided Over Rising Insurance Rates

Another year means another class-action lawsuit filed in response to the rising cost of insurance levied by an insurance carrier — this time involving AXA Equitable Life Ins.

Barring a settlement, the outcome of the case will only add to the pile of litigation that has courts split on the legality of raising the cost of insurance (COI).

“Courts remain divided over the legality of raising the cost of COIs,” wrote Jeffrey W. Bird, a financial advisor with NBW Group in Minneapolis, in the December issue of the For Advisors Only newsletter.

In Fleisher v. Phoenix Life Insurance, a long-running class action case challenging a COI rate increase, a New York U.S. District Court held that an insurer raising rates may only consider factors “specifically enumerated in the policy contract,” Bird wrote.

Such factors included the insured’s sex, issue age, policy year and class. (The case was settled last year for $42.5 million and Phoenix agreed to a freeze on any new COI increase through Dec. 31, 2020, court documents indicate.)

“The argument boiled down to whether Phoenix was restricted solely to those factors listed to those factors listed, or whether those factors were only some of those that the carrier could consider,” Bird also wrote.

Not so in Norem v. Lincoln Life, decided in 2013 by the U.S. Court of Appeals for the Seventh Circuit.

In that case, “the court insisted the term ‘based on’ wasn’t limiting, because, for example, no one would suppose that a cake recipe ‘based on’ flour, sugar and eggs must be limited only to those ingredients,” Bird wrote.

Class-action suits against raising insurance rates are nothing new and can be traced back to the early 1990s at least, if not earlier. For generations, insurance companies considered COI increases unthinkable. Once some carriers crossed the line, others followed suit.

Latest Suit Alleges Targeting

The latest salvo in the COI saga involves the Brach Family Foundation, a charitable foundation that sued AXA Equitable in February in U.S. District Court in New York and accused AXA with violating the terms of its Athena Universal Life II insurance contracts.

Plaintiffs allege that the company raised COI rates for a block of nearly 1,700 universal life policies that were selected in part for their pattern of premium payments.

Plaintiffs argue in court filings that Axa Equitable increased prices specifically on its UL policyholders “who minimize the premium payments and keep policy values as low as possible — even though the policies expressly allow them to do so.”

Axa Equitable, the plaintiffs allege, is targeting only policyholders with issue ages above 70 and with current face values of more than $1 million, a group for which “there is no equitable basis for singling out that subset for an increase.”

Similar to Fleisher v. Phoenix, in which the dispute hinged on specifically enumerated elements that allowed the carrier to raise the COI, the plaintiffs that Axa Equitable is raising prices based on factors that are not mentioned in the contract.

“While the policies permit AXA to adjust the cost of insurance rates periodically, they allow AXA to do so based only on certain specified factors, such as reasonable assumptions about mortality and investment experience,” Brach Family Foundation said in court documents. “‘Minimal funding’ is not one of those enumerated factors.”

Plaintiffs also say Axa Equitable filings indicate the company will generate an extra $46 million in profit over what the company had initially projected by raising the COI levy.

Carriers Within Their Bounds

The company, in response, said it has hewed to the terms of its Athena universal life contracts and is within its right to raise prices.

“In an effort to prudently manage our book of business, we continuously monitor the performance of our in-force policies,” Axa Equitable said through a spokeswoman in an email response Friday.

“Because we expect future mortality and investment experience to be far less favorable than anticipated, a change in rates was necessary,” she wrote. “We stand by our decision to raise rates and believe this suit has no merit.”

Axa Equitable isn’t the only company rising COI rates. Company representatives with Transamerica and Voya Financial say they’ve communicated the price increases through their agents and distributors in a timely fashion.

According to research conducted by M Financial Group in Portland, Ore., Transamerica announced COI rate increases on some UL policies; Banner Insurance and William Penn Life raised COIs for no-lapse guarantee UL plans issued from 1996 to August 2008; U.S. Financial Life, an AXA subsidiary, jacked up COIs on Nova and SuperNova UL contracts; Voya Financial hiked some charges on COI on nine UL and no-lapse guarantee products bought before October 2009; and AXA raised COI to Athena Universal Life II beginning Jan. 1.

Industry experts had no doubt that it was only a matter of time before the increases were challenged in court, as has been the case in the past. Brach Family Foundation v. Axa Equitable appears to be the first in this latest round of COI disputes.

How and where the courts come down in this particular case, the industry will have to wait and see.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].