Court upholds $28.4M verdict of COI charges, adds potential interest

A Missouri appellate court upheld a $28.4 million award last week in a class-action lawsuit over the cost-of-insurance (COI) charges on universal life policies.

Additionally, the court remanded the lawsuit to the trial court after finding that plaintiffs were entitled to prejudgment interest.

The case originated from a David B. Karr purchase of a flexible premium adjustable policy from Kansas City Life Insurance Co., court documents say.

The policies provide a death benefit like traditional term life insurance but also accumulate a cash value, which earns interest and can be borrowed against or withdrawn by the policyholder. The cash value is paid to the policyholder if a policy is terminated or surrendered.

Cost of insurance disputed

Karr filed three claims for breach of contract relating to how the accumulated cash value for the policies were calculated.

"KCL breached the Policies by reducing each Policy's monthly cash value by an overstated monthly deduction comprised of a 'cost of insurance' amount and a 'monthly expense charge,'" Karr claimed in court documents.

The monthly cost of insurance should be based on mortality risk factors, the lawsuit states. Instead, KCL "breached the Policies by considering non-mortality factors like expense recovery and profit generation to determine" the monthly rate, court documents claim.

Likewise, Karr claimed that the monthly expense charge provisions in the policies specified a fixed dollar amount that could be included in the monthly deduction subtracted from cash value. KCL "breached the Policies by also considering expense recovery in calculating monthly COI rates," the lawsuit claims.

Lastly, the lawsuit claims that the insurer failed to adjust monthly COI rates as its expectations regarding future mortality experience improved. The industry has a difficult history with controversial COI hikes.

KCL argued for summary judgment based on the statute of limitations and the "primary jurisdiction doctrine" in order to permit the Missouri Department of Insurance to "determine the meaning" of the policies, court documents say.

A Missouri court allowed the lawsuit to proceed as a class action on behalf of all current and former Missouri flexible premium adjustable owners of policies for the following products issued in the state, subject to certain exclusions: Better Life Plan, Better Life Plan Qualified, LifeTrack, AGP, MGP, PGP, Chapter One, Classic, Rightrack (89), Performer (88), Performer (91), Prime Performer, Competitor (88), Competitor (91), Executive (88), Executive (91), Protector 50, LewerMax, Ultra 20 (93), Competitor II, Executive II, Performer II, or Ultra 20.

No interest given

After a short trial in December 2022, a jury awarded the class of plaintiffs $28.4 million. Karr followed up by filing a motion for prejudgment interest costs.

According to Karr, the additional prejudgment interest calculation totaled $13.5 million with that amount continuing to accrue at the daily rate of nearly $5,000 through the date of a final judgment. KCL opposed the request for interest and argued that Karr's breach of contract claims
"were not liquidated and would result in a double recovery," court documents say.

In May 2023, the trial court accepted the jury's verdict but denied Karr's request for prejudgment interest. An appeal sent the case to the Missouri Court of Appeals.

"The trial court committed legal error when it denied Karr's request for an award of
prejudgment interest," Judge Cynthia L. Martin wrote in a Sept. 24 decision.

Kansas City Life provided the following response to the appeals court ruling: "We are aware of the ruling. We believe that the Appellate Court’s opinion contains a number of errors. The Company is in the process of appealing this ruling."

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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.