Those of you with gray hair like me may recall the life insurance vanishing premium lawsuits from the mid-1990s. As a refresher, that flood of lawsuits arose from life insurance policies sold in the 80s (mainly whole or universal life), when policy dividends were high, and policy illustrations showed that accumulated dividends would carry the policy with no additional premiums needed after a certain point in time (i.e., the premiums would “vanish”). The phrase “paid up policy” was heavily used in those days. Unfortunately, when the 90s came along, premium dividends were significantly reduced for a number of economic reasons including much lower interest rates, and suddenly, life insurance policyholders who had not paid premiums in years were getting premium due notices. Needless to say, the plaintiffs’ bar had a field day, with thousands of lawsuits and class actions being filed.
The vanishing premium cases ultimately wound down after years of litigation and billions paid in settlements. Fast forward 20 years later, and life insurance companies may be in the crosshairs again, in a twist on the vanishing premium claims. A class action was filed in January against a large life insurance company in federal court in Maryland. The claims are that the life insurance company manipulated the balance sheets through the use of wholly owned captive companies in an effort to create false surpluses, leading to diminished reserves and increased corporate dividends to shareholders. The insurer is alleged to be increasing policyholder premiums as a result of the shifted transactions and misrepresenting to its policyholders the reason policy costs are going up.
Similar to the vanishing premiums litigation of yesteryear, the claims being brought include breach of contract, conversion and fraud, with punitive damages being sought on behalf of the named plaintiffs and the class. Also similar to the vanishing premium cases, what began with one suit against one company has implications for many other life insurance companies. Apparently, many companies have been sending letters to their life insurance policyholders warning of impending premium increases, and these companies will likely find themselves targeted for similar litigation.
While it is too early to tell if this new version of life insurance litigation will explode like the vanishing premium lawsuits of old, this development definitely warrants monitoring by the industry in an effort to stay ahead of the curve. It is never too early to begin considering litigation strategy options in the event these claims have legs.
