Almost a year ago, the U.S. Court of Appeals for the Ninth Circuit ruled that an alleged violation of California's illustration statutes could serve as a predicate for liability under the California Unfair Competition Law. Since then, the case in which that decision was rendered has yielded some interesting results. The case I'm referring to is Walker v. Life Insurance Company of the Southwest.
As a refresher, the Ninth Circuit ruling reversed in part a decision by the U.S. District Court for the Central District of California in a certified class action of indexed universal life policyholders residing in California.
California's illustration statutes, as listed in the California Insurance Code, are substantially similar to NAIC Model 582, and apply to all individual life insurance policies sold in California, with a few exceptions. The Ninth Circuit affirmed the district court's finding that the illustrations of the policy charges and interest rates were not deceptive, but left open the question of whether the challenged practices were unlawful or unfair.
After that decision, plaintiffs filed a new complaint in the district court, which alleged only that the insurer violated California's UCL by failing to adhere to the illustration statutes. Specifically, this version of the complaint alleged that Life Insurance Company of the Southwest:
- Provided incomplete illustrations.
- Portrayed nonguaranteed elements as guaranteed.
- Failed to define terms in language a consumer can understand.
- Illustrated nonguaranteed elements not described in the policies.
- Used illustrations that depict policy performance more favorable than that which could be reasonably based on actual historical experience.
The court issued a ruling that addressed each of the specific purported violations. The court granted summary judgment for the insurer on the "incomplete" allegation, finding that the illustration statute did not require that every policy feature be included in a basic illustration.
Based on its previous holding that the guaranteed interest rates
were in fact guaranteed, the court also granted the insurer's
motion on the nonguaranteed element allegation. Finding that some
terms were defined and some were not, the court granted in part
each party's motion on various terms not being defined.
The court found that a statute providing that language should be "understandable" did not impose a "mandatory statutory requirement which an insurer can violate," and thus granted the insurer's motion on that allegation.
Finally, the court granted summary judgment for plaintiffs on nearly all of their allegations that certain nonguaranteed elements not in the contract were found in the illustration. These elements included incentives to retain the policy, such as reductions in charges after a certain period of time.
In sum, this is a positive result for the industry, and certainly mitigates the Ninth Circuit's earlier ruling. Most of the challenges to the broad language of the statute were rejected by the court. These challenges include not requiring illustrations that provide information on every single nuance in a policy, or that were vaguely "understandable" by consumers.
The two issues on which the plaintiff, Walker, prevailed were the allegations that some terms were not adequately defined and that reductions in charges not defined in the contract were improperly contained in the illustration. Those two issues can be fairly easily fixed going forward – carriers should ensure that terms are defined, and that there are no charges or credits found on the illustration that are not described in the contract.
As for policies issued in the past, it remains to be seen whether there will be an uptick in litigation. As predicted, there has been an increase in cases alleging violations of other insurance statutes (such as grace and lapse notification statutes, for example), but cases alleging violations of the illustration statutes have not yet followed suit.
So what's next? The plaintiffs recently moved to certify a class of all California residents who purchased IUL policies from Life Insurance Company of the Southwest. Meanwhile, the insurer has stipulated that all class members received one of a handful of types of pre-sale illustrations. It is likely that reliance on the illustrations will feature prominently in the insurer's opposition to the plaintiffs' motion for class certification.
Because reliance on the IUL illustrations was by the Ninth Circuit and the trial court in its earlier rulings, it may determine whether a class can be certified. The class certification ruling, then, may impact whether the industry will see more or fewer class action lawsuits with similar allegations going forward.
The trial will be in front of a judge, and not a jury, who will then decide the appropriate remedy for the only two remaining violations. Plaintiffs cannot recover "damages" as traditionally understood under the UCL, but can receive a declaration or injunction ordering the insurer to do (or not do) something, or rescission of the insurance policies requiring a refund of premiums.
To avoid liability, insurers and advisors should ensure compliance with state and federal statutes and regulations. Particularly with respect to illustrations, ensure that all necessary terms are defined, and that there are no charges or credits on the illustration not found in the contract. Conducting a thorough and periodic audit of your materials can help you spot any issues of concern.
Additionally, providing the potential customer with full information and documenting the reason for purchase can help avoid or dampen the impact of litigation. As discussed, reliance and causation will likely be the sticking points in determining class certification. If the purchaser bought the policy for reasons other than the alleged violations or if any potential issues were disclosed, the purchaser cannot then complain that they were damaged by that infraction.
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