A federal court judge has refused to dismiss a lawsuit brought by the Alberta Investment Management Corp. over a cost-of-insurance rate increase by Transamerica Life Insurance Co.
The firm's two entities, LSH Co. and LSH II Co., and its securities intermediary, Wells Fargo Bank NA, filed a breach-of-contract suit in November in the U.S. District Court for the Central District of California in Los Angeles.
On Wednesday, March 20, Judge S. James Otero largely sided with the plaintiffs, saying four claims could remain the case and they could replead two others that he dismissed.
The Edmonton, Canada-based pension fund manager also filed a similar suit last March against AXA Equitable Life Insurance Co. in U.S. District Court for the Southern District of New York in Manhattan.
Alberta Investment Management said the increases on its 22 Transamerica policies at the center of the dispute range from 11% to 100% and ultimately would increase premiums by up to $18 million through policy maturities.
The suit said the increases were imposed on 20 of the policies in 2015 and 2016 and against the remaining two last year.
The pension fund manager said the universal policies range in face amount from $1 million to $11 million and were issued between 1985 and 2005.
The pension fund's two Luxembourg entities alleged that raising the cost-of-insurance rate, referred to in this case as the monthly deduction rate, would force them to pay exorbitant premiums that would reduce the value of the policies or force them to lapse or surrender their policies and forfeit the premiums they or their predecessors had paid for years.
They argued that Transamerica stood to gain "a huge windfall" either through higher premiums or retaining premiums on policies it would never have to pay a death benefit.
The complaint alleges breach of contract, breach of the implied covenant (contractual), breach of the implied covenant (tortious), injunctive and restitutionary relief under the California Business and Professions Code, violation of the Illinois consumer fraud and deceptive business practices law and declaratory relief. The plaintiffs are asking for compensatory and punitive damages to be determined at trial, pre- and post-judgment interest and the costs of the suit, including reasonable attorneys' fees and restitution.
In its 23-page decision, the court denied Transamerica's motion to dismiss the complaint for lack of personal jurisdiction and failure to state a claim under which relief can be granted under federal rules. The judge said the breach-of-contract claim survived dismissal. The plaintiffs argued that Transamerica breached the policies' terms by increasing the monthly deduction rate based on factors other than the insurer's expectations of future costs.
The LSH entities said the insurer breached the contract by attempting to circumvent the guaranteed minimum crediting rate and by increasing the monthly deduction rate to recoup past lost profits. The judge noted that key policy language says any change in the monthly deduction rate must be prospective and subject to the insurer's expectations of future costs factors. Such factors can include mortality, expenses, interest, persistency and applicable federal, state and local taxes.
The judge said that the plaintiffs contend that "interest" can only refer to interest that the insurer earns or expects to earn on its profits from providing insurance and not on funds in the policyholder's account. Furthermore, the plaintiffs believe that the insurer can only consider interest it earns on the mortality component in determining the cost of insurance.
"The Court concludes that Plaintiffs do not make a sufficient showing that there is a special meaning given to the term 'interest,'" Otero stated. "This does not mean, however, that the Court dismisses Plaintiffs' Breach of Contract Claim. While the Court agrees that the LSH Policies are not reasonably susceptible to Plaintiffs' interpretation of 'interest,' Plaintiffs' additional allegations allow Plaintiffs' Breach of Contract Claim to survive dismissal," the judge ruled.
Otero also said the plaintiff's contractual breach of implied covenant partially survived dismissal.
Transamerica contends the claim is barred for the policies issued in Illinois, Michigan and Illinois because those states don't recognize that claim as a valid cause of action. The court agreed with the insurer for policies issued in those states, it but allowed the plaintiffs to amend the case on this point. The judge kept in the case the claim for the remaining policies issued in California, Arizona, Washington, D.C., Florida and Nebraska.
The judge also allowed the following claims to remain in the case: tortious breach of implied covenant and injunctive and restitutionary relief under California's unfair competition law.
However, it dismissed the Illinois consumer fraud and deceptive business practices claim brought by plaintiffs, which alleged the monthly deduction rate was done to intentionally cause policies to lapse and create a windfall for the insurer.
Although the plaintiffs' alleged wrongful conduct due to the monthly deduction rate increases, they failed to allege that any of the relevant conduct occurred in Illinois, the judge said. Again, however, in dismissing this count, Otero said the plaintiffs could amend it.
The judge also held that the plaintiffs' declaratory relief claim survived dismissal. They sought a declaration that the rate increases were improper and that any excess premiums must be returned.
The suit said that "Transamerica neither has experienced, nor reasonably can expect to experience, higher mortality rates, lower investment income, or other adverse changes in expenses for its policies, including the LSH Policies."
The suit said that mortality rates have steadily improved each year since the LSH policies were issued.
It said the trend showing improved mortality is even more pronounced for older insureds in both the 2008 and 2015 Valuation Basic Tables.
Attorneys with the McDowell Hetherington LLP law firm in Houston and Hinshaw and Culbertson LLP in Los Angeles, who represent Transamerica, were not immediately available for response.
Daniel Goldberg and Avi Israeli, attorneys with the Holwell Shuster & Goldberg LLP law firm in New York, represent the plaintiffs.
Originally posted on TheDeal.com March 25, 2019