480 F.3d 579 (1st Cir. 2007), 06-1721, Brooks v. AIG SunAmerica Life Assur. Co.

Docket Nº:06-1721.
Citation:480 F.3d 579
Party Name:Nancy BROOKS, Trustee of the Irrevocable Trust of Donald L. Silverman and as Executrix for the Estate of Donald L. Silverman, and Joan Silverman, Trustee of the Irrevocable Trust of Donald L. Silverman and as Executrix for the Estate of Donald L. Silverman, Plaintiffs, Appellants, v. AIG SUNAMERICA LIFE ASSURANCE COMPANY, Defendant, Appellee.
Case Date:March 23, 2007
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 579

480 F.3d 579 (1st Cir. 2007)

Nancy BROOKS, Trustee of the Irrevocable Trust of Donald L. Silverman and as Executrix for the Estate of Donald L. Silverman, and Joan Silverman, Trustee of the Irrevocable Trust of Donald L. Silverman and as Executrix for the Estate of Donald L. Silverman, Plaintiffs, Appellants,



No. 06-1721.

United States Court of Appeals, First Circuit.

March 23, 2007

Heard Dec. 5, 2006.

Page 580

John Peter Zavez, with whom Noah Rosmarin and Adkins, Kelston Zavez, P.C. were on brief for appellants.

James R. Carroll, with whom Michael S. Hines and Skadden, Arps, Slate, Meagher Flom LLP were on brief for appellee.

Before TORRUELLA, Circuit Judge, CYR, Senior Circuit Judge, and HOWARD, Circuit Judge.

CYR, Senior Circuit Judge.

Nancy Brooks and Joan Silverman, as trustees of an irrevocable trust created by Donald Silverman and as executors of his estate, appeal from a district court decision dismissing their putative class-action claims for breach of contract and unfair business practices against decedent's life insurer, AIG SunAmerica Life Insurance Company. We affirm.



In May 1984, Mutual Benefit Life Insurance Company (Mutual) issued a flexible premium adjustable life (FPAL) insurance policy to Donald Silverman. The FPAL policy provided, inter alia, a death benefit of $850,000 (provided Silverman survived until at least April 1999) and a maturity date of May 1, 2012. Mutual agreed to provide Silverman with yearly reports showing the policy's current cash value, cash surrender value, total paid premiums, and total assessed charges.

Like most FPAL policies, the Mutual policy provided Silverman with a type of savings and investment feature, which depended on the potential investment growth of the policy's accumulated cash value (ACV). Although Silverman could increase or decrease the amount and frequency of his planned premium payments (viz., the policy's flexible premium feature), he initially committed to pay a fixed $41,658.50 premium each year until the policy's maturity date. These premium payments would be added into the ACV of

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the policy. Mutual would invest the ACV, and any interest or dividends earned (guaranteed not to be less than 4% annually) would be added back into the policy's ACV.

On the other hand, Mutual periodically would reduce the policy's ACV to account for cash withdrawals or loans from the ACV made to Silverman, a monthly charge (not to exceed $4 per month) for Mutual's administrative expenses, and the cost of insurance rate (COI rate). Unlike Silverman's fixed annual premiums, the COI rate, which reflected the current actual cost to Mutual of insuring the risks to Silverman's life, was expected to increase over the course of the policy term:

The monthly cost of insurance rate is based on the sex, age, and rate class [viz., Male/Non-smoker] of the insured. Monthly cost of insurance rates will be determined by [Mutual] annually, by earnings, mortality, persistency, and expenses, including taxes. Any change in rates will be in accordance with any procedures and standards on file with the Insurance Department of the jurisdiction in which this policy is delivered [viz., Massachusetts]. Such cost of insurance rates will not be greater than those shown in the table of maximum monthly cost of insurance rates on page 15.

Because Silverman's annual premium payments were fixed, whereas COI rates would increase over time, the monthly COI rate deduction from the policy's ACV could deplete the policy's ACV rapidly if, for example, the insured failed to make timely premium payments, or if the investment return on the ACV was less than optimal. For the years 1999, 2000, and 2001, however, the policy capped the monthly COI rate that Mutual could deduct at $9.42, $10.42, and $11.47 per $1000 of insurance, respectively.

In March 1991, Silverman assigned ownership of his FPAL policy to the irrevocable trust (the Trust) of which appellants currently serve as trustees. In 1994, the New Jersey Commissioner of Insurance took control of a financially-distressed Mutual, and developed a court-approved rehabilitation plan (Rehabilitation Plan) transferring Mutual's assets and selected liabilities to MBL Life Insurance Corporation (MBL Life). Mutual policyholders, including Silverman, were given the option either to receive 55% of their policies' cash surrender value, or to have their policies restructured and transferred to MBL Life at their full value. 1 Silverman elected the latter option. From 1994 through 1999, MBL raised the COI rate from $3.36 per $1000 of insurance to $5.14 per $1000 of insurance.

In 1999, MBL Life obtained court approval pursuant to this Rehabilitation Plan to assign the Mutual policies to appellee AIG SunAmerica Life Assurance Company (SunAmerica). For the policy years 1999, 2000, and 2001, SunAmerica raised the monthly cost of insurance rate on Silverman's FPAL policy from $5.14 to $7.95 per $1000 of insurance. Silverman died on June 27, 2001, and SunAmerica paid the Trust a death benefit of $857,901.86.

By letter dated May 9, 2003, appellants notified SunAmerica, inter alia, that they believed its COI rate increases in 1999, 2000 and 2001 must have been overcharges, given that MBL Life had raised the COI rate at most by 11.5% (in 1997), whereas the SunAmerica COI rates for 1999 and 2000 were increased by 22.5% and 21.8% respectively as compared to the prior year. Appellants further faulted SunAmerica for failing to notify Silverman

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that he needed to increase the amount or frequency of his premium payments in order to offset the dramatically higher COI rates being deducted from his policy's ACV after 1999.

On May 28, 2003, SunAmerica sent appellants a letter explaining that within certain limits, the owner [of an FPAL policy] is given flexibility to determine the amount of premium he or she wants to pay, that Silverman had made no premium payments in 1992 and 1993, that SunAmerica had sent annual statements to Silverman showing that his premium payments were insufficient to cover the COI rate deductions from the policy's ACV, and yet he never requested adjustments to his premium payments. SunAmerica also noted that the policy plainly provides that COI rates would increase (subject to guaranteed yearly caps) over the 28-year life of the policy, and that its COI rates for 1999, 2000, and 2001 were $6.52, $7.12, and $7.95, well below the policy caps $9.47, $10.42, and $11.47. On July 2, 2003, appellants responded, stating only that SunAmerica had failed to comply with their request that it provide the actual per thousand rate mortality charges for the years before SunAmerica acquired the Silverman policy, or as far back as you can provide. On August 5, 2003, SunAmerica sent appellants the requested information, for policy years 1994-1999 (viz., $3.36, $3.72, $4.17, $4.71, and $5.14).

In February 2005, appellants sent SunAmerica a demand letter pursuant to Mass. Gen. Laws Chapter 93A, alleging that SunAmerica had willful[ly] and knowing[ly] committed unfair or deceptive acts or practices by raising, without any justification, the COI rates from 1999 to 2001, failing to warn Silverman that his policy's ACV was being depleted, and misrepresenting that its COI increases had been court-approved pursuant to the Rehabilitation Plan. SunAmerica responded by letter dated March 21, 2005, denying all of these allegations. In May 2005, appellants, acting as trustees/executors of the Silverman trust and estate, filed this putative class-action diversity suit against SunAmerica in the United States District Court for the District of Massachusetts, alleging that SunAmerica's COI rate increases had breached the FPAL policy (Count 1), breached its implied covenant of good faith and fair dealing (Count 2), and violated the Massachusetts and California unfair business practices statutes (Counts 3 and 4). At the core of all four claims is this allegation:

Upon information and belief, the [COI] Rate Increases were not made in accordance with any procedures and standards on file with the Insurance Department of the jurisdiction in which any of the Mutual Life Block of Policies were delivered.

(Emphasis added.)

SunAmerica moved to dismiss the complaint for failure to state a claim, pursuant to Federal Rule of Civil Procedure 12(b)(6). Finding that appellants' complaint failed to allege SunAmerica's bad faith, the district dismissed the breach of implied covenant claim in Count 2, but deferred any ruling on the remaining counts subject to appellants' submission of a supplemental pleading identifying with some specificity the provision or provisions of the contract alleged to have been breached and the manner in which they were breached.

Rather than submitting the invited supplemental pleading, however, appellants filed a supplemental brief in opposition to the SunAmerica motion to dismiss. Appellants cited the policy provision that COI rate changes would be in accordance with any procedures and standards on file with the [Massachusetts Division of Insurance],

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and a state regulation which they maintained had obligated SunAmerica to make such a filing as a precondition to selling FPAL policies in Massachusetts:

Each filing for approval of a variable life insurance policy form shall include an actuarial memorandum, prepared and certified by a qualified actuary, in such form as may be described by the Commissioner, which contains a description of the company's methodology[ies] (sic) used to determine reserve liabilities for any guaranteed death benefits and other...

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