In re Conseco Life Ins. Co. Life Trend Ins. Mktg. & Sales Practice Litig., C 10–02124 SI.

• Decision Date: 29 January 2013
• Docket Number: No. C 10–02124 SI.,C 10–02124 SI.
• Citation: 920 F.Supp.2d 1050
• Parties: In re CONSECO LIFE INSURANCE CO. LIFE TREND INSURANCE MARKETING AND SALES PRACTICE LITIGATION.
• Court: U.S. District Court — Eastern District of California

920 F.Supp.2d 1050

In re CONSECO LIFE INSURANCE CO. LIFE TREND INSURANCE MARKETING AND SALES PRACTICE LITIGATION.

No. C 10–02124 SI.

United States District Court, N.D. California.

Jan. 29, 2013.

Alyson A. Foster, August J. Matteis, Jr., Benjamin R. Davidson, Jonathan M. Cohen, Kathleen M. Hale, Scott D. Gilbert, Stephen A. Weisbrod, Gilbert LLP, Washington, DC, David J. Millstein, Millstein & Associates, San Francisco, CA, for Plaintiffs.

Cale P. Keable, David S. Clancy, James R. Carroll, Raoul Dion Kennedy, Skadden Arps Slate Meagher & Flom LLP, San Francisco, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT, DENYING CONSECO'S MOTION FOR SUMMARY JUDGMENT AND DENYING CONSECO'S MOTION TO DECERTIFY THE ENTIRE CLASS OR SUBCLASS

SUSAN ILLSTON, District Judge.

Now before the Court are plaintiffs' motion for partial summary judgment, defendant Conseco's motion for summary judgment, and Conseco's motion for decertification of the entire class, or in the alternative, decertification of the subclass of releasors. The parties have submitted briefs and on December 14, 2012, the Court held a hearing on the motions. Having carefully considered the parties' arguments, the Court GRANTS IN PART and DENIES IN PART plaintiffs' motion for partial summary judgment and DENIES Conseco's motion for summary judgement and DENIES Conseco's motion to decertify the class or subclass.

BACKGROUND

I. Factual Background

Plaintiffs in this multidistrict class action are holders of “LifeTrend 3” and “LifeTrend 4” life insurance policies now administered by defendant Conseco. Plaintiffs allege that Conseco breached the insurance policy when it restructured two account fees in 2010—so-called “cost of insurance charges” and “expense charges”—and seek injunctive and declaratory relief requiring Conseco to reverse these fees, to refrain from charging them in the future, and to restore the value of plaintiffs' policies.

A. The Policies Pre–2010

The policies were issued in the 1980s and 1990s by Massachusetts General Life Insurance Company and Philadelphia Life Insurance Company, and are now administered by Conseco. The policies provided for a stated annual premium to be paid by the policyholder. See Clancy Decl. in Supp. of Conseco's Mot. for Decert. (“Clancy Decl. I”), Ex. 1, (the “Brady Policy”) at 3; Hopkins Decl. in Supp. of Pl. Mot. for Part. Summ. Judg., Ex. 1, Brady Policy at 3. Conseco deposited the policyholder's premium into an “accumulation account,” which would accrue a minimum guaranteed interest rate (either 3.5% or 4.5% depending on the kind of policy). The policy permits Conseco to deduct a monthly “cost of insurance charge” (“COI charge”) and a monthly “expense charge” from the accumulation accounts. The COI charge was subject to a cap as set forth in the policy. The expense charge could never exceed $5 per month. Policyholders were permitted to take out loans against the balance of their accumulation accounts. A policyholder could choose at any time to surrender his policy and receive the balance of the accumulation account, minus a set “surrender charge.” Brady Policy at 9. The combined effect of the above provisions was that the balance of a policyholder's accumulation account would change over time as a result of any loans taken out, monthly deductions, and the accumulation of interest at the guaranteed rate.

To arrive at a monthly COI charge, Conseco multiplied the cost of insurance rate (“COI rate”) by what it called the “net sum”—the difference between a policyholder's death benefit and the amount in his or her accumulation account. The COI rate was determined according to a table entitled, “Guaranteed Maximum Monthly Mortality Charge,” which set a rate per $1000 of net sum, “based upon the Commissioner's 1980 Standard Ordinary Mortality Table.” Brady Policy at 10. For example, according to the Table, a 70–year old male with $50,000 in his accumulation account and $100,000 death benefit, has a net sum of $50,000 and pays $3.87 per $1000 of that net sum, for a maximum monthly COI charge of $193.50, less other unrelated charges or additions. The $3.87/1000 rate represents the monetized percentage chance that someone of a particular age and gender will die in a given policy year. This monthly COI charge calculation is a maximum. The policy allows Conseco to adjust the charge upward or downward so long as it does not exceed the maximum as provided for in the Table Id. at 9–10. The policy, however, does not disclose precisely how or why Conseco would make upward or downward adjustments. The “Monthly Cost of Insurance” section states, “[Conseco] reserves the right to adjust the monthly cost of insurance being charged on any policy anniversary by increasing or decreasing the rates for the monthly cost of insurance under this plan by giving written notice to all insureds not less than ninety days prior to the date of such change.” Id. However, “[i]n no event can the rates for the monthly cost of insurance be increased to an amount greater than the rates for the attained age of the insured specified in this table.” Id. at 10. Moreover, “[t]he monthly cost of insurance rates, and any change in the monthly cost of insurance as provided herein, are and will be determined on a uniform basis for insured of the same age, sex and classification for all policies issued with like benefits and provisions.” Id.

For many years, Conseco only deducted COI charges for the first eight years a policy was in effect. See, e.g., Hopkins Decl., Ex. 7, Conseco's Resp. to Minn. Dept. of Commerce, at 4 (“Based on the pricing elements of the time, Massachusetts General Life ... instituted a current company practice where COI and expense charges would only be deducted for the first 8 policy years.”). After the eighth year, the COI charge dropped to $0. Id. Because there were no cost of insurance deductions, the insured's accumulation account values would continue to exceed the death benefit, also called the guaranteed cash value (“GCV”). There was also an Optional Premium Payment Provision (“OPPP”), which provided that the policyholder could choose to reduce or stop paying annual premiums after five years, so long as the amount of money in his or her accumulation account met or exceeded the GCV. See Hopkins Decl., Ex. 3 at CLIC 0003517. Thus, for those who elected the OPPP provision, after eight years, no additionalpremium payments or cost of insurance charges were required.

The policies also contained a “non-participating” clause, which stated that the policies “will not share in any of the Company's profits or surplus earnings. Any premium or factor changes are determined and redetermined prospectively. The Company will not recoup prior losses, if any, by means of premium or factor changes.” Brady Policy at 13.

B. The October 2008 Letter.

Plaintiffs allege that, from the time they purchased their policies in the 1980s and 1990s, until 2008, Conseco sent yearly notices stating that the policies were adequately funded and that no additional monthly fees were owed. Brady FAC ¶¶ 71, 76–77 (Dkt. 51). In October 2008, however, Conseco sent a letter (the “October 2008 Letter”) to policyholders announcing that their policies had become underfunded. See October 2008 Letter to Hovden, Hopkins Decl. Ex. 9. The Letter informed policyholders that Conseco planned to restructure its COI and expense charges, and stated that the additional charges were necessary because “experience factors have differed from those assumed when your policy was originally sold.” Id. The Letter did not elaborate on the “experience factors.” The Letter did inform the affected policyholders that they had three options for making up the shortfalls in their now underfunded accumulation accounts. First, a policyholder could make an up-front payment to make up the shortfall, then resume paying premiums to ensure that the policy remained in full force. Id. Alternatively, a policyholder could refrain from paying off the shortfall, in which case the policy would go into “Continuation of Insurance.” Id. After entering Continuation of Insurance, the policyholder could either choose to do nothing and let his policy terminate when its balance became insufficient to cover monthly deductions, or could make flexible premium payments until the balance exceeded the cash value of the policy, in which case the policy would go back into full force and could be maintained with additional premiums in the future. Id.

C. The Regulatory Settlement

Upon receiving the October 2008 Letter, policyholders began contacting state insurance regulators to express concerns about the additional COI and expense charges. Hopkins Decl., Ex. 12., Regulatory Settlement Agreement (“RSA”) ¶ 21. Several months after sending the October 2008 Letter, Conseco sent its policyholders a follow-up letter (the “December 2008 Letter”) stating that they should disregard the October 2008 Letter because Conseco had begun working with state insurance regulators to review Conseco's actions. See December 2008 Letter to Brady, Hopkins Decl. Ex. 13. On May 28, 2010, Conseco reached a Regulatory Settlement Agreement with the various state regulators. Pursuant to the RSA, Conseco is required to follow a specific set of procedures in administering the policies. Furthermore, Conseco agreed not to demand that policyholders pay one-time shortfall payments. The RSA allowed Conseco to resume COI charges with specified restrictions and procedures. RSA ¶¶ 56–61.

The RSA included a “Corrective Action Plan” (“CAP”), which provided for a number of changes to the policies. RSA ¶¶ 31–66. Some of these changes automatically applied to all policyholders, and others were contingent on waiving legal claims against Conseco in exchange for certain benefits. For example, in exchange for eligibility to recover from a $10 million settlement pool, the policyholder released Conseco from all claims ...