Robainas v. Metro. Life Ins. Co.
| Decision Date | 09 October 2015 |
| Docket Number | 14cv9926 (DLC) |
| Parties | MARIA DEL CARMEN ROBAINAS, GIOVANNI VALLADARES, JOSE A. CAPABLANCA, MODESTO MARTIN, JACQUELINE J. RUSS, ALLEN PEREZ and GREGORY TRUITT, Plaintiffs, v. METROPOLITAN LIFE INSURANCE COMPANY and METLIFE, INC., Defendants. |
| Court | U.S. District Court — Southern District of New York |
For Plaintiffs:
David J. Harth
John S. Skilton
Timothy W. Burns
Jeff J. Bowen
Eric G. Barber
Freya K. Bowen
Jesse J. Bair
Perkins Coie LLP
One East Main Street, Suite 201
Madison, WI 53703
Keith W. Miller
Perkins Coie LLP
30 Rockefeller Plaza, 22nd Fl.
New York, NY 10112
Shawn M. Raiter
Larson King LLP
30 East Seventh Street, Suite 2800
Saint Paul, MN 55101
William R. Scherer, Jr.
Albert F. Frevola, Jr.
Joshua D. Clark
Conrad & Scherer LLP
633 South Federal Highway, 8th Fl.
Fort Lauderdale, FL 33301
Peter B. Katzman
Mazzeo Song & Bradham LLP
444 Madison Avenue, 4th Fl.
New York, NY 10022
Shanon J. Carson
Glen L. Abramson
Patrick F. Madden
Berger & Montague, P.C.
1622 Locust Street
Philadelphia, PA 19103
Kai H. Richter
Nicholas Kaster, PLLP
4600 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
For Defendant:
Patrick Joseph Gennardo
Sandra Denise Hauser
Dentons US LLP
1221 Avenue of the Americas
New York, NY 10020
Plaintiffs Maria Robainas and others ("Plaintiffs") brought a putative class action on behalf of those who purchased life insurance from Metropolitan Life Insurance Company ("MLIC" or "Defendant").1 MLIC moves to dismiss the complaint on fourgrounds: (1) the Plaintiffs lack standing under Article III; (2) the Plaintiffs fail to state a claim under Fed. R. Civ. P. 12(b)(6); (3) the primary jurisdiction doctrine bars the Court from adjudicating this action; and (4) the statute of limitations has run. For the reasons that follow, the Plaintiffs do not have Article III standing because they have failed to demonstrate that they suffered an injury-in-fact. The Court therefore lacks subject-matter jurisdiction over the action and MLIC's motion to dismiss is granted.
The following facts are asserted in the complaint and taken from documents integral to those claims. The Plaintiffs are a putative class of MLIC policyholders and more than two thirds of class members live outside of New York. MLIC is a life insurance company incorporated in New York with its principal place of business in New York.
In general, life insurance provides money to beneficiaries after an insured person's death, helping to defray the costs associated with losing a loved one. Policyholders may buy lifeinsurance as individuals or as part of a group plan, often through their employer. The cost of a life insurance policy may reflect the financial health of the insurer, and MLIC advertises that it is in good financial condition.
MLIC is regulated by the New York State Department of Financial Services ("NYDFS"). In order to guarantee that life insurance companies can pay claims when they come due, New York regulations require that insurers establish reserve liabilities ("reserves"). These reserves must contain "admitted assets," which are assets that can be reliably liquidated to pay claims immediately when they become due. State regulators determine the required reserve amounts using established formulas. These formulas, however, leave open the possibility that a devastating mortality event or market disruption could leave insurance companies unable to pay claims. Regulators also monitor MLIC's risk-based capital ("RBC") ratio, which is the ratio of the insurer's total capital to the minimum capital required under the reserve formula. RBC ratios are important in evaluating the financial condition of a life insurance company.
Many insurers obtain reinsurance to help minimize the risks involved in offering insurance. With reinsurance, the primary insurer ("ceding insurer") contracts with another insurer to carry all or part of the risk assumed by the primary insurer inwriting the original policy. Primary insurers -- such as MLIC -- may claim a "reserve credit" through reinsurance, which has the effect of reducing the assets a primary insurer must maintain in support of its reserves. Primary insurers remain ultimately responsible for paying policyholder claims, even when those claims are covered by reinsurance agreements.
New York regulators permit primary insurers to take reserve credits for reinsurance only when that reinsurance meets certain requirements. There are two types of reinsurance that regulators deem sufficiently safe to allow a reserve credit: (1) where the reinsurer is authorized by the primary insurer's regulator; and (2) where the reinsurer is unauthorized but posts adequate, easily-liquidated collateral for the reinsurer's obligation. The collateral posted by unauthorized reinsurers typically consists of a trust maintained with a U.S. financial institution or irrevocable letters of credit ("LOC") from a U.S. financial institution. A primary insurer may seek reinsurance from a "captive" reinsurer, which is affiliated with the primary insurer's parent, provided that the captive reinsurer is authorized in New York or able to meet the same conditions set forth for unauthorized reinsurers.
Some New York life insurers use a tactic called "shadow insurance" to escape these regulatory requirements for captivereinsurance. In July 2012, NYDFS investigated the shadow insurance practices of New York life insurance companies. The NYDFS issued a report of its findings in 2013 ("Report"). The Report found that, in a typical shadow insurance transaction, primary insurers use a captive subsidiary located offshore or in another jurisdiction with lax regulations governing the reinsurer's collateral. Using reinsurers subject to looser regulatory requirements allows the primary insurer to take a reserve credit without meaningfully reducing its own risk.
Four specific types of shadow insurance transactions caused the NYDFS greatest alarm. These are "hollow asset" transactions, "naked parental guarantees," "conditional letters of credit," and "two-step transactions." A "hollow asset" is a letter of credit with a parental guarantee that is recorded as an asset on the books of a captive reinsurer, when such a letter of credit is not a "real asset." A "naked parental guarantee" occurs when the captive reinsurer does not obtain a letter of credit, but simply promises that its parent company will cover its losses. A "conditional letter of credit" is a letter of credit that has stipulated conditions that must be met before it can be drawn upon, which is riskier than an unconditional letter of credit. "Two-step transactions" involve a New York primary insurer ceding risk to a non-New York based affiliate, who then again reinsures the risk to a company affiliated with theprimary insurer. Shadow insurance transactions reduce the reserve liabilities of primary insurers by providing them with an avenue for obtaining reserve credits without meaningfully reducing their risk. This artificially increases an insurer's RBC ratio. This increase has the effect of making the primary insurer appear more financially stable than it actually is, which in turn could inflate its ratings or manipulate those who rely on the RBC ratio for determining an insurer's financial health.
These shadow insurance transactions also lead to increased risks for policyholders. In particular, parental guarantees do not result in a meaningful transfer of risk from the primary insurer to the captive reinsurer. Thus, in the event of a crisis, primary insurers may not have sufficient liquid capital to pay life insurance claims. Further, because the financial health of a primary insurer is linked to the financial stability of its parent, if a bank declines to renew a parent company's LOC supporting a primary insurer's reserve credit, the primary insurer may be unable to find other sources of funding to pay its claims.
MLIC, a wholly-owned subsidiary of MetLife, Inc. ("MetLife"), uses captive and offshore reinsurance companies to reinsure its policies. According to Plaintiffs, MLIC isidentified as "Case 1" in the NYDFS Report. MLIC is well-rated by all of the ratings agencies, including Moody's and Standard & Poor's. Both MetLife and MLIC advertise their financial strength in order to compete with other insurers.
Plaintiffs' complaint details several shadow insurance transactions by MLIC. For example, MLIC obtained a reserve credit from four LOCs totaling $1,184,000,000 that were used by its captive affiliate, MetLife Reinsurance Company of Vermont ("MRV"), and its offshore affiliates, Exeter Reassurance Company Ltd. and Missouri Reinsurance (Barbados), Inc. MLIC did not disclose that these LOCs were backed by contractual parental guarantees, meaning that the agreements did not actually transfer as much risk as it appeared from MLIC's regulatory filings. MLIC's reserve credit included a $315 million LOC that the Report determined was a "hollow asset," even though MLIC reported it as an admitted asset. MLIC also used two-step transactions with non-New York affiliates who then ceded their risk to captive reinsurers. MLIC's RBC ratio improved by 109% after it entered into these shadow insurance transactions. Further, in its 2011 Annual Statement, MLIC reported that it took a reserve credit in the amount of $2,947,745,838. The reserve credit was based, in part, on the transactions with MLV and other captive reinsurers.
Plaintiffs allege that MLIC did not disclose these shadow insurance transactions and therefore violated § 4226(a)(4) of the New York Insurance Law. The statute prohibits insurers from "mak[ing] any misleading representation, or any misrepresentation of the financial condition of any such insurer or of the legal reserve system upon which it operates." In support of their allegations, Plaintiffs claim that MLIC did not disclose its parental guarantees in its annual required...
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