In Value of Insurance coverage Litigation, Courts Proceed to Disagree Over the Which means of the Key Contractual Provision
For those who see a film that’s “primarily based on a real story,” how near the story are you anticipating the film to be? Your reply to that query could inform whether or not you assume the everyday breach of contract declare in price of insurance coverage (“COI”) litigation ought to be dismissed on the pleadings and/or abstract judgment or proceed all the way in which to trial.
OVERVIEW
In late 2013 and early 2014, when COI litigation picked up and commenced percolating via the courts, an early cut up developed over the which means of the time period “primarily based on” within the context of COI provisions. On one facet of the cut up was the Seventh Circuit, which interpreted “primarily based on” such that when a common life coverage says COI charges are “primarily based on” 4 enumerated components (e.g., expectations of future mortality, bills, curiosity, and lapses), the insurer is permitted to think about components past these enumerated components in calculating charges, as long as it no less than takes into consideration the enumerated components. On the opposite facet was the Southern District of New York, which interpreted “primarily based on” such that in calculating COI charges, an insurer was permitted to think about solely these 4 enumerated components and nothing else.
At present, as insurers throughout the trade have continued to boost COI charges and litigation by coverage homeowners difficult these will increase has inevitably adopted, courts throughout the nation, together with the Eighth Circuit, Eleventh Circuit, and district courts within the Second, Third, Fifth, and Ninth Circuits, have lined up on each side of the cut up. This alert surveys the present lay of the land on the which means of “primarily based on.”
COI PROVISIONS IN UNIVERSAL LIFE POLICIES TYPICALLY USE THE TERM “BASED ON”
COI provisions in common life insurance policies govern what underlies the most important month-to-month cost to the policyowner (and which in flip is the largest driver of month-to-month premium funds): COI charges. COI charges are what they sound like—they’re designed to cowl no less than the insurer’s prices in offering insurance coverage protection to the insured, and they’re decided primarily based on individualized mortality traits of the insured reminiscent of age, well being, and smoker standing. So, as a normal matter, the youthful, the more healthy, and the much less of a smoker the insured is, the much less of a COI price—and the much less of a month-to-month premium fee—she or he will incur on the coverage.
The provisions usually take one in all two varieties, each of which use the operative time period “primarily based on.” The primary sort of COI provision offers that COI charges are “primarily based on” the individualized mortality traits of the insured (e.g., “COI charges are primarily based on the insured’s age on the coverage anniversary, intercourse, and relevant price class.”). The second sort offers that COI charges are “primarily based on” a listing of things that drive prices for insurers (e.g., “COI charges are primarily based on our expectations of future mortality, curiosity, bills, and lapses.”).
These provisions come into focus when insurers enhance COI charges—whether or not as a consequence of modified expectations about mortality going ahead or in any other case—which regularly results in litigation by coverage homeowners alleging breach of the COI provision. The essential allegation is that in elevating COI charges, the insurer breached the COI provision by contemplating components apart from these particularly enumerated within the provision. For instance, in latest COI price enhance litigation arising out of the Eleventh Circuit the place the coverage said that COI charges are decided “primarily based on [the insurer’s] expectations as to future mortality expertise,” the plaintiff coverage homeowners asserted a breach of contract primarily based on the allegation that as a result of “developments in drugs and science have improved life expectancy over time,” the insurer essentially thought-about one thing apart from future mortality expectations in growing charges. See Slam Dunk I, LLC v. Connecticut Gen. Life Ins. Co., 853 F. App’x 451, 452 (11th Cir. 2021); see additionally In re Lincoln Nat’l COI Litig., 269 F. Supp. 3d 622, 633 (E.D. Pa. 2017) (“Plaintiffs first contend the Insurance policies expressly restrict the grounds upon which Lincoln can increase COI charges to Lincoln’s ‘expectation of future mortality, curiosity, bills, and lapses,’ and Lincoln breached by imposing the COI enhance to recoup previous losses and for different impermissible causes.”). Movement observe adopted over the which means of the COI provision.
THE EARLY SPLIT OVER THE MEANING OF “BASED ON” (AND CAKE RECIPES)
The query for courts thus turns into whether or not the insurer, in elevating COI charges, has breached the COI provision by allegedly contemplating components apart from these particularly set forth within the COI provision. And the reply to that query activates the which means of “primarily based on.” Is “primarily based on” illustrative, such that, in elevating COI charges, the insurer is permitted to think about components apart from these particularly set forth within the COI provision as long as it no less than begins with or takes into consideration the enumerated components? Or is “primarily based on” unique, such that the insurer is prohibited from contemplating components apart from these expressly enumerated within the COI provision in adjusting charges?
An early supporter of the primary strategy was the Seventh Circuit, which was confronted with a COI provision in a common life coverage that said: “The price of insurance coverage price is predicated on the insured’s intercourse, difficulty age, coverage 12 months, and fee class.” Norem v. Lincoln Ben. Life Co., 737 F.3d 1145, 1147 (seventh Cir. 2013). On abstract judgment, the events “didn’t contest that that Lincoln incorporates a wide range of elements past these enumerated within the coverage,” e.g., revenue margins or the recoupment previous funding losses, “when it calculates the COI price.” Id. at 1148. In figuring out that the insurer, Lincoln, had however not breached the coverage and thus affirming dismissal of the case, the Seventh Circuit turned to cake recipes: “[N]o one would suppose {that a} cake recipe ‘primarily based on’ flour, sugar, and eggs should be restricted solely to these elements. Thus, neither the dictionary definitions nor the widespread understanding of the phrase ‘primarily based on’ recommend that Lincoln Profit is prohibited from contemplating components past intercourse, difficulty age, coverage 12 months, and fee class when calculating its COI charges.” Norem v. Lincoln Ben. Life Co., 737 F.3d 1145, 1150 (seventh Cir. 2013). So “primarily based on” was illustrative, not unique.
The Southern District of New York reached the opposing conclusion in decoding the next COI provision: “[COI] charges will probably be primarily based on our expectations of future mortality, persistency, funding earnings, expense expertise, capital and reserve necessities, and tax assumptions.” Fleisher v. Phoenix Life Ins. Co., 18 F. Supp. 3d 456, 464-65 (S.D.N.Y. 2014). Plaintiffs made the usual allegation that, in elevating COI charges, the insurer had thought-about components apart from these enumerated within the COI provision. See id. at 465. In denying the insurer’s abstract judgment movement on the COI breach declare, the courtroom once more turned to cake recipes: “Within the cookbooks I learn, recipes are exhaustive lists of all of the elements wanted to bake a cake, or fricassee a rooster, or roast a saddle of mutton. Extremely skilled cooks would possibly be capable of play with recipes, however the common house cook dinner (the individual analogous to the common insured beneath New York legislation) follows them slavishly, with out including different, undisclosed elements. The desserts they bake are ‘primarily based on’ the elements listed within the recipe—they embrace these elements and none different.” Id. at 473. So “primarily based on” implied exclusivity, or on the very least was ambiguous as as to whether it implied exclusivity. Id. at 474. The courtroom went onto apply New York’s contra preferentem rules to an ambiguous time period and construed the time period in opposition to the insurer upfront of trial. See id.; see additionally U.S. Financial institution Nat. Ass’n v. PHL Variable Ins. Co., No. 12-cv-6811, 2014 WL 2199428, at *11 (S.D.N.Y. Could 23, 2014) (“For considerably the explanations said in Fleisher, I maintain that (1) the phrase ‘primarily based on’ as used within the PAUL III Insurance policies is ambiguous and will probably be construed in opposition to the drafter (PHL) as a limiting phrase …”).
COURTS REMAIN SPLIT OVER THE MEANING OF “BASED ON”
Within the years because the Norem and Fleisher selections, courts have taken competing approaches over whether or not COI provisions ought to be learn as offering an illustrative or exhaustive checklist of elements. The previous studying means a win for the insurer on a movement to dismiss or abstract judgment. The latter studying usually means, at minimal, that the breach declare can’t be resolved on the pleadings or on abstract judgment; it could additionally imply that, relying on whether or not relevant state insurance coverage legislation requires the courtroom to construe ambiguous contractual phrases in opposition to the insurer, a win for the plaintiff coverage homeowners on legal responsibility upfront of trial.
First Strategy: “Based mostly On” Is Illustrative
- The Eleventh Circuit in Slam Dunk, 853 F. App’x 451 (eleventh Cir. 2021) confronted a COI provision stating that COI charges “are decided by [Connecticut General] primarily based on its expectations as to future mortality expertise. at 452. After the insurer raised COI charges and the coverage homeowners introduced a declare for breach of contract, the courtroom affirmed dismissal on the insurer’s movement to dismiss after figuring out that the plaintiff “advances a studying of the COI provision that’s opposite to its plain language by incorrectly studying exclusivity into the phrase ‘primarily based on.’” Id. at 454-55 (“Nothing in regards to the plain and bizarre which means of the phrase “primarily based on” connotes exclusivity, and nothing about it implies the checklist that follows is exhaustive.”); see additionally Advance Tr. & Life Escrow Servs., LTA v. Protecting Life Ins. Co., No. 18-cv-1290, 2022 WL 3159266, at *6 (N.D. Ala. Aug. 8, 2022) (dismissing coverage homeowners’ COI breach declare on the pleadings after figuring out that “[a]pplying Slam Dunk to the insurance policies on this case, the Courtroom agrees with Protecting Life that ‘primarily based on’ doesn’t connote exclusivity and that Protecting Life could depend on components apart from expectations of future mortality expertise in setting COI charges.”).
- The Southern District of Indiana in West v. Wilco Life Ins. Co., No. 20-cv-2961, 2021 WL 5827019 (S.D. Ind. Dec. 8, 2021), making use of Norem, granted the insurer’s movement to dismiss on the coverage homeowners’ breach declare after figuring out that “[t]he phrase ‘precise month-to-month price of insurance coverage charges will probably be decided by the corporate primarily based on the coverage price components’ doesn’t recommend that the corporate should completely depend on the coverage price components.” at *7. In different phrases, based on the courtroom, the time period “‘primarily based on” sure components “doesn’t recommend exclusivity” and fairly “means that the charges are set to the corporate’s discretion.” Id. at *7-8; Maxon v. Sentry Life Ins. Co., No. 18-cv-254, 2019 WL 4540057, at *3 (W.D. Wis. Sept. 19, 2019) (making use of Norem and reaching the identical outcome).
Second Strategy: “Based mostly On” Is Unique (Or At Least Ambiguous)
- The Eighth Circuit in Vogt v. State Farm Life Ins. Co., 963 F.3d 753 (eighth Cir. 2020) was confronted with a COI provision stating that COI charges “are primarily based on the Insured’s age on the coverage anniversary, intercourse, and relevant price class.” at 761. The courtroom discovered that the COI provision was no less than ambiguous after observing that “[i]f State Farm wished the liberty to gather a COI charge primarily based on components apart from these enumerated within the coverage, it might have drafted the coverage language to unambiguously obtain this intention.” Id. at 763-64. Making use of contra preferentem rules beneath Missouri insurance coverage legislation, the courtroom construed the ambiguous coverage language in opposition to the insurer and granted abstract judgment in favor the coverage homeowners on legal responsibility. Id.
- The District of Arizona in McClure v. State Farm Life Ins. Co., 20-cv-1389, 2022 WL 2275665 (D. Ariz. June 23, 2022) was confronted with a COI provision stating that COI charges “are primarily based on the Insured’s age on the coverage anniversary, intercourse, and relevant price class.” at *1. In denying the insurer’s abstract judgment movement, the courtroom discovered that the supply was plausibly ambiguous and additional that “[t]he “primarily based on” language seems to allow State Farm to make use of solely the listed issue[s] in calculating COI charges.” Id. at *4.
- The District of Minnesota in Advance Tr. & Life Escrow Servs., LTA v. ReliaStar Life Ins. Co., No. 18-cv-2863, 2022 WL 911739 (D. Minn. Mar. 29, 2022), decoding a COI provision stating that COI charges “will probably be primarily based on our anticipated future mortality expertise,” utilized the Vogt holding and denied the insurer’s abstract judgment movement on the coverage homeowners’ COI breach declare after figuring out that “Plaintiffs’ interpretation of “will probably be primarily based on” as language that connotes exclusivity is affordable, and Plaintiffs have raised a real difficulty of truth as as to whether the language is ambiguous.” at *5; see additionally Jaunich v. State Farm Life Ins. Co., No. 20-cv-1567, 2022 WL 2318560, at *2 (D. Minn. June 28, 2022) (“Furthermore, the Eighth Circuit Courtroom of Appeals has held exactly this: “that the phrase ‘primarily based on’ within the COI provision is no less than ambiguous and thus should be construed in opposition to State Farm.”).
- The Western District of Texas in Web page v. State Farm Life Ins. Co., No. 20-cv-00617, 2022 WL 718789 (W.D. Tex. Mar. 10, 2022) (Report & Suggestion), going through a COI provision which said that COI charges “are primarily based on the Insured’s age on the coverage anniversary, intercourse, and relevant price class,” really useful denial of the insurer’s abstract judgment movement after reviewing the case legislation and observing that “the circuit courts of enchantment addressing comparable COI provisions have reached opposite conclusions as to what constitutes an affordable interpretation of the contract” and discovering that the time period was arguably ambiguous. at *6-10
- The Northern District of California in Bally v. State Farm Life Ins. Co., No. 18-cv-04954, 2019 WL 3891149 (N.D. Cal. Aug. 19, 2019) was confronted with a COI provision stating that COI charges “are primarily based on the Insured’s age on the Coverage anniversary, intercourse, and relevant price class.” at *2. In denying the insurer’s abstract judgment movement, the courtroom decided that “the plain which means of the important thing phrase at difficulty right here, ‘primarily based on,’ is ambiguous,” and, making use of contra preferentem rules beneath California insurance coverage legislation, construed the time period in opposition to the insurer. See additionally EFG Financial institution AG v. Lincoln Nat’l Life Ins. Co., No. 17-cv-2592, 2017 WL 4222887, at *4 (E.D. Pa. Sept. 22, 2017) (making use of California legislation and denying the insurer’s movement to dismiss after observing that “[t]he Insurance policies expressly restrict the grounds upon which Lincoln can increase COI charges to Lincoln’s ‘expectation of future mortality, curiosity, bills, and lapses.’”).1
- The Japanese District of Pennsylvania in In re Lincoln, 269 F. Supp. 3d 622 (E.D. Pa. 2017), was confronted with a COI provision stating that COI charges “will probably be primarily based on our expectation of future mortality, curiosity, bills, and lapses.” at 629-630. The insurer, on a movement to dismiss, took the bizarre strategic step of not even advancing the argument that in calculating COI charges, it was permitted to think about components apart from these expressly enumerated within the COI provision. Id. (“Defendants seem to acknowledge that, if Lincoln did increase the COI primarily based on non-enumerated components, it might represent a breach of contract.”). The coverage homeowners survived the movement to dismiss on their COI breach declare. Id. at 635; Kalodner v. Genworth Life & Annuity Ins. Co., 262 F. Supp. 3d 218, 224 (E.D. Pa. 2017) (denying insurer’s movement to dismiss after decoding a COI provision analogous to the Lincoln provision and figuring out that the insurer had “failed to determine that the Coverage unambiguously authorizes it to think about” components apart from the enumerated components in elevating COI charges).
Adjoining to the circumstances above are circumstances decoding COI provisions that use the language “seek advice from” or “rely upon” as an alternative of “primarily based on.” See, e.g., Advance Tr. & Life Escrow Servs., LTA v. Sec. Lifetime of Denver Ins. Co., No. 18-cv-1897, 2021 WL 62339, at *3 (D. Colo. Jan. 6, 2021) (granting insurer’s abstract judgment movement after figuring out that “[c]reating a listing of things one should think about is a far cry from forbidding consideration of the rest. The bizarre which means of ‘seek advice from’ is ‘to have recourse to; to show or enchantment to, seek the advice of; esp. to seek the advice of a supply of data so as to confirm one thing.’”) (quoting the Oxford English Dictionary); EFG Financial institution AG, Cayman Department v. Transamerica Life Ins. Co., No. 16-cv-8104, 2017 WL 3017596, at *6 (C.D. Cal. July 10, 2017) (denying insurer’s movement to dismiss as a result of COI provision utilizing the time period “rely upon” was “moderately inclined to plaintiffs’ interpretation,” i.e., that the supply set forth an exhaustive checklist of things); DCD Companions, LLC v. Transamerica Life Ins. Co., No. 15-cv-3238, 2015 WL 12697657, at *6 (C.D. Cal. Dec. 23, 2015) (analogous reasoning). Courts stay equally cut up over the which means of those provisions.
THE WAY FORWARD FOR LIFE INSURERS: TACKING AWAY FROM “BASED ON”?
As of this writing, the Seventh and Eleventh Circuits have taken the pro-insurer, illustrative strategy to “primarily based on” COI provisions, and the Eighth Circuit has taken the pro-policy proprietor, unique strategy. District courts within the Second Circuit, Third Circuit, Fifth Circuit, and Ninth Circuits have endorsed a pro-policy proprietor strategy.
For all times insurers in pro-policy proprietor states, the way in which ahead could also be to shift focus away from the time period “primarily based on.” Which will imply, as a matter of contractual drafting, inserting phrases like “reminiscent of” into the COI provision. Or as soon as an insurer is already occasion to COI litigation, it could imply arguing not that the phrase “primarily based on” connotes exclusivity, however fairly that any components the insurer did think about in elevating charges fall pretty inside the enumerated COI components. One factor is obvious: with the present Circuit cut up, neither insurers nor insureds will be capable of have their cake and eat it too anytime quickly.
1On a second abstract judgment movement in the identical case, the insurer argued not that the time period “primarily based on” permitted it to think about non-enumerated components (e.g., profitability) in elevating COI charges, however fairly that one of many enumerated COI components (particularly, “relevant price class”) permitted it to think about profitability in elevating charges. Id. The insurer’s gambit on the second chunk of the apple paid off, and the courtroom dismissed the COI breach declare on abstract judgment. See Bally v. State Farm Life Ins. Co., 536 F. Supp. 3d 495, 503 (N.D. Cal. 2021) (“The Courtroom concludes that the Month-to-month COI Charges provision unambiguously permits State Farm to think about non-mortality components in calculating the “relevant price class” that State Farm later makes use of as one in all three components in figuring out a person policyholders’ month-to-month price of insurance coverage price.”).