Modal premium litigation: adding it up.

The controversy surrounding modal premium litigation that began five years ago continued in 2004 with two more court cases pending in New Mexico. While some industry experts were unsure at press time whether verdicts would be reached by year end, life insurers continue to keep watch on the cases and what the lawsuits might mean for the industry.

Azar vs. Prudential and Berry vs. Federal Kemper Life Assurance Co. are the most recent additions to a series of more than 20 national class-action suits concerning billing practices filed in New Mexico courts. The practice of "modal premiums" allows premiums to be paid more frequently than annually. Plaintiffs allege that insurers should disclose annual percentage rates and finance charges if a single annual payment would total less than a year of monthly, quarterly or semiannual premium payments.

The first modal premium suit, protesting that premium totals weren't clearly disclosed in policies, was filed in 1999 by attorney Floyd Wilson against Mass Mutual.

Recently, life insurers have seen pronouncements from the New Mexico Court of Appeals that weren't to their liking, said Victoria Fimea, senior counsel, litigation, for the American Council of Life Insurers. In one case, the appeals court reversed the trial court's judgment on liability, sending the issue back to the trial courts. The appeals court was more inclined to agree with the trial court pronouncements on the breach of contract claims, she said, noting that most cases are in the pretrial phase.

Fimea expects these cases to have long-term effects for life insurers. For example, although there have been only limited copycat cases appearing in other state courts so far, the results may bring about additional filings, she said.

Fimea also believes that if New Mexico courts "whittle away" the ability of life insurers to rely on the approval of their state regulators, then there may be continued denigration of the primary jurisdiction doctrine. The concern for the industry is that if the New Mexico courts do not respect the primary jurisdiction doctrine, then other states may follow suit--something she said is unfavorable to the industry.

In addition, Fimea believes that if more rulings with lucrative settlements are awarded to plaintiffs, there may be further empowerment of the plaintiffs trial bar to come after the industry about its products, specifically around language and wording.

The ACLI continues to monitor the issue and most recently filed an amicus brief in the Azar vs. Prudential case. The ACLI argued that although the case alleges that the federal Truthin-Lending Act--which requires meaningful disclosure of credit terms--was violated, modal premium payments aren't lending situations. The case is still pending in the New Mexico district court.

Some fear that modal premium litigation is tramping on state insurance commissioners' ability to oversee insurance regulation. In 2003, District of Columbia Commissioner of Insurance and Securities Regulation Lawrence Mirel told participants in a legal seminar that the complaints cited failure to provide an annual percentage rate for these fees as an unfair trade practice.

Joseph M. Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, an independent periodical, believes there's no justifiable argument against disclosure. He cites the following reasons for disclosure: consumers need the APR to judge the desirability of paying premiums annually; wide variations in APRs exist both among and within companies, and adding up the modal charges in a year and dividing the sum by the annual premium causes a huge understatement of the APR and therefore deceives policyholders about the cost of paying premiums other than annually.

For decades, Belth has recommended to insurance regulators and legislators that insurers be required to disclose APRs to policyholders.

Insurers are taking a wait-and-see approach, said Bruce Deal, managing principal of Analysis Group's Menlo Park, Calif. office. "They're being cautious about making too dramatic of a change while the cases are pending," he said. Deal thinks the risk of being sued will eventually lead insurers to make even more explicit disclosures.