Holding Down the Fort.
Life insurers faced with a "vanishing-premium" lawsuit need not come out with their hands up. Quite the contrary: They might be better off if they come out fighting.
Though the plaintiffs' bar continues to bring vanishing-premium lawsuits, and the occasional big-name, bigmoney settlement might capture the headlines for a few days, life insurers are winning the battle in the trenches. Indeed, this year's cases continued the prevailing trend in vanishing-premium litigation: Those insurers who fight, for the most part win.
These insurers have not only won often, they have also won early. By obtaining denial-of-class certifications on potential class actions and by securing the outright dismissal of these cases at the preliminary pleading stage, many insurers have defeated vanishing-premium lawsuits long before trial.
The Controversy Begins
Vanishing-premium lawsuits began as a trickle in the mid-1990s, swelled to a flood by the late '90s and continue in a steady stream today. These lawsuits arise from the sale, beginning in the late 1970s, of whole life insurance policies, whose dividends accumulate to build cash value. Once the dividend accumulation rises to a certain level, it could be used to pay the policy premium. To be sure, these insurance policies were sold through representations and contracts that made it clear that, far from being guaranteed, dividends and the accumulation of cash value were subject to economic conditions.
Nonetheless, when the high interest rates of the late 1970s and early to mid-1980s declined and these policies did not perform as policyholders had hoped, the lawsuits came. The typical vanishing-premium lawsuit alleges that a defendant-insurer sold so-called vanishing-premium life insurance. That is, policyholders claim that the insurer, through its sales agents, induced the policyholders to buy a life insurance policy by representing that a whole life policy would be "fully paid up" or that the premium payments would "vanish" after a certain amount of time or number of payments.
Complaints in vanishing-premium lawsuits usually assert claims using a number of theories, the most common of which are breach of contract, common-law fraud and/or violations of state consumer-fraud statutes. This shotgun-style method of pleading reflects the inability of plaintiffs to find any legal theory under which courts will consistently find insurers liable.
Another weakness of vanishing-premium lawsuits is found in another of their common characteristics--namely, that these suits are often brought on behalf of purported classes of plaintiffs. The tenuous financial viability of these suits poses a fundamental problem to the plaintiffs' bar: Vanishing-premium lawsuits are expensive to prosecute and, on an individual basis, yield only small awards. Hence, plaintiffs have sought to exploit the economies of scale afforded by class actions, without regard to whether such cases can be fairly presented on a "classwide" basis.
In what has been called the first wave of vanishing-premium litigation, the largest life insurers have faced purported nationwide class actions in federal court. These classes sometimes comprise as many as 200,000 to 300,000 members and can involve claims arising in all 50 states. Though this wave of litigation appears to be winding down--in large part due to the success of insurers in denying certification to these potential classes--several other trends appear to be emerging.
Though a few of these emerging trends are sufficiently prevalent to warrant a word of comment, there is no reason to believe that the tactics employed in new-wave suits will be any more successful than those used in the old. In one of these trends, a wave of copycat litigation has hit several small to midsize life insurers; in another, plaintiffs have sought to avoid some of the obstacles blocking nationwide suits in federal courts by bringing single-state class actions, often in state courts. These two trends involve such minor tactical tweaking that they have been and likely will continue to be bedeviled by the same obstacles as the first-wave suits were.
In fact, class actions of every variety have been so unsuccessful that plaintiffs are now resorting to individual suits. But individual suits have an obvious problem: To make these suits pay, plaintiffs must win large punitive-damages awards. A risky proposition even in the best of times, winning such windfalls faces even longer odds in light of the building momentum behind tort reform and the increasing tendency of appellate courts to reduce exorbitant punitive-damages awards, a tendency which likely will become even more pronounced in the wake of the recent U.S. Supreme Court decision mandating the most heightened level of appellate review for punitive-damages awards.
Most plaintiffs try to obtain class certification under a Federal Rule of Civil Procedure that requires the predominance of common to individual issues on the one hand, and the superiority of the class action to individual suits on the other. In several district court cases decided in the late 1990s, courts denied certification to vanishing-premium lawsuits for failing to satisfy this rule.
According to these courts, plaintiffs could not prove their claims without making case-specific, individualized showings of the alleged misrepresentations made by the sales agent in each sale. In addition, courts found that plaintiffs in most cases would have to show the reasonable reliance of each customer on those alleged misrepresentations. Because such showings would swamp the courts with mini-trials concerning individualized issues, these courts reasoned, individual issues would predominate over common ones and the class action would not be superior to individual suits.
In this year's cases, courts continued this trend by rejecting a number of theories devised by plaintiffs in the hope of clearing the nearly insurmountable hurdle posed by the federal rules. The most common of these theories is the purported common scheme, and its failure to persuade courts is typified by one of this year's vanishing-premium cases, Keyes vs. Guardian Life Insurance Company of America, 194 F.R.D. 253 (S.D. Miss. 2000).
In Guardian, plaintiffs sought to obtain class certification for their common-law fraud claims by alleging that they were the victims of the standardized misrepresentations and omissions--not of the sales agents, but of the insurer's upper management. According to plaintiffs' allegations, which were entirely unproven, the insurer's upper management supplied its sales agents with illustrations and computer software to generate illustrations which, in demonstrating how and when a customer's premiums would vanish, relied on the same underlying and purportedly fraudulent actuarial assumptions.
Like most other courts, the Guardian court rejected this theory, finding that the insurer's sales representatives did not always use the illustrations and software--or, for that matter, any other uniform sales method--but, rather, varied their sales presentations according to what was thought to be relevant and appropriate to each individual customer. Thus, the court never reached the merits of plaintiffs' allegations, which were, in any event, baseless. This argument continues to be unavailing.
The Guardian opinion is also note-worthy for having rejected another theory advanced by plaintiffs. Unable to satisfy the predominance and superiority requirements, plaintiffs have tried to obtain class certification under another federal rule in the alternative. This provision authorizes class actions in certain circumstances where equitable relief, such as an injunction or a declaratory judgment, would be appropriate for the class.
Though reliance on this other rule obviates the predominance and superiority problems, it poses another--although no less daunting--difficulty: The rule clearly does not apply to cases in which plaintiffs seek exclusively or predominantly monetary damages. Thus, though plaintiffs asserted various claims couched in equitable terms, the court in Guardian rejected these pleas as transparent efforts to disguise what were primarily demands for monetary relief.
In accord with another prevailing trend, many of this year's cases were dismissed outright at the preliminary pleading stage, often on statute-of-limitations grounds. This year, as in the past, most courts found that the statute-of-limitations clock began running when plaintiffs received the so-called "vanishing-premium" policy. Because most of the claims brought by plaintiffs have statutes of limitations ranging from three to five years, courts dismissed many of the claims brought on policies received before 1995 through 1997.
Even where the applicable state law contained a discovery rule--that is, where the statute-of-limitations clock would not begin to run until plaintiffs knew or should have known of their cause of action--courts have found plaintiffs' vanishing-premium lawsuits to be time barred. Most courts find that the plaintiffs were put on notice of their claim, and hence the statute of limitations was triggered upon receipt of a policy whose unambiguous terms contradicted the alleged misrepresentations of the sales agent. Because the statute-of-limitations clock continues to run, these dismissals can be expected to increase with the passage of time.
James Carroll is a partner and Reeghan Raffals is an associate Reeghan with the Boston office of the law firm Skadden, Arps, Slate, Meagher & Flom LLP.
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|Title Annotation:||vanishing-premium lawsuits|
|Date:||Sep 1, 2001|
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