United States District Court, S.D. New York
MARTIN FLEISHER, as trustee of the Michael Moss Irrevocable Life Insurance Trust II, and JONATHAN BERCK, as trustee of the John L. Loeb, Jr. Insurance Trust, on behalf of themselves and all others similarly situated, Plaintiffs,
PHOENIX LIFE INSURANCE COMPANY, Defendant
[Copyrighted Material Omitted]
For Martin Fleisher, As trustee of the Michael Moss Irrevocable life insurance Trust II, on behalf of themselves and all others similarly situated, Jonathan Berck, As trustee of the John L. Loeb Jr. Insurance Trust, on behalf of themselves and all others similarly situated., Plaintiffs: Frances Sarah Lewis, Steven Gerald Sklaver, Susman Godfrey LLP(CA), Los Angeles, CA; Jacob W Buchdahl, Seth D. Ard, Shawn J. Rabin, Susman Godfrey LLP (NYC), New York, NY; Rebecca Sol Tinio, U.S. Attorney's Office, SDNY, New York, NY.
For Phoenix Life Insurance Company, Defendant: Brian Patrick Perryman, Kristen Reilly, Waldemar J Pflepsen, PRO HAC VICE, Jason H. Gould, Carlton Fields Jorden Burt, P.A., Washington, DC; Jacob R. Hathorn, Robert David Helfand, Stephen J. Jorden, Carlton Fields Jorden Burt, P.A., Simsbury, CT; Patrick J. Feeley, Dorsey & Whitney LLP, New York, NY; Raul Antonio Cuervo, PRO HAC VICE, Carlton Fields Jorden Burt, P.A, Miami, FL.
For Towers Watson, Adr Provider: Sharon L. Levine, LEAD ATTORNEY, PRO HAC VICE, Lowenstein Sandler PC (NJ), Roseland, NJ.
For Towers Watson, Miscellaneous: Sharon L. Levine, PRO HAC VICE, Lowenstein Sandler PC (NJ), Roseland, NJ.
MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT
COLLEEN MCMAHON, United States District Judge.
Plaintiffs Martin Fleisher (" Fleisher" ), as Trustee of the Michael Moss Irrevocable Life Insurance Trust II, and Jonathan Berck (" Berck," and, together with Fleisher, " Plaintiffs" ), as Trustee of the John L. Loeb, Jr. Insurance Trust, initiated this class action against Defendant Phoenix Life Insurance Company (" Phoenix" ). The only remaining claim (Count One) alleges that Phoenix breached the terms of certain insurance policies owned by the Trusts.
Both the Plaintiffs and the Defendant move for partial summary judgment on liability for Fleisher's claim pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons discussed below, the Defendant's motion in granted in part
and denied in part, and the Plaintiffs' motion is denied in its entirety.
A. The Parties
Plaintiff Fleisher is the trustee of the Michael Moss Irrevocable Life Insurance Trust II. Plaintiff Berck is the trustee of the John L. Loeb, Jr. Insurance Trust. These two trusts own life insurance policies issued by Defendant Phoenix. See Pl. 56.1 Statement at ¶ 2.
Plaintiff Fleisher brings his breach of contract claim on behalf of a class. The Court previously certified a class consisting of:
All owners of flexible-premium " universal life" insurance policies issued by Phoenix Life Insurance Company that were subjected to the Cost of Insurance rate increase announced by Phoenix on or about November 1, 2011 (excluding defendant Phoenix, its officers and directors, members of their immediate families, and the heirs, successors or assigns of any of the foregoing).
Compl. ¶ 37; see also Docket No. 135. We have come to refer to this class as the " 2011 Class" to distinguish it from a second class, formerly represented by Plaintiff Berck and now decertified, who brought similar claims relating to a cost of insurance rate increase imposed in 2010.
This motion deals only with the claim for breach of contract asserted by Fleisher and the 2011 Class.
B. The PAUL Policies
Plaintiff Fleisher and the members of the 2011 Class own (or owned) " substantively identical" Phoenix Accumulator Universal Life (" PAUL" ) insurance policies. Def. 56.1 Statement Resp. at ¶ 3.
Generally speaking, there are two categories of life insurance: whole life insurance and term life insurance. Term life insurance protects the policyholder for a specified period of time. Whole life policies, by contrast, remain in existence throughout the life of an insured. In general, premiums on term insurance policies pay only for the cost of providing the insurance, while at least some whole life policies have some type of participatory investment or savings feature. The PAUL policies at issue here are a type of whole life insurance called universal life insurance.
Traditional whole life insurance policies require payment of a fixed monthly premium. The cost of life insurance for any insured increases over time as the insured ages and becomes more likely to die. In order to spread out this insurance cost into fixed monthly premium payments, the premium charged earlier in the life of the insured must be greater than the actual insurance cost, and the premium charged later in life must be less than the actual insurance cost. The amount of early year premiums paid in excess of actual insurance costs goes into a cash reserve that accumulates in value (the " policy value" ). This policy value functions like a savings account. When the insurance cost exceeds the fixed monthly premium later in life, the policy value is used to supplement the fixed premium in order to cover the total actual insurance cost. See New York State Department of Financial Services,
" Basic Types Of Policies," http://www.dfs.ny.gov/consumer/cli_basic.htm (last visited April 29, 2014).
During the life of the insured, the policyholder may choose to cash out his accumulated policy value by " surrendering" the policy. Though surrender causes the policyholder to lose life insurance protection, he is able to withdraw the balance of the policy value in cash, subject to any surrender charges specified in the contract. See id.
Universal life insurance is similar to traditional whole life insurance but with a central distinguishing feature--the policyholder is not required to pay a fixed monthly premium.
Under the terms of these " flexible premium" PAUL policies, a policyholder must pay a Minimum Initial Premium, which is specified in his contract. See Compl. Ex. B at 1, 3. This amount covers his up-front costs. Any amount in excess of the Minimum Initial Premium that the insured chooses to pay is deposited into his savings account--his " Policy Value," on which Phoenix pays interest.
Thereafter, the policyholder has options. The only requirement is that he must pay enough each month to cover the monthly insurance expenses (referred in the policy as the " Monthly Deduction" ). If he fails to do that, the policy will lapse.
Otherwise, the policyholder has flexibility to determine the amount and timing of his premium payments. He may choose to make monthly payments equal to the Monthly Deduction and nothing more--rather like buying a term life insurance policy. See Def. 56.1 Statement Resp. at ¶ 5. If the policyholder chooses to pay this minimum amount every month, his Policy Value will never increase above zero. Such a policyholder would not be utilizing the savings component of his policy.
Alternatively, a policyholder can pay an amount in excess of the minimum Monthly Deduction. The excess payment will be added to his Policy Value.
Once his Policy Value is high enough, the policyholder may elect not to make premium payments for a while, and instead allow Phoenix to draw down his Monthly Deduction from his accumulated Policy Value. The policyholder can do this until the Policy Value is depleted--at which point the Policy Value account must be replenished, or the policy will lapse. This strategy allows the policyholder flexibility in the timing of his payments; he can pay excess premiums in times when he has better cash flow and then use his accumulated Policy Value to cover the periods when his cash flow deteriorates. Meanwhile, the money in the policyholder's " savings account" --his Policy Value--accrues interest for as long as it sits in the " savings account."
Because of these characteristics, Phoenix marketed PAUL policies as " offering [policyholders] flexibility" to " [a]djust the amount and timing of premium payments to fit [a policyholder's] cash flow needs." Lewis Decl. Ex. 7 at 965.
Phoenix asks each policyholder to estimate his " Planned Premium" during the insurance application process. See Compl. Ex. B at 3. The policy defines the " Planned Premium" as " the premium that is selected in the application or as later changed by you for this policy that you intend to be pay [sic] on a regular modal basis." Id. However, the policyholder is not required to adhere to his estimate of his Planned Premium. The term is not mentioned elsewhere in the policy as a required payment. In fact, Section 10 of the policy, titled " Premiums," makes no mention of the policyholder's Planned Premium. See id. Ex. B at 13. Instead, the policy repeatedly refers to how Phoenix will handle
" any premium payment" it receives, bolstering the understanding that a policyholder is not required to pay premiums in any particular amount. Id. This lack of any required premium payment--" Planned" or otherwise--is why these policies are referred to as " flexible premium."
A policyholder can also choose to pay excess premiums every month in order to accumulate a high Policy Value. So if a policyholder finds Phoenix's current interest rate attractive, he may choose to invest more money with Phoenix; if he does not, his Policy Value will increase each month only by the amount of interest earned on that Value. See id. ; Pl. 56.1 Statement at ¶ 6.
Phoenix marketed this " Cash Accumulation" aspect of the policies, stating: " A competitive, interest-sensitive return helps your policy's cash value increase over time." Lewis Decl. Ex. 7 at 964. Phoenix is able to pay interest to policyholders because it invests the funds it receives from them and earns returns on those investments.
In sum, it is entirely up to the policyholder whether to utilize the savings (or " Cash Accumulation" ) feature of his policy. He may choose to pay the minimum Monthly Deduction each month, or he may take advantage of the option to pay excess premiums, to build up his Policy Value, and to use the accumulated Policy Value to cover his Monthly Deductions. He may maintain a high Policy Value, a low Policy Value, or no Policy Value at all. As one would expect, Phoenix uses experience studies to predict how many policyholders will use their policies as investment vehicles and how many will not; but Phoenix can have no expectation that any particular policyholder will use the savings feature or keep money a high Policy Value, because that is at the policyholder's option. These are truly " flexible premium" policies.
C. Computation of the Monthly COI Charge
One of the insurance charges included in the Monthly Deduction is the " Cost of Insurance" (" COI" ) charge. The COI charge represents Phoenix's risk of paying the death benefit (the policy's " Face Amount" ) to the policy's beneficiary upon the death of the insured. The policyholder's payment of COI charges to cover Phoenix's risk is the policy's insurance component. See Compl. Ex. B at 12.
The policy sets forth a formula for calculating the monthly COI charge. The formula is this: Monthly COI Charge = COI Rate x Net Amount at Risk. See id.
The policy defines the " Net Amount at Risk" (" NAR" ) as the Total Face Amount of the policy (the death benefit) divided by 1.0032737 less the Policy Value in any given month. See id. Ex. B at 7, 12. Because the denominator used in calculating Net Amount at Risk is approximately 1, for shorthand purposes I will describe the NAR as the Total Face Amount minus the Policy Value--although I recognize that the formula differs slightly from that rounded calculation.
The " Total Face Amount" is equal to the " Basic Face Amount" plus the " Supplemental Face Amount; " these two components of the death benefit are selected by the policyholder and shown on the face of the policy. For example, Fleisher's Basic Face Amount is $6 million, and his Supplemental Face Amount is zero. Thus, his Total Face Amount--the total to be paid to the beneficiaries upon the death of the insured--is $6 million. See id. Ex. B at 3.
The " Policy Value" (a defined term) is " determined by accumulating with interest
the Policy Value for the prior day increased by Net Premiums credited and decreased by withdrawals and, on the Monthly Calculation Day, the Monthly Deductions from Policy Value . . ." Id. Ex. B at 8. The " Net Premium" is equal to any premium payment submitted by a policyholder less a percentage " Sales Charge," which is a fee deducted from each premium payment. See id. Ex. B at 12. The " Monthly Calculation Day" is the " date on which monthly deductions are assessed from the Policy Value," which occurs once a month. Id. Ex. B at 8. In other words, the Policy Value on any given day is equal to the prior day's Policy Value plus any premiums or interest added to the account, less any expenses or withdrawals deducted from the account.
The policy does not contain a simple, straightforward definition of the " COI rate," as it does for the other terms used. Instead, Section 9 of the policy--entitled " Policy Value" --explains how to calculate something called the " Cost of Insurance Charge." The COI rate is used to compute the " Cost of Insurance Charge," and, as Section 9 explains, there are two different ways to calculate the COI rate, depending on when it is being calculated.
The first paragraph (" Paragraph A" ) explains how to calculate the " rates for the Cost of Insurance Charge" on the date the policy comes into force:
The rates for the Cost of Insurance Charge as of the Policy Date are based on the sex, if applicable, Age, Risk Classification, Basic Face Amount, Supplemental Face Amount, Net Amount at Risk, and duration that the coverage has been in force for the insured.
Id. Ex. B at 12. Paragraph A explains that the COI rate " as of the Policy Date," (a date identified on the face of the policy) will be calculated based on certain factors. The Policy Date is not necessarily the same as the " Issue Date" --which is defined separately--but in Fleisher's policy the Policy Date and the Issue Date are the same. The insured's " sex," " Age," and " Risk Classification" are identified on the face of the policy in accordance with the insured's personal and health characteristics. For example, Fleisher's policy states that the insured, as of the issue date, was a 72-year-old male whose Risk Classification was " Non-Smoker, Percentage Substandard 150.0%." Id. Ex. B at 3. For any policy in which the Policy Date and the Issue Date (the date when coverage comes into force) are the same date, the " duration that the coverage has been in force" drops out as a factor in calculating the COI rate as of the Policy Date, because that value is zero.
The policy then states: " The first Monthly Calculation Date is the Policy Date." Id. Ex. B at 8. Thus, a Monthly Deduction is due on the Policy Date, and the first monthly COI charge is equal to the NAR multiplied by the initial COI rate that Phoenix determines " based on" the factors listed in Paragraph A: sex, age, risk classification, basic and supplemental Face Amount, NAR, and duration of coverage.
The next paragraph (" Paragraph B" ) explains how to calculate the COI Charge (which the policy defines as " the charge for the Net Amount at Risk" ) for " a specific Policy Month." Id. Ex. B at 12. A " Policy Month" is defined as " the period from one Monthly Calculation Date up to, but not including, the next Monthly Calculation Date." Id. Ex. B at 8. In simpler terms, a Policy Month is any month during which the policy is in force. Paragraph B states:
The Cost of Insurance Charge for a specific Policy Month is the charge for the Net Amount at Risk. The charge for the Net Amount at Risk is an amount
equal to the per dollar cost of insurance rate for that month multiplied by the Net Amount at Risk, and such rates will be based on our expectations of future mortality, persistency, investment earnings, expense experience, capital and reserve requirements, and tax assumptions. The Maximum Monthly Rates at any Age are shown in Section 2 . . . .
Id. Ex. B at 12. This lawsuit is about the meaning of this paragraph.
To establish the COI Charge for any particular Policy Month, Phoenix multiplies the " per dollar cost of insurance rate for that month " by the NAR (Total Face Amount less Policy Value). Id. (emphasis added). Paragraph A discussed above explains only how to calculate the COI rate that will be used to determine what Monthly Deduction is due on the Policy Date--what I will call the " initial COI rate." In any succeeding month, the COI rate may be adjusted in accordance with the terms of Paragraph B before calculating the COI Charge.
The policy says that " such rates" ( i.e., the COI rates for any Policy Month) will be based on Phoenix's " expectations" about six identified factors: future mortality, persistency, investment earnings, expense experience, capital and reserve requirements, and tax assumptions. Notably, this list does not include the factors that are used to calculate the COI rate " as of the Policy Date." I assume this is because the initial COI rate as of the Policy Date is a baseline rate off which future rate adjustments are calculated, and those factors were taken into account when the initial COI rate was calculated.
Phoenix is not required to calculate a new COI rate every month. The company starts with the initial COI rate in force on the Policy Date and " review[s] [its] COI rates periodically, and may re-determine Cost of Insurance rates at such time . . ." Id.
The COI rate is also subject to certain maximum rates set forth in the policy, which vary in accordance with the age of the insured. See id. Ex. B at 7.
One of the breach of contract allegations in this lawsuit is that, in calculating a COI rate adjustment in 2011 (the " 2011 COI Rate Adjustment" ) for some (but not all) of the PAUL policies, Phoenix violated the contract by using factors in its calculation of the " cost of insurance rate for that month" that are impermissible under the terms of the policy. Whether plaintiffs are correct about that turns on the correct interpretation of Paragraph B.
D. The 2011 COI Rate Adjustment
In November 2011, Phoenix announced that it was imposing the 2011 COI Rate Adjustment; it changed the COI rates for some (but not all) of the PAUL policies, including those held by Fleisher and the members of the 2011 Class. The company sent letters to the affected policyholders to tell them that the 2011 COI Rate Adjustment would take effect on their next policy anniversaries. See Pl. 56.1 Statement at ¶ 28. The members of the 2011 Class are those policyholders whose COI rates increased. See Fleisher v. Phoenix Life Ins. Co., No. 11 Civ. 8405 (CM) (JCF), 2013 WL 4573530, at *1 (S.D.N.Y. Aug. 26, 2013).
It is undisputed that, in setting a new " cost of insurance rate for that month," Phoenix took Policy Values into consideration. Phoenix admits that it " analyzed funding ratios . . . in the process of defining the class" that would be subject to the 2011 COI Rate Adjustment. Def. 56.1 Statement Resp. at ¶ 30. A policy's funding ratio is equal to the Policy Value divided by the Total Face Amount. ...