United States District Court, S.D. New York
For Jonathan Ross, David Levin, Plaintiffs: John Singleton Skilton, Perkins Coie LLP, Madison, WI; David James Harth, Perkins Coie LLP (WI), Madison, WI.
For AXA Equitable Life Insurance Company, Defendant: Brad Scott Karp, Bruce Birenboim, Elizabeth M. Sacksteder, LEAD ATTORNEYS, Jesse Scott Crew, Justin David Lerer, Paul, Weiss, Rifkind, Wharton & Garrison LLP (NY), New York, NY; Caitlin Elizabeth Grusauskas, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY.
OPINION AND ORDER
JESSE M. FURMAN, United States District Judge.
Plaintiffs Jonathan Ross and David Levin bring this putative class action on behalf of those who purchased life insurance from AXA Equitable Life Insurance Company
(" AXA" ), alleging that AXA violated New York Insurance Law Section 4226 by engaging in various " shadow insurance" transactions in connection with its life insurance business. Before the Court are two motions: Plaintiffs' motion for class certification pursuant to Rule 23 of the Federal Rules of Civil Procedure (Docket No. 87), and AXA's motion to dismiss Plaintiffs' Second Amended Complaint (the " Complaint" ) (Docket No. 105). For the reasons that follow, the Court concludes that Ross and Levin fail to show that they suffered a concrete injury-in-fact, as required to establish standing under Article III of the U.S. Constitution. Accordingly, the Court holds that it lacks subject-matter jurisdiction and that the Complaint must be dismissed. Plaintiffs' motion for class certification is therefore denied as moot.
Although the Court is not technically limited to the four corners of the Complaint in assessing whether Plaintiffs have standing, see Tandon v. Captain's Cove Marina of Bridgeport, Inc., 752 F.3d 239, 243 (2d Cir. 2014), the following facts are taken from the Complaint and documents it incorporates by reference and are assumed to be true for the purposes of AXA's motion to dismiss, see Karmely v. Wertheimer, 737 F.3d 197, 199 (2d Cir. 2013); WC Capital Mgmt., LLC v. UBS Secs., LLC, 711 F.3d 322, 329 (2d Cir. 2013).
A. Life Insurance and Its Regulation in New York State
Many consumers in the United States purchase life insurance to provide surviving loved ones with financial benefits after death, benefits that may help defray the cost of estate taxes and funeral expenses or counteract the loss of the decedent's income. (Second Am. Compl. (Docket No. 105) (" SAC" ) ¶ 33). Nevertheless, although many life insurance policies are contractually guaranteed for up to fifty years in the future, they are not guaranteed (as bank accounts are) by any federal agency such as the Federal Deposit Insurance Corporation. ( Id. ¶ 39). Despite (or perhaps because of) the absence of such federal guarantees, life insurance companies are generally heavily regulated by state government agencies, including the New York State Department of Financial Services (" NYDFS" ), which is charged with overseeing the practices of New York-based life insurance companies. ( Id. ¶ 40).
Given the nature of insurance, the number of claims a life insurer needs to satisfy at any given time -- and, relatedly, the assets the company needs to satisfy them -- is contingent on several factors, including mortality rates. ( Id. ¶ 43). Accordingly, state regulations usually require life insurers to establish reserve liabilities (" reserves" ), using formulas that account for such factors. ( Id. ¶ ¶ 42-43). To support these reserves, life insurers must hold " admitted assets" -- typically high-quality assets that a life insurer can reliably liquidate to pay outstanding claims. ( Id. ¶ 42). Nevertheless, while reserve requirements are calculated to cover more than a life insurer's likely projected risk, they are not sufficient to cover the total amount of an insurer's exposure -- meaning that in the event of a major " mortality event" (such as a terrorist attack or a pandemic) that greatly increases the number of claims at a given time, or a market disruption that reduces the assets held by insurance companies, a life insurer could find itself faced with more claims than its reserves are able to cover. ( Id. ¶ ¶ 43-44).
Perhaps because of these concerns, the National Association of Insurance Commissioners introduced two model regulations, known as Regulations XXX and AXXX, versions of which have since been
adopted in New York. ( Id. ¶ ¶ 45-46). Regulations XXX and AXXX apply to term and universal life insurance policies, respectively, and thus cover " the most significant life insurance products." ( Id. ¶ ¶ 45-46). Among other things, they increase the burden of (or " conservatism of" ) statutory reserve requirements by, for example, increasing overall reserve level requirements and limiting a company's ability to use admitted assets for anything other than supporting its reserves. ( Id. ¶ ¶ 45-47). The regulations also affect various measures associated with life insurance companies' risk-based capital, the minimum amount of capital insurers are required in order to protect policyholders. ( Id. ¶ 48). In analyzing the financial health of a life insurance company, regulators and analysts often look to that company's risk-based capital ratio -- the ratio of the insurer's total adjusted capital to the minimum amount of capital a company is required to hold under the relevant regulator's formula. ( Id. ¶ 50). Because Regulations XXX and AXXX affect reserve requirements, and accordingly the minimum amount of capital required under New York regulations, both regulations have increased the amount of total adjusted capital a company must hold in order to obtain the same risk-based capital ratio they had prior to the regulations' promulgation. ( Id. ¶ 52).
B. Reinsurance Transactions
To help minimize the risks involved in offering insurance, many insurers obtain reinsurance, whereby a primary insurer (or " ceding insurer" ) pays a premium to another insurer (the " reinsurer" ) in exchange for carrying some or all of the risk the primary insurer took on in writing an initial insurance policy. ( Id. ¶ 54). In turn, primary insurers may claim " reserve credits" through such arrangements -- in essence, reducing the assets a primary insurer is required to maintain in support of its reserve liabilities. ( Id. ¶ ¶ 55-57; see Mem. Law Supp. Def.'s Mot. To Dismiss Second Am. Compl. (Docket No. 106) (" Def.'s Mem." ) 5; see also Decl. Bruce Birenboim Supp. Def.'s Mot. To Dismiss (Docket No. 107) (" Birenboim Decl." ), Ex. 1 (" NYDFS Report" ) 1). Effectively, therefore, reinsurance fulfills two functions: It can help manage risk and can free up capital for other purposes. (SAC ¶ 55).
Nevertheless, because a primary insurer remains liable on all policyholder claims in the event that the reinsurer defaults, regulators generally allow primary insurers to take reserve credit only when there is sufficient assurance of the reinsurer's ability to pay claims for which it assumed risk. ( Id. ¶ ¶ 54, 56). There are two categories of reinsurance transactions generally deemed " safe" enough to warrant granting the primary insurer a reserve credit: (1) those with reinsurers who are licensed or accredited by the primary insurer's own regulators (" authorized reinsurers" ); and (2) those with unauthorized reinsurers who post sufficient high-quality, easily liquidated collateral to account for potential obligations -- typically by maintaining a trust with a United States financial institution or by obtaining an irrevocable and renewable (" evergreen" ) letter of credit from a United States financial institution. ( Id. ¶ ¶ 56-58). Occasionally, a primary insurer will seek reinsurance, not from an unaffiliated third-party insurer but, instead, from affiliated (" captive" ) entities -- that is, a company owned by the insurer's parent company. ( Id. ¶ 59; NYDFS Report 1). A primary insurer may claim reserve credit for these reinsurance transactions just as they can for those with unaffiliated third parties, so long as the captive reinsurer meets the above-mentioned requirements -- that is, the captive insurer is either regulated by the primary insurer's own regulators or posts collateral
deemed sufficient under the regulations prescribed by the primary insurer's ...