SEPTEMBER 2017 BAD FAITH CASES: MOTION TO DISMISS DENIED WHERE ALLEGED FACTS SUPPORT BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING (Philadelphia Federal)

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The insureds brought a consolidated class action against the insurer under certain life insurance policies. The policies are different from standard whole life insurance policies because the premium payments are flexible. Policyholders may adjust both the amount and frequency of their premium payments, so long as they maintain sufficient funds in the account to cover a monthly deduction. The monthly deduction is comprised of a cost of insurance (“COI”) charge and other related expenses.

The policies serve as an investment vehicle, whereby policyholders make payments into an interest bearing account. The insurer withdraws the monthly deduction from each account and deposits interest monthly. A policyholder may elect to pay a premium in excess of the monthly deduction. Those excess funds then increase the policy’s accumulated value. However, if the monthly deduction exceeds the value of interest generated and the premium paid, the policy value is reduced.

The insureds allege that the insurer unlawfully increased the COI under the policies by using impermissible considerations, and failed to provide some policyholders with illustrations of the COI increase upon request. Specifically, the insureds allege that the insurer cannot set the COI to recoup prior losses based on interest rate changes or miscalculations in previous mortality assumptions. The insureds allege “[the insurer] is impermissibly using its discretion to recoup past losses or ‘blunt the impact of the prevailing low interest rate environment.’” In many cases, the insurer allegedly increased COI rendered the policies economically burdensome.

The insureds brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and various other claims. As to the breach of the implied covenant of good faith and fair dealing claim, the insurer argued that this claim be dismissed as duplicative because it is based on the same facts as the breach of contract claim. The Court denied the motion. Pennsylvania “law does recognize an implied covenant of good faith where . . . the [insurer] is expressly given a constrained amount of discretion under the Policy.” For Rule 12(b)(6) purposes, the Court held that the insureds adequately alleged that the insurer breached the implied covenant “by exercising their limited discretion under the Policies in an unreasonable and unfair manner with the intent of . . . frustrating policyholders’ expectations and depriving them of the benefit of the agreement.”

Furthermore, the Court declined to dismiss the breach of contract claim, finding that the insureds’ allegations were plausible at this stage of the litigation.

Date of Decision: September 11, 2017

In re Lincoln National COI Litigation, No. 16-06605, 2017 U.S. Dist. LEXIS 146904 (E.D. Pa. Sept. 11, 2017) (Pappert, J.)

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