Statements about insurance policies' flexibility not puffery

U.S. Bank Nat. Ass'n v. PHL Variable Ins. Co., 2013 WL 791462 (S.D.N.Y.) (magistrate judge)

US Bank brought this lawsuit as securities intermediary for Lima Acquisition LP, which owns 12 life insurance policies issued by PHL.  US Bank alleged that BHL breached the terms of the policies and violated various laws by raising the rates on the policies in 2010 and 2011.  It added claims for violations of the Connecticut Unfair Trade Practices Act and the Connecticut Unfair Insurance Practices Act, and PHL moved to dismiss.  The magistrate judge recommended granting the motion in part and denying it in part.

The policy terms allow policyholders to choose how much they wish to pay each month, and the account accrues interest.  Fees are deduced, including the cost of insurance (what the insurer pays for the cost of bearing the mortality risk). The policies allow the insurer to adjust those rates, but only based on certain specified factors, most significantly mortality. There’s no fixed monthly premium, but the account has to be big enough to cover the fees; if it’s not, the policy will lapse.

US Bank alleged that, to induce consumers to buy the policies, PHL misrepresented the circumstances under which rate increases might occur, and then further misrepresented that the rate increases that did happen were “in accordance with” the policies’ terms.  Life expectancy has increased, which should have decreased the cost of insurance, but PHL allegedly increased the cost instead in violation of policy terms, both to increase its fees and to induce policyholders to let the policies lapse, relieving PHL of the risk of payment.  PHL allegedly “knowingly and intentionally disseminated false and misleading policy illustrations that overstated the cost of insurance rates to induce policyholders to lapse or surrender their policies.”  Moreover, PHL allegedly made false and misleading statements in its policies, stating that policyholders needed only to pay enough in premiums to cover their monthly policy charges, but PHL began charging more for policyholders who pay only their minimum monthly charges.  Also, PHL allegedly made false and misleading statements about the flexibility of the policies, first in policies issued in 2005-2007 and also to the plaintiff immediately before it acquired ownership interests in the policies in 2010.

Initially, there’s no private cause of action under CUIPA; however, CUTPA provides consumers with remedies for violations of other laws, including CUIPA, so the CUIPA-related allegations remain important.  CUTPA provides a remedy for any person who has suffered an ascertainable loss of money or property as a result of an unfair trade practice.

It has a three-year statute of limitations running from the date of the violation (not from discovery or from injury). The lawsuit was filed in November 2011, so claims based on conduct before November 2008 should be time-barred. But some of the alleged misrepresentations in the complaint clearly occurred after then, such as the allegations that PHL made false and misleading statements before US Bank bought interests in the policies in 2010 and that after the 2010 rate increases PHL said they were in accordance with the terms of the policies.

PHL argued that its alleged misrepresentations about the flexible nature of the policies were made in 2005-2007, and also in press releases in 2003 and 2006, so claims were time-barred.  But PHL wasn’t alleged to have wronged this plaintiff before November 2008.  There was no reason why violations against someone else should start the limitations period as to US Bank’s claims, even though US Bank wasn’t affected by the initial violation. “To bar the plaintiff's claim, as the defendant argues, would mean that the defendant can make the statements at issue here to anyone in the future with impunity because any claims based on the statements would be untimely.” Thus, the limitations period started to run when the statements were made to US Bank during the period immediately before it bought into the policies in 2010.

In order to prove this variety of CUTPA claim, US Bank needed to prove the traditional common-law elements of negligent misrepresentation: (1) a misrepresentation of fact; (2) which the defendant knew or should have known was untrue; (3) on which the plaintiff reasonably relied on the misrepresentation; and (4) which caused pecuniary harm.

PHL argued that US Bank failed to plead misrepresentation.  First, PHL argued that claims about policy flexibility were mere opinion/puffery, subject to varying interpretations depending on how different people thought.  But misrepresentations about specific characteristics, including policy terms, are not puffery.  Moreover, “qualitative statements can be misrepresentations of existing facts if those statements are belied by conditions known to the defendants.”  The challenged statements about the policies were that they gave policyholders the “opportunity to lower premiums, as well as adjust the amount and timing of premium payments”; were “designed to balance protection and cash accumulation with features suited to meet policyholders' evolving personal or business planning needs”; “offer increased choice and policy design flexibility to meet the needs of the high net worth” policyholders; were “appropriate for those looking to minimize long term insurance costs while seeking competitive returns”; and “featur[e] flexible premiums and adjustable-death benefits.” 

In their full context, these statements could be more than puffery.  If in fact the policyholder would be penalized for paying only the monthly policy charges or adjusting the amount of monthly payments, then the policies weren’t as advertised.  These statements weren’t simple hopes but were, it was alleged, intended and understood to describe the policies’ essential characteristics.  “To find them to be mere puffery would drain all meaning from descriptions such as ‘flexible’ or ‘lower premium payments’ and leave policyholders unable to rely on any qualitative descriptions of insurance policies.”

However, the statement that rate increases were “in accordance with the terms” of the policies was nonactionable opinion. Its truth depended on the legal effect of a contract's provisions, and an insurer's legal opinion of the terms of its policies wasn’t actionable.

PHL argued that the complaint didn’t allege reasonable reliance, but the proper question wasn’t whether it contained the magic phrase but rather whether the pleadings plausibly alleged facts from which reasonable reliance could be inferred.  US Bank pled reliance on the insurer’s representations; it was “entirely plausible” that such reliance was reasonable.  US Bank had no reason to believe that the representations were false or misleading and PHL didn’t argue that US Bank was unreasonable to rely on them.

Likewise, the complaint was pled with sufficient particularity under Rule 9(b), providing fair notice of the claim.  The sufficiency of the pleadings may depend on the nature of the case, the complexity or simplicity of the relevant transactions, etc.  It was enough that US Bank identified several specific statements and documents in which the statements were made—“namely, the defendant's press releases, letters regarding its cost of insurance rate increases, and marketing materials” and how the statements were false and misleading, even if it didn’t identify which person at US Bank received those representations.