qualitative statements about insurance policies weren't necessarily puffery

U.S. Bank Nat’l Ass’n v. PHL Variable Ins. Co., 2013 WL 791462, No. 12 Civ. 6811 (S.D.N.Y. March 5, 2013) (magistrate judge)

Just coughed up by Westlaw, noted for discussion of puffery.

US Bank, as securities intermediary for Lima Acquisition LP, sued PHL for breaching its policy terms and violating various laws by raising the insurance rates on its policies.  The causes of action included Connecticut Unfair Trade Practices Act (CUTPA) and Connecticut Unfair Insurance Practices Act (CUIPA) claims; the magistrate judge concluded that there was no independent private cause of action under CUIPA, but a CUIPA violation could form the basis of a CUTPA claim.

Lima owned twelve policies issued by PHL. The policies allowed holders to choose how much to pay, and the account would accrue interest, with fees deducted.  The policies permit the insurer to adjust the key fee (the cost of insurance), but only based on certain specified factors, the most significant of which is mortality. If the account isn’t sufficient to cover fees, the policy will lapse.

The complaint alleged that PHL misrepresented the circumstances under which rate increases might occur and later further misrepresented that the rate increases were in accordance with the policy terms.  PHL allegedly increased rates to make money and induce “shock lapses” in which policyholders give up instead of paying, relieving PHL of payout risk, including by intentionally overstating the cost of insurance to current policyholders to induce lapse and by stating that policyholders needed only to pay enough to cover monthly charges, but then charging more for policyholders who paid only the minimum. Other alleged falsehoods included PHL’s statements that the policies provided the “opportunity to lower premiums” and “increased choice and policy design flexibility.”

Some of the statements might be outside the 3-year statute of limitations, but some of the alleged misrepresentations were clearly timely.  PHL argued that the alleged misrepresentations about flexibility were made well over 3 years before suit was filed, in other policies issued from 2005-2007, and in “press releases to policyholders and prospective policyholders” issued in 2003 and 2006.  But PHL didn’t allegedly wrong this plaintiff at that time, since Lima hadn’t bought then.  “The defendant has provided no reason why violations against someone else should also start the limitations period as to the plaintiff’s claims, even though the plaintiff was not affected by that 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.”

PHL argued that its statements were merely opinion, not fact.  Misrepresentations about policy terms are actionable.  And “‘while statements containing simple economic projections, expressions of optimism, and other puffery are insufficient,’ qualitative statements can be misrepresentations of existing facts if those statements are belied by conditions known to the defendants.”  Opinions can be actionable if they’re without a basis in fact or undermined by facts known to the speakers. 

The statements here revolved around the choice/flexibility represented by the policies, e.g., “opportunity to lower premiums, as well as adjust the amount and timing of premium payments” and “features suited to meet policyholders’ evolving personal or business planning needs.”  The court found that these statements, while not phrased as absolutes or measurable characteristics, described their “essential, distinguishing characteristics.”  Though “flexible” or “lower premium payments” alone might be nonactionable opinion, they could be actionable in their full context.  “If, as alleged, the policyholder could not pay only the monthly policy charges or adjust the amount of monthly payments without being penalized, the Policies departed from their advertised characteristics.”  The statements weren’t just PHL’s hopes.  “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.”

As for PHL’s statement that the rate increases were “in accordance with the terms” of the policies, though, that was an opinion about the law, not a misstatement of fact.  (Citation: Restatement (Second) of Torts § 545(2) & cmt. a (1977) ( “[T]he statement of the legal consequences of [the known] facts is a statement of opinion as to what a court would determine to be the legal consequences of the facts.”).  Mentioned because the court in the recent Oracle case held to the contrary—that representations that a course of conduct was legally protected could be false advertising.)

The complaint also sufficiently alleged facts going to reliance and pled the fraud claim with particularity.