An interesting cost of insurance (COI) increase lawsuit has been playing out over the span of two years in a Los Angeles courtroom.  The case was featured in a Wall Street Journal today as the case is set to go to trial next week.  (1)

The case involves a Los Angeles church pastor and an investment group that financed life insurance policies on his church members.  Reverend Hardwick was the pastor of a predominately African American church who was concerned about the number of uninsured congregants in his flock.  In the 1960s, the pastor, along with a locally prominent, but not yet nationally known attorney by the name of Johnny Cochran, began to devise a program to provide life insurance to parishioners.  The idea finally came to fruition in 2004 when Transamerica issued 2,400 TransValue flexible premium universal life insurance life policies in two pools.

According to the lawsuit, during the negotiation process Reverend Hardwick met with officials of Transamerica and voiced his concerns that the carrier might charge higher rates for his group for the same coverage because his congregants were African American, a process known as red-lining.  The carrier, in written correspondence, assured Reverend Hardwick that the policy to be issued was “the same product that would be available for any similar group that might apply for coverage,” and that, “the charges, benefits and features are exactly the same as we would issue in all states where the policies have been approved.”

According to minutes from the case, the reverend was also concerned about future increases in the cost of insurance. The plaintiffs contend that Transamerica “repeatedly assured Hardwick that it would not raise the Policies’ MDR [monthly reduction rates] at any time in the future.”

In 2009, an investor, DCD Partners, took over the premium payments on the policies.  Each policy was issued with a $275,000 death benefit, with $225,000 to DCD, $35,000 to PIC Trust, a charitable organization run by Reverend Hardwick, and $15,000 to the insured.  Prior to entering the agreement, DCD reached out to Transamerica, and “received information regarding the policies” with Transamerica telling the investor that “it had only increased the cost of insurance once over the previous thirty years.”  DCD “reasonably relied on this representation in acquiring its interest in the policies.”

While both Hardwick and DCD stated that they relied on Transamerica reassurances as to the remote likelihood of a COI increase during their commitment to buy, the court documents show that it was “undisputed that Hardwick signed numerous documents acknowledging that the existing MDR was not guaranteed and could increase in the future.”  In addition, before investing in the policies, DCD hired an insurance expert who told them “the cost of insurance could go up so long as it went up for all similarly situated policyholders.”

In 2013, Transamerica raised the cost of insurance on the policies in the pools by approximately 50%, and per the Wall Street Journal article, the plaintiffs alleged that “Transamerica impermissibly used race-based data” when calculating the increase, which “makes the program unsustainable.”

In a statement referenced in the WSJ article, Transamerica responded, saying they “did not raise rates on the policies due to the race of those insureds, nor would we ever increase rates based on racial considerations,” saying the allegations were “categorically false and offensive.”

According to court documents, a Transamerica actuary “examined the profitability of the
Policies” by reviewing death claims over the prior life of the Policies” and after assessing census date, along with lapse and interest rate assumptions, “projected that Transamerica would lose money on the Policies in the future” without a rate increase.  The plaintiffs countered that the Transamerica actuary “reverse-engineered a death claim projection in order to support an MDR increase” and “did not consider data from the mortality experience” of another block of similar policies.

The policies were originally taken out to provide parishioners with a $15,000 burial fund and according to the WSJ article, to date they have “paid for 188 funerals.”  Per the article $50 million of the potential $660 million in benefits has been paid out.  Next week’s court date may tell how many will receive benefits in the future.

  1. Life Insurer Faces Off Against African-American Church in Battle Over Rates, Leslie Scism, The Wall Street Journal, online August 31, 2017, in paper September 1, 2017