Life insurance policies issued in the past are often transferred in blocks to reinsurers on a 100% indemnity reinsurance basis. These transfers often include servicing agreements, where the assuming reinsurer takes responsibility for all policy services, including determining the cost-of-insurance. In the past several years, policyholders have brought putative class actions against life insurance companies claiming that the life insurance companies have been raising the cost-of-insurance improperly using factors not permitted by the policies thereby reducing the economic value of the investment portion of the life insurance policy.
In a recent case an interesting procedural question arose over whether the assuming reinsurer in a 100% indemnity reinsurance arrangement with a service agreement had the right to intervene in the putative class action cost-of-insurance case against the original policy issuing company.
In Barnes v. Security Life of Denver Insurance Co., No. 18-1487, 2019 U.S. App. LEXIS 38242 (10th Cir. Dec. 23, 2019), a policyholder bought an adjustable life insurance policy that had an investment and savings component in addition to the life insurance component. The original insurance company eventually ceded the policy along with other similar policies to a reinsurer on a 100% indemnity reinsurance basis along with a service agreement. The service agreement gave the reinsurer full administrative responsibility over the reinsured policies and allowed the reinsurer to control the defense of any lawsuits brought on the reinsured policies.
Over the years, the accumulated value of the policy was hit with deductions causing the cash value of the policy to be less than the policyholder anticipated. The policyholder sued the original insurance company for breach of contract on behalf of himself and other similarly situated policyholders.
In this case, the complaint challenged the calculation of the cash value and the charges being levied against the policy. Determining the cost-of-insurance charges and all other policy servicing items was no longer the responsibility of the original insurance company, but was the responsibility of the reinsurer under the service contract. Accordingly, the reinsurer sought to intervene in the lawsuit to protect its interests.
The district court denied the motion and the reinsurer appealed. On appeal, the circuit court granted the reinsurer’s motion to intervene as of right, with one dissent. In reversing and granting the reinsurer’s motion to intervene, the court found that the reinsurer established a direct, substantial and legally protectable interest in the action for purposes of intervention. The majority noted that the reinsurer had the financial interest in the proceeding as a 100% reinsurer and as the administrator of the business responsible for any extra-contractual damages.
The court also found that the reinsurer’s interests would be substantially impaired if intervention was denied. The majority concluded that the interests of the ceding insurer and reinsurer were not identical. This is because, among other things, there were policies administered by the reinsurer in issue and policies administered by the ceding insurer in issue and each party would have its own interests in defending the administration of the subsets of policies. Clearly, found the court, the ceding insurer would turn to the reinsurer to defend the administration of the reinsured policies, but would have its own defense for those policies not reinsured by the reinsurer. Moreover, even though the reinsurer had the right to control the litigation against the ceding insurer, the ceding insurer had refused to allow the reinsurer to control the litigation because the ceding insurer’s own unique interests were at stake.
Essentially, the appellate court found that the reinsurer met the criteria for direct intervention as of right, rather than relying on contractual rights to control the defense or approve settlements.