Dickman v. Banner Life Ins. Co., No. WMN-16-192, 2016 U.S. Dist. LEXIS 176364 (D. Md. Dec. 21, 2016).
A Maryland federal court denied a life insurer’s motion to strike allegations related to its reinsurance and dividends transactions. The court found that the transactions were potentially relevant to the breach of contract and fraud claims in that they provide an alternative reason for the increased cost of insurance fees.
In this case, the insured purchased life insurance policies from the insurer. The insured paid the minimum premiums to keep the policy in force for a guaranteed 20 years. The insured had the option to pay above and beyond the minimum premium and the excess was invested for the benefit of the policy holder. The extra funds could be used to extend the coverage past 20 years, reimbursed or, in the event the insured died, the money would go to the policy’s beneficiary. The insurer extracted an expense fee and a cost of insurance (COI) fee with each premium. The remainder after the fees were extracted was added to the policy’s cash value.
In October 2015, the insurer dramatically increased the COI. As a result of the increase, monthly premium payments would no longer cover the COI and the difference was taken from the accumulated cash values. Because the cash values would be completely drained, the option to extend the policies beyond the 20-year guarantee was no longer available. Thus, the insured would no longer receive an additional benefit from the years of additional payments.
The insurer sent a letter notifying its policy holders that the COI would increase. The notification did not indicate by how much the COI would increase. The insured said the increase was due to “reevaluated assumptions regarding the number and timing of death claims, how long people would keep their policies, how well investment would perform, and the cost to administer policies.” The insured claim that the insurer’s reasons are specious – that the real reason is a scheme to funnel cash into its corporate parent. The insured allege that the parent company was in a distressed financial condition and the insurer set up wholly-owned captive reinsurers offshore or out-of-state for the purpose of offloading its policies in exchange for phantom or inflated assets so it would appear to have sufficient reserves to permit distribution of dividends.
The insured brought breach of contract, unjust enrichment, conversion and fraud claims. The court dismissed the unjust enrichment and conversion claims. The unjust enrichment claim was dismissed because the subject matter of the unjust enrichment claim was covered by an express contract. The conversion claim was dismissed because the cash values of the insured policies were not specific or identifiable as required by the claim of conversion.
The insured’s fraud claim survived the insurer’s argument that it is barred by the economic loss and source of duty rule, which provides that a tort claim cannot be maintained with a breach of contract claim. As the court explained, the exception to this rule is when a party alleges fraud in the inducement, which “establishes an independent, willful tort that is factually bound to the contractual breach but whose legal elements are distinct from it.” The court found that this case involved fraud in the inducement based on the inference that the insurer sent the insured financial statements that did not indicate its financial instability, thus the statements were made to induce continued excess payments. The court limited the insured’s fraud and breach of contract claim in that they could not be brought against the insurer’s parent company citing a longstanding practice of courts rejecting foisting liability on parent companies for the acts of their subsidiaries.