On February 12, 2016, in Toulon v. Continental Cas. Co., an Illinois federal court dismissed with prejudice the latest class action suit against a long-term care (LTC) insurance company challenging the propriety of premium rate increases. The plaintiff’s core theory has been raised in numerous prior cases. Specifically, insurers have been accused of making allegedly fraudulent misrepresentations and omissions as part of a “bait and switch” or “low-ball pricing” scheme to deceive customers into buying LTC insurance policies that had intentionally been priced at artificially low rates using unreasonable “lapse rate” assumptions, only to later increase those rates dramatically. Although that theory has had little success in recent years despite numerous cases filed, here the plaintiff presented a new twist on that theory, focusing on allegedly false and misleading statements in the NAIC Long Term Care Insurance Personal Worksheet and a related Notice to Applicant that allegedly primed the insured to expect only modest rate increases. Nonetheless, the Court held that policyholders cannot claim to have been misled about the possibility, frequency or magnitude of future rate increases when the insurer has disclosed its contractual right to increase premiums without limitation.

Plaintiff Sophie Toulon purchased an LTC policy in 2002. In 2013, the insurer increased Toulon’s premiums by 76.50% following regulatory approval. Toulon’s First Amended Complaint, brought on behalf of a putative nationwide class of LTC policyholders, principally alleged that the insurer made fraudulent statements and omissions in its Long Term Care Insurance Personal Worksheet that applicants completed at time of sale for suitability purposes. At issue were a series of statements allegedly designed to lull policyholders into expecting limited, affordable rate increases in the area of 20%:

  • The company has a right to increase premiums in the future;
  • The company has sold long term care insurance since 1965 and has sold this policy since 1998;
  • The company has not raised its rates for this policy;
  • However, the company did raise rates by 15% in 1995 on long term care policies sold seven to 12 years ago that provided essentially similar coverage; and
  • Have you considered whether you could afford to keep this policy if the premiums were raised, for example, by 20%?

Toulon argued that the insurer disseminated these alleged false and misleading statements as part of a scheme to use unreasonable lapse rate assumptions to generate artificially low and unsustainable premiums that the insurer “knew” would increase by far more than 20%. 

The insurer moved to dismiss Toulon’s First Amended Complaint, and on August 18, 2015 the court granted the dismissal, but did so without prejudice. Toulon v. Continental Cas. Co., No. 15 CV 138, 2015 WL 4932255 (N.D. Ill. Aug. 18, 2015).

In finding no fraud had occurred, the court held that none of the statements identified by Toulon were actually false, especially given that the insurer prominently “advised plaintiff that it had the ability to raise premiums” and did so “without any qualification,” and made no representation to the contrary. Id. at *2. Furthermore, noting that the hypothetical of a 20% increase came from an Illinois Department of Insurance regulation which mandates the content of the Worksheet, the court rejected Toulon’s arguments that “by mentioning any figure at all, defendant committed itself to premium increases in that ballpark alone.” Id. The court held that even if the Worksheet could plausibly be read to contain a false statement about the potential magnitude of a rate increase, there could be no justifiable reliance on such a statement in light of the disclaimers in the Worksheet and elsewhere. Id.

The court disposed of the fraudulent omission claim by finding that the insurer had no duty to disclose its rate increase plans. Id. at *3. Because no fiduciary or special relationship existed as a matter of law between insurer and insured under Illinois law, Toulon argued that a duty to disclose stemmed from the insurer’s position of influence and superiority over its elderly and inexperienced policyholders. Id.  But, the court rejected this argument, holding that it would lead to fiduciary/special relationship being created “anytime an established insurer sold a policy to an elderly person who was not sophisticated in the ways of insurance and that insurer complied with Illinois’s ‘suitability’ requirements.” Id. at *3. In addition, the court found there had been no misleading “half-truth” statements, because none of the insurer’s communications could be read as a comprehensive explanation of how it prices premiums. Id.

The court dismissed Toulon’s claim under the Illinois Consumer Fraud Act for largely the same reason it dismissed Toulon’s fraudulent misrepresentation claim: “An act will not said to be deceptive when the plaintiff is explicitly alerted to the complained of result.” Id. at *5.

Following the dismissal without prejudice of the First Amended Complaint, Toulon subsequently filed a Second Amended Complaint. The insurer again moved to dismiss, and on February 12, 2016, the court dismissed the Second Amended Complaint—this time, with prejudice. Toulon, 2016 WL 561909 (N.D. Ill. Feb. 12, 2016).

Plaintiff’s Second Amended Complaint added allegedly fraudulent misrepresentations made in the Notice to Applicant that accompanied the Worksheet. But, the Court again found that none of the challenged statements were actually false. Id. at *3–4. In an attempt to bolster her Complaint, Toulon pointed to additional language in her Policy—including a statement that the insurer “may” (as opposed to “will”) change premium rates—and argued that “by presenting the possibility of an increase in her premium, [the insurer] misled her as to both the probability and magnitude of such an increase.” Id. at *3 (emphasis added). Not mincing words, the court held that Toulon’s theory “requires an unreasonable logical leap and cannot be the basis for a fraudulent misrepresentation claim.” Id. 

It remains to be seen whether Toulon and other recent decisions will ultimately dissuade plaintiffs from bringing class action challenges to LTC rate increases. For now, it is clear that the battle over LTC rate increases is far from over. As rate increase challenges continue to be dismissed from the courts, policyholders are becoming increasingly active on the administrative front, making efforts to sway regulators to preempt or limit rate increase approvals, and filing grievances with regulators to protest approved rate increases through the administrative hearing process.