On February 6, 2018, the Seventh Circuit Court of Appeals departed from a number of recent decisions holding that long-term care insurance (LTCI) policyholders cannot challenge rate increases when the insurer has disclosed in the policy its right to increase premiums. The case is Newman v. Metropolitan Life Insurance Company, No. 17-1844, 2018 WL 732912 (7th Cir. Feb. 6, 2018).
The court found that a MetLife sales brochure and the company's LTCI policy were susceptible to the interpretation that the plaintiff's rates could not be increased because she had elected a reduced payment option after age 65. The policy contained four disclaimers reserving the right to change premiums on "a class basis," but the court nonetheless found that the policy was ambiguous because it did not define the term “class.” Newman underscores the importance of clearly disclosing the potential for rate increases in LTCI advertising materials and policy language. Potential plaintiffs may see the decision as opening the door for new class action attacks on premium rate increases by sub-classes of LTCI policyholders who have elected special payment arrangements.
The relevant facts, as reported by the court, are as follows. At age 56, plaintiff Margery Newman purchased a long-term care insurance policy from MetLife. She elected a non-standard payment method called "Reduced-Pay at 65." In a brochure given to applicants, MetLife described this payment method as follows:
"By paying more than the regular premium amount you would pay each year up to the Policy Anniversary on or after your 65th birthday, you pay half the amount of your pre-age 65 premiums thereafter."
Ms. Newman purchased the policy and selected the Reduced-Pay option. When she received her policy, it contained only one reference to the Reduced-Pay option, which showed that her premium amount at age 65 would be half the amount she paid until age 65:
"In addition, you have selected the following flexible premium payment option: Reduced Pay at 65 Semi–Annual Premium Amount: Before Policy Anniversary at age 65 $3231.93 On or after Policy Anniversary at age 65 $1615.97"
The policy disclosed, in a bold, all-caps header, that "PREMIUM RATES ARE SUBJECT TO CHANGE." In three other places, the policy reserved MetLife's right to increase premium rates on a "class basis." The policy defined more than 30 terms, but not the word "class."
Ms. Newman paid her premium, and when she attained age 65 her premium was cut in half. However, after her 67th birthday, MetLife doubled the premiums for all long-term care policyholders in Illinois, including Reduced-Pay policyholders over age 65. For Ms. Newman, this meant that her semi-annual premiums increased to $3,851.80, which were higher than they were when she first purchased the policy.
The District Court decision
Ms. Newman filed a putative class action against MetLife for breach of contract, common law fraud, fraudulent concealment and unfair and deceptive practices under the Illinois Consumer Fraud Act. She alleged that the statements in the brochure and in the policy caused her to reasonably understand that her post-65 premium was fixed at half the amount of her pre-65 premium. She argued that the policy's reservation of the right to change premiums on an undefined "class basis" was ambiguous. According to Ms. Newman, "class" arguably referred to everyone in the Reduced-Pay group, with the effect that Reduced-Pay policyholders removed themselves from the larger class of policyholders who had not elected the Reduced-Pay option.
MetLife moved to dismiss based upon the policy's disclosures of the possibility of rate increases, arguing these applied to all long-term care policyholders, including those who elected the Reduced-Pay option. In March 2017, the District Court for the Northern District of Illinois granted MetLife's motion and dismissed Ms. Newman's claims. The district court concluded that the policy disclosed in four places that premium rates could change and was not ambiguous as to the operation of the "Reduced-Pay at 65" option. The district court rejected Ms. Newman’s argument that by purchasing the "Reduced-Pay at 65" option, she opted into a policy class immune from post-age 65 premium increases.
The Seventh Circuit's reversal
Chief Judge Diane Wood of the Seventh Circuit, joined by Judges Frank Easterbrook and Ilana Rovner, reversed. The Court of Appeals concluded that Ms. Newman had offered a reasonable interpretation of the policy. "A reasonable reader easily could think, however, that 'on and after' the policy anniversary following age 65, the policy holder (here, Newman) will pay half of what she personally was paying prior to that anniversary date." Because the word "class" is undefined, it "might mean age, in which case class membership is independent of payment arrangements," but "it might refer to the payment arrangement, so that everyone in the Reduced-Pay group comprises a single class and the effect of class membership is defined by the terms of the Reduced-Pay option."
Based upon this contractual ambiguity and failure to define "class," the Seventh Circuit concluded that Ms. Newman prevailed on the liability phase of her breach of contract claim. The Seventh Circuit also revived Ms. Newman's class action claims for deceptive practices and consumer fraud, and remanded for further proceedings. MetLife has filed a motion for rehearing and rehearing en banc.
The Seventh Circuit's ruling in Newman departs from a line of recent cases holding that policyholders cannot assert claims over rate increases where the insurer has disclosed its contractual right to increase premiums, including the recent Seventh Circuit decision in Toulon v. Continental Casualty Co., 877 F.3d 725 (7th Cir. 2017). The Newman panel distinguished Toulon on the basis that the plaintiff there was "warned about the undesirable result and simply misconstrues the material offered by the insurance company," whereas Ms. Newman was not warned by MetLife's brochure or the policy about the possibility of a rate increase in her post-65 premiums.
In both Toulon and Newman, the language in the insurance policies disclosing the potential for increases was substantially equivalent. The primary factual distinction is that Ms. Toulon was not part of a sub-class of policyholders with prospective special premium rights. Ms. Toulon was guaranteed fixed premiums for the initial 10 years of policy ownership, whereas Ms. Newman's rights were prospective, accruing at age 65. Ms. Toulon's policy made clear that her premium rates could increase after 10 years.