On February 23, 2017, the United States Court of Appeals for the Second Circuit affirmed the rulings of several US district courts, shutting down a series of policyholder class actions that had been filed against Metropolitan Life Insurance Company and AXA Equitable Life Insurance Company challenging the companies’ disclosures surrounding captive reinsurance transactions. See attached order in the cases captioned Ross et al. v. AXA Equitable Life Ins. Co., Robainas et al. v. Metropolitan Life Ins. Co., Yarbrough et al. v. AXA Equitable Life Ins. Co. and Intoccia et al. v. Metropolitan Life Ins. Co. The order is a strong signal from the Second Circuit that plaintiffs who fail to demonstrate concrete, non-speculative injury lack Article III standing to sue, and also dashes future putative plaintiffs’ hopes of leveraging New York’s insurance laws to support lawsuits by policyholders who are not personally affected by the conduct they challenge.
In the decided cases, all putative class actions, the plaintiffs, holders of term life insurance and variable annuities with guaranteed benefit riders, had seized upon rhetoric in a June 2013 policy report issued by the New York Department of Financial Services (NYSDFS) to challenge the defendant insurers’ failure to disclose certain details of captive reinsurance transactions. Specifically, the plaintiffs alleged that each insurer had misrepresented its financial strength by failing to disclose in its statutory annual statement that affiliated reinsurers used parental guarantees from the insurer’s holding company parent, in support of evergreen letters of credit from banks backing their reinsurance obligations.
According to the plaintiffs, these “shadow insurance” transactions were a kind of “financial alchemy” that created the appearance of reducing risk, but had the effect of making insurers’ capital reserves “appear larger and rosier than they actually are,” allegedly leaving policyholders with less protection. The complaints, all of which were filed in the US District Court for the Southern District of New York, did not challenge the captive transactions themselves—which are routinely used in the industry, are perfectly legal and were specifically approved by the NYSDFS. Nor did they allege violations of any specific disclosure requirement regarding captives. Instead, the plaintiffs charged that the defendants had violated New York Insurance Law Section 4226(a)(4), which prohibits insurers from making “any misleading representation, or any misrepresentation of the financial condition of any such insurer or of the legal reserve system upon which it operates.” Based on this claim, the plaintiffs asserted that the nationwide classes they sought to represent were entitled to penalties afforded by Insurance Law Section 4226(d), in the amount of all of the life insurance premiums (and/or contributions to annuity benefit riders) that they had paid, i.e., a claim for free life insurance and guaranteed benefits.
The insurers moved to dismiss these cases on multiple grounds, including the plaintiffs’ failure to allege injury-in-fact sufficient to confer Constitutional Article III standing. In 2015, all three district court judges dismissed the complaints for a lack of standing.1 The plaintiffs appealed.
On appeal, the Second Circuit considered three theories of injury raised by the plaintiffs. First, the plaintiffs' argument that they faced an increased risk that claims would not be paid, because the insurers’ reserves were compromised and lower than represented. Second, the plaintiffs' claim that they were injured by holding policies that were less valuable than represented. And third, the plaintiff's contention that a violation of the insurance law was enough to confer standing, because they had been deprived of their “right to truthful information” from the insurers.
The last theory had been weakened by the US Supreme Court’s 2016 decision in Spokeo v. Robins, issued just before this appeal was briefed. In that decision, the Supreme Court clarified that a statutory violation, without more, is not sufficient to confer Article III standing, reaffirming that a plaintiff must always suffer a concrete injury. Following the Supreme Court’s lead, the Second Circuit held that plaintiffs could not rely on a violation of the insurance law alone to supply standing. The Court reasoned that while a statutory violation that necessarily creates a risk of harm could conceivably be a sufficient injury—assuming it meets all of the other elements of the Supreme Court’s test (i.e., concrete, particular, not conjectural or hypothetical, fairly traceable to defendants’ conduct, etc.) —a misleading representation does not, by itself, create that risk. Indeed, in this case, the plaintiffs did not even allege, much less demonstrate, that they, or any other policyholders would not have purchased the products but for the alleged omissions.
Plaintiffs’ other two theories of injury were also rejected by the Second Circuit. In order for the allegedly increased risk that claims would not be paid to manifest itself into an actual injury, an extended series of hypothetical events, including an economic downturn and a bank failing to honor the letter of credit, would have to occur. Thus this theory travelled “too far down the speculative chain of possibilities to be ‘clearly impending,’” and was rejected. Addressing the plaintiffs’ decreased-value theory of injury, the Second Circuit explained that “the value of a life insurance policy or an annuity rider is the amount that will be paid by the policy in the future.” As plaintiffs had only alleged that the amount that will be paid out might decrease in the future, they had not alleged a current injury.
Since the plaintiffs lacked Article III standing, the dismissal of their case was affirmed.
Although a summary order, the Second Circuit’s opinion is a strong signal from the Court regarding Article III standing. It also dashes future potential plaintiffs’ hopes of leveraging Insurance Law 4226 to support a cause of action for policyholders who are not affected by the alleged misrepresentation or omission over which they sue.