#165 | Indexed UL Class Action Lawsuit Investigation

In the last few days, a link to a posting on topclassactions.com has been blazing through the industry like wildfire. The headline specifically references a class action lawsuit investigation trying to find (and presumably sign up) Pacific Life PDX and Minnesota Life Eclipse IUL policyholders who have purchased either of the two products within the last 5 years. The gist of the claim by the soliciting firm is that “people who have purchased IUL insurance policies over the past give years may have been misled about the inherent  risks and numerous hidden fees that may affect their final value” and, in particular, that “even if markets continue to rise, when hidden costs and fees are factored in – an IUL may provide a significantly lower rate of return than if the customer simply invested in securities directly.” The article makes numerous references to “misleading,” “improper”, “hidden” and “exaggerated” claims in illustrations. Damning, indeed.

But why has a simple solicitation for members of a prospective class action lawsuit been flying around our industry? These solicitations happen all the time and often for moonshot cases. A class action lawsuit without a class is not a viable lawsuit, so signing up members of the class is an essential beginning step to the case. I think there are two reasons why it’s caused such a fervor. First, it surfaces a deeply-held and latent fear in our industry that, eventually, the class action lawyers will figure out what’s going on with IUL and they’ll eat us alive. If that’s when you’re worried about, then this solicitation gives you reason to fear. IUL is on their radar. So while this solicitation is not anything yet, it’s not nothing, either.

The other reason why people have been passing this lawsuit around is because of the specificity of the claims by the firm about who may have been harmed and why. The line of reasoning in the post is interesting, if flawed. The fundamental premise is that “an agent often uses an ‘illustration,’ or an example of how the policy works and what benefits can be expected (my emphasis)…the purpose [of which] is to provide the consumer with some idea of what the policy will be worth in the future.” From there, the post goes on to talk about all of the ways that illustrations potentially mislead consumers into thinking they’re going to get more than they actually will, thanks to hidden charges and subversive tactics. The problem with this line of reasoning is that illustrations are not projections. They are not designed to show what benefits can be expected or provide a reasonable basis for the future value of the policy. According to the illustration regulations and all of the fine print in the illustration itself, illustrations are simply explanations of how the policy works. The fact that agents portray them as projections and consumers don’t catch the fine distinction is not the fault of the life insurers, never mind the fact that life insurers regularly and viciously compete with each other on the basis of illustrated performance.

Fortunately or unfortunately, depending on your perspective, a class action lawsuit that makes the case that illustrations are misleading as projections about future performance is going to be dead from day one. Life insurers got caught flat-footed by the vanishing premium debacle on exactly this issue and that’s the reason why the illustration model regulation came to be. They’ve been building up defenses against this kind of lawsuit for decades and there’s no way, in my mind, that it will pass muster. There’s too much fine print to protect them. A vastly more effective strategy would be for the firm to claim that life insurers built policies with hidden and incomprehensible mechanisms such that the illustration is misleading about how the policy itself works and for bonus points, that life insurers wantonly use illustrations as competitive weapons, which is obviously true and can be proven by the mountains of life insurer-branded fliers touting competitive positioning based on illustrated performance. Now that’d be a smoking lawsuit. But in its current form, this particular lawsuit investigation howls like a wolf but bites like a Shih Tzu.

The next one, though, might not be so tame.