#239 | Filed: PacLife PDX Class Action Lawsuit

I’ve uploaded the lawsuit and you can read it by clicking here.

While working at MetLife, I was struck by how often the notion of “ending up on the front page of the Wall Street Journal” was invoked as a reason to do the right thing – and there was a reason the fear was real for MetLife. Back in the early 1990s, MetLife made the headlines for selling life insurance policies as retirement “investments” – not life insurance – to nurses nationwide from its Tampa office. I literally heard about the Tampa nurse scandal within the first week of joining the company and it was pretty obvious that, 20 years later, the company was still scarred. But things like that are incredibly uncommon. The idea that a life insurer could end up on the front page of the Wall Street Journal for any reason is almost laughable. For the most part, the popular press pays exactly zero attention to life insurers. We’re terribly boring, you know.

Instead, the more potent fear for life insurers is a class action lawsuit with teeth. Like any other consumer-facing industry, we have our fair share of class actions and some of them have been extremely successful. Class actions on “vanishing premium” sales practices reaped “huge jury verdicts, multi-million dollar class action settlements and changes that go to the very foundation of the life insurance industry.” We’re talking literally billions of dollars in aggregate settlements. Most recently, life insurers have been successfully sued for COI increases and have had to pay hundreds of millions in restitution. But so far, we haven’t seen much action in class action lawsuits for Indexed UL. That is, at least, until now.

Someone in the industry forwarded me a lawsuit filed in Orange County last week against Pacific Life and, particularly, addressing the best-selling PDX product. The lawsuit was filed by Bonnet, Fairbourn, Friedman and Balint, a law firm in Phoenix with a long track-record of class action suits in life insurance, including huge settlements in vanishing premium and COI increases. In contrast to a failed previous lawsuit regarding IUL illustrations in California, which was a muddled mess of arguments easily handled by the fine print in the illustration, this complaint is a scalding, technical and comprehensive indictment of the product itself and the way that it was sold. And, to boot, the client facts are a near-perfect example of bad practice in the Indexed UL market, complete with inflated commissions, claims that policy performance is “guaranteed” because it’s “whole life” and dramatically reduced illustrated performance after modest changes to the illustrated rate. This is not a frivolous, fishing expedition lawsuit. It’s a well-aimed harpoon throw.

The core claims of the lawsuit are probably not surprising to anyone with even a passing understanding of PDX. Based on my read, it seems as though the primary points are as follows:

  1. The Performance Factor is “intentionally misleading and deceptive,” a claim the complaint goes through great lengths to demonstrate by pointing out that it was never disclosed to the customer and is only vaguely described in marketing materials, and even then only for its positive attributes.
  2. The Performance Factor was “a subterfuge” created to flout AG 49, which has since been modified by the regulators specifically to address designs like this one
  3. The product itself is far riskier and more leveraged than clients realize and, because of its high charges, doesn’t actually provide downside protection.
  4. The attraction of the product rested on an assumption of perpetual 50% option profits, which the complaint describes as “an indefensible assumption that is unsupportable, unsustainable and actuarially unreasonable.”
  5. That PacLife knew the initial cap of 10% was “unsustainable” based on the dilution of its portfolio yield and temporarily low option prices, but chose to use it for sales reasons.
  6. Agents could adjust their compensation to be significantly higher than the market-rate, which resulted in higher policy charges for clients and greater risk of downside loss.

There are numerous other supporting points, but these are the highlights. The complaint also quotes from every publicly-available source to support the arguments, including public articles written by yours truly, Brett Anderson’s bombastic takedown of PDX in his IUL Digest and statements by Pacific Life itself. The lawsuit is almost excruciatingly well researched. It seems like it will hit home.

But will it? Let’s examine the core arguments from an alternative point of view. The Performance Factor isn’t disclosed – just like any other non-guaranteed element in any other life insurance contract. And yes, it did flout AG 49 in terms of illustrated performance, but it was consistent with the guideline as written, including the 50% option profit assumption, and was subsequently copied by numerous other insurers. PDX was certainly riskier than a typical Indexed UL product but risk is disclosed on illustrations using the guaranteed and alternative values. The downside drawdown risk from policy charges is common to all Indexed UL products, not just PDX, and the downside guarantee only applies to credits, not actual policy values. Furthermore, PDX has an embedded alternative 2% rate surrender value and optional long-term guarantee. And even if PacLife knew that the original 10% cap was unsustainable, the illustration model regulation allows for use of current rates regardless of whether or not they are sustainable. Finally, producers can adjust their compensation on a variety of products, not just this one. Taking all of that into account, it’s pretty hard to argue that PacLife PDX is in strict contravention of the rules.

That’s actually what makes this lawsuit so dangerous. PacLife will inevitably argue for dismissal because it is, in fact, in strict compliance. But the complaint makes a compelling case for why compliance doesn’t mean consumer protection. If this lawsuit is successful, it could open the floodgates for similarly-styled lawsuits against Indexed UL products even if they are in compliance with the guidelines. There are certainly some specific things related to PDX, particularly the Performance Factor, but the core arguments in the complaint are common to all Indexed UL products. BFFB just chose an extreme product paired with perfect client facts for its opening gambit. Whether or not the complaint is successful is important, but more important is how the complaint fails or succeeds. That’s going to be the signal to the industry about what happens next. Will this be another round of multi-billion dollar restitutions paid like in vanishing premiums or yet another lawsuit foiled by the fine print? Time will tell.

Until then, this case is going to be quite interesting to watch. Pacific Life will undoubtedly respond viciously because it knows what is at stake. There are tens of thousands of PDX policyholders and billions in premium. If they’re on the wrong side of this thing, it’s going to hurt – and not just financially. PacLife has long upheld its reputation as an ethical company, burnished by its recent third consecutive recognition as one of the World’s Most Ethical Companies by the Ethisphere Institute based in part on its “innovation and reputation.” This class action lawsuit lays out a devastating and systematic argument for behavior that, if found to be true, would undermine that story. Their defense will assuredly be every bit as scalding, comprehensive and technical as the complaint. So grab some popcorn, folks. This is going to be good.