WILMINGTON, Del. (CN) - PHL Variable Insurance Co. aims to save itself billions of dollars in death benefits by dumping customers through exorbitant rate increases, the U.S. Bank National Association claims in court.
U.S. Bank NA, as securities intermediary for Lima Acquisition LP, sued PHL in Federal Court. PHL, an affiliate of The Phoenix Companies, is the only defendant.
The bank association claims PHL's discriminatory misconduct uses deceptive business practices that already have been censured in New York state.
PHL is "raising future cost of insurance rates on existing policies after inducing policyholders to purchase their policies based on lower rates," according to the complaint.
The rate shock forces policyholders "like the plaintiff" to either "pay exorbitant premiums that Phoenix knows would no longer justify the ultimate death benefits, or lapse or surrender their policies and forfeit the premiums they have paid," the complaint states.
As a result, U.S. Bank says, PHL "will make a huge profit - either through higher premium payments or by eliminating a large group of policies (through lapses or surrenders) and keeping the premiums that have been paid to date." (Parentheses in complaint.)
The plaintiff says it bought six universal life insurance policies from PHL Variable, in 2005 and 2006.
Unlike whole life insurance, universal life insurance is a "flexible premium" adjustable life insurance that allows policyholders to pay what they want into their policy account each month, so long as they maintain an account balance that covers the policy and insurance charges.
The selling point for universal life insurance is that it gives "policyholders flexibility, both in the payment of premiums and the adjustment of death benefits," the bank says.
It also allows policyholders to "pay more into their account if they wish to accumulate tax-deferred interest, or they can pay just enough to cover their monthly policy charges if they wish to invest their funds elsewhere."
This makes universal life insurance less expensive than whole life insurance because "there is no guaranteed fixed rate of growth on funds in the policy account and no guaranteed fixed death benefit," according to the complaint.
But PHL raises its insurance rates when "mortality has improved not worsened, and this has resulted in new life insurance mortality tables that would, if anything, support a decrease in cost of insurance rates," the complaint states.
PHL is using a "policyholder's account value as a basis for raising the cost of insurance rates," not the insured's life expectancy, the bank says.
This is "not a permissible basis for raising [the] cost of insurance rates," the bank says, because it "discriminates against policyholders who choose to pay only enough premiums to cover their policy charges and not use the savings feature of their policies."
The bank says PHL's rate increases are unlawful because they "violate policy provisions and applicable law prohibiting discrimination in rates."
Yet PHL marketed these so-called PAUL policies as "appropriate for insurance buyers who wished to 'minimize long term insurance costs while seeking competitive returns."
"Phoenix also represented that these products would allow policyholders 'to lower premiums, as well as adjust the amount and timing of premium payments,' and would give them 'increased choice and policy design flexibility to meet [their] needs," the complaint states.
After inducing plaintiff and similarly situated policyholders into buying these universal life insurance policies, PHL changed the rules and raised the rates on those who "fund[ed] their accounts simply to cover their policy charges, as they were expressly allowed to do," U.S. Bank says in the complaint.
Raising the rates, the bank says, makes "some policies so expensive that policyholders would be shocked into lapsing or surrendering their policies, and Phoenix timed its rate increases to maximize its premium revenue before inducing such 'shock lapses.'"
The bank claims PHL hatched this scheme back in 2008, when Phoenix "began suffering serious financial difficulties as a result of the national economic crises," when shareholder equity loses by the company totaled nearly $1.5 billion.
This so-called "Project X, was a highly confidential project to raise COI rates on all PAUL policies," the complaint states.
In 2010, Phoenix sent a "letter advising policyholders that if they did not maintain sufficient 'accumulated policy values,' their cost of insurance rates would go up," the complaint states.
In other words, U.S. Bank claims, Phoenix told policyholders that "if they did not overfund their policies with premium payments, thereby maintaining a positive policy value (which would also have the effect of reducing the amount that Phoenix would have to pay upon a mortality event, i.e., the net amount at risk), Phoenix would penalize them by increasing their cost of insurance rates."
U.S. Bank claims Phoenix breached the policies in a number of ways, and that its rate increases violates state anti-rate-discrimination laws and other laws.
"(I)f Phoenix's unlawful scheme succeeds, Phoenix will never have to pay hundreds of millions, if not billions, of dollars in death benefits on those policies, after having already collected millions of dollars in premiums on them," the complaint states.
The bank seeks an injunction and punitive damages for unfair trade, breach of contract and breach of faith.
Its lead counsel is Travis Hunter, with of Richards Layton.
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