MILWAUKEE (CN) – A federal class action claims that Northwestern Mutual Life Insurance took advantage of thousands of whole-life policyholders by failing to adjust interest rates on loans in accordance with the economic climate, as it promised to do. The class claims Northwestern adjusted interest rates upward during the stagflation of the late 1970s, but never reduced them, as promised, when interest rates sank.
Lead plaintiffs Gad and Jean Smith say they bought whole life policies that “originally contained policy language providing for a maximum loan interest rates [sic] of 5 percent of 6 percent (the ‘5%/6% limit policies’).”
But the economic morass of the late 1970s, known as stagflation, brought “an unprecedented rise in market interest rates,” and Northwestern Mutual “became alarmed,” according to the complaint. The insurer feared that “owners of the 5%/6% limit policies would engage in arbitrage, withdrawing the cash values by borrowing at the 5% or 6% rate guaranteed them in the policies, and reinvesting the cash values in other safe investments which paid higher rates.”
So around 1977, the class claims, Northwestern Mutual amended its policies to charge variable rates “that Northwestern promised would vary with long-term economic conditions but would never exceed 8 percent (the ‘variable loan rate amendment’).”
“In return for accepting the company’s amendment, owners of the 5%/6% policies were offered the right to participate in a higher tier dividend class together with other members of the mutual insurance company whose policies allowed Northwestern to charge a maximum interest rate of 8 percent on policy loans. Smith accepted the offer and each of Smith’s six policies was modified to permit a variable loan rate with a maximum of 8 percent 9the ‘variable loan rate policies’). Despite the sustained drop in interest rates since 1990 and the current historically low interest rate environment, Northwestern has continued to assess an unchanging 8 percent interest rate against the loans made on Smith’s variable loan rate policies in violation of it express contractual and fiduciary duty,” according to the complaint.
The class seeks an injunction and damages for breach of contract and breach of fiduciary duty.
It lead counsel is Paul Scoptur with Aiken & Scoptur.