The COVID-19 situation is affecting all businesses, and insurance companies are no exception. To date, much of the attention on the insurance industry, including recent legislative, regulatory and litigation activity, largely has focused on property and casualty insurers—in particular, whether “business interruption” policies cover an insured’s business losses caused by social distancing and states’ stay-at-home orders. Numerous state regulators and individual legislators across the country are insisting that insurers cover these losses. That battle likely is to be resolved ultimately by the courts.
But life insurers are not immune to increased litigation exposure either. Many circumstances developing now will result in litigation in the coming months.
Why this matters: The current situation—a looming recession, cash flow problems throughout the economy and a declining stock market—creates significant uncertainty for life insurance companies. While your financial teams and analysts can help you model how to weather the storm from a financial perspective, you may be faced with significant legal and regulatory headwinds. Our team includes numerous attorneys who have represented the life insurance industry for decades, including in senior in-house positions at the world’s largest insurers. We are monitoring these and other potential litigation risks and how they may affect your business, and would be pleased to discuss our strategies with you.
Payment accommodations and the risk of lapsed policies: State regulators, such as the New York Department of Financial Services, are issuing and considering guidance that life insurers should accommodate late and deferred payments and otherwise ensure that policies stay in force. What should life insurers do when a policyowner fails to make a scheduled or required premium payment, which at least in normal circumstances could cause the policy to enter a grace period and, eventually, to lapse? Enterprising plaintiffs’ lawyers might construct a putative class of policyowners whose policies terminated or declined in value during the COVID-19 pandemic.
State-by-state variance: Not all states are responding to the crisis in the same way, creating an increasingly inconsistent patchwork of regulations, orders and guidance. Missteps and misadministration by insurers are possible, if not likely, and will be seized upon in private litigation.
Fee increases: Increasing economic pressure will make it more difficult for insurers to earn enough on premium investments to keep products profitable, especially on those products and blocks of business with a guaranteed minimum rate of return. Recent lawsuits have led to large settlements with insurers that raised the cost of insurance rates or non-guaranteed elements, but insurers may nonetheless conclude that they have no choice but to raise rates to ensure the continuing viability of the product.
Programmatic underwriting challenges: As underwriting guidelines, including technologies now used by many in the industry to increase the efficiency of underwriting, need to adapt to any changing actuarial assumptions and forecasts, plaintiffs may recycle and refresh challenges and concerns to underwriting decisions on grounds such as discrimination. While time will tell whether there could be merits to any such challenges, life insurers should be mindful of prior litigation and regulatory concerns in this area.
Hastening the next wave of universal life insurance litigation: In recent years, the life insurance industry has faced lawsuits over the changes in the cost of insurance and other non-guaranteed elements in variable and interest-sensitive whole life and universal life policies, like those described in the preceding paragraphs. Those cases often involved policies that were guaranteed to stay in force as long as the scheduled premium is paid, regardless of the cash value of the policy. But for universal life policies without that provision, will the large drops in the global securities markets and continuing drops as companies report reduced earnings from this recession—or default on their bonds—lead to increased policy lapse rates, even after the immediate COVID-19 situation has passed? If so, we can expect creative plaintiffs’ lawyers to be waiting in the wings.
Sales and marketing issues: Long a favorite theme of the plaintiffs’ bar, insurers may see a rise of litigation asserting that policyholders were misled at the point of sale if insurers react to market and economic forces by raising rates, or by taking action that policyholders view as inconsistent with contract terms.
Long-term care riders to life policies: While the long-term care industry has been in decline for some time, some insurers have turned to offering long-term care riders to life policies. In light of the well-reported impact that COVID-19 has had on older populations, insurers certainly need to pay particular attention to claims handling to ensure that systematic decision-making or policy language enforcement cannot migrate into legal challenges. For example, insurers must consider carefully any across-the-board claims decision making and policy interpretation that could present opportunities for plaintiffs to pursue class claims.
Conditional coverage litigation: Many life insurance companies offer new customers conditional coverage of an applied-for policy during the underwriting process. For customers who die as a result of COVID-19 during the conditional coverage period—whether from the virus or as a victim of excess mortality wrought by the pandemic—will policy underwriters still be able to make an ex ante underwriting determination? Or will the desire to avoid paying out a large amount of life insurance proceeds (compared to the minimal premiums received) result in unexpected underwriting denials? We expect the plaintiffs’ bar to assert that any underwriting denials of conditional coverage is improper.
Other economic considerations: The uncertain economic situation may affect the solvency of some carriers or their reinsurers and could be a perfect storm: A significant increase in mortality and associated life insurance payouts, a jump in loan loss provisions and charge-offs, and potential write-downs on assets may require a capital infusion. For mutual insurers, that may raise considerations of demutualization or restructuring into a mutual holding company structure. Is that possible in the short term, and how will regulators react?