Insurance company sued in class action lawsuit over equity indexed universal lifeArticle added by Roccy DeFrancesco on February 15, 2012
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

Let me first state that I like the company that got sued. I’ve read the filing and the partial granting of defendant’s motion to dismiss, and my initial opinion of the case is that it appears to lack merit.

I just found out an insurance company that sells equity indexed universal life was sued in a class action lawsuit (Joyce Walker, et al. v. Life Insurance Company of the Southwest) in 2010. It’s odd how that never made the news, but when I found out about it, I wanted to put something out there on it so we can all learn from it.

What’s the lawsuit about?

Plaintiffs allege that the insurance company engaged in “unfair, unlawful, and fraudulent business acts or practices” without “specifically disclos[ing] and identify[ing] the cost of buying and maintaining the policies” and instead “concealed these very substantial costs within the projected earnings of these policies.” The lawsuit centers on the following:
  • A lack of full disclosure of fees in EIUL policies
  • Improper illustrating
  • Inadequate explanation of “tax-free” borrowing
Let me first state that I like the company that got sued. I’ve read the filing and the partial granting of defendant’s motion to dismiss, and my initial opinion of the case is that it appears to lack merit.

It appears to have been filed by plaintiffs who are Monday-morning quarterbacking their decision to buy an equity indexed universal life policy back in 2006. Based on what I know, it seems that plaintiffs knew the risks associated with buying an EIUL policy for wealth building. Because the market didn’t perform well, they are making a technical argument about a lack of disclosure of certain fees as their way to strong arm the insurance company into giving them money (and, of course, there is a punitive damage claim which is where the big bucks are in cases with little damage such as the one at hand).

So, do not take this article as my negative commentary on the insurance company as much as it is a warning to advisors.

Motion to dismiss partially granted

In May 2011, the court partially granted the insurance company’s motion to dismiss. The court dismissed the claim about understating the income tax consequences of a policy lapse on tax-free borrowing from a policy. Unfortunately, the court did not dismiss the claim dealing with lack of disclosure when it comes to certain charges/fees in the policy.

It is important to understand that the review for granting a motion to dismiss is very high. Courts will bend over backwards if they can find a valid legal argument and any amount of facts to avoid granting a dismissal.

The court found that there was enough evidence for the case to move forward on the lack of full disclosure of certain fees/charges. It is my hope that the insurance company fights this case and takes it to trial where a verdict can be found in their favor.

I am familiar with the insurance company’s illustrations, and they are not so different from any insurance company selling policies (EIULs, ULs, WLs or VULs). There is a ton of information about fees — none of which a client actually reads.

What can we learn from this lawsuit?
  • As an attorney, it’s unfortunate, but we learn that if you look long enough, you can find an attorney who will sue for just about anything (all the reason to make sure you and your clients are asset protected).

  • That we need to go out of our way to make sure we fully explain to clients how life policies and annuities work and their pros and cons (in other words, stop giving out fluffy sales books on EIULs; and, instead, give out a book that gives readers details and, in turn, will help prevent lawsuits for lack of disclosure. )

  • Always give your clients a CYA (cover-your- ass) letter after you sell a product and keep a copy for your records. For advisors I work with, I have CYA letters that I created that are several pages long that I recommend advisors send to clients after selling an equity indexed universal life policy or a fixed indexed annuity.
We’ll see what happens with this lawsuit and if it settles or goes to trial. I’ll keep you informed when I find out more. But for now I recommend that all advisors get in the good habit of fully explaining products to clients (even if that kills some sales) and make sure you CYA. It’s a tough world out there, and attorneys looking to make a quick buck will come after you if you give them the opportunity.
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