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Celedonia X. Yue v. Conseco Life Insurance Company

April 2, 2012


The opinion of the court was delivered by: Honorable A. Howard Matz, U.S. District Judge


Present: The Honorable A. HOWARD MATZ, U.S. DISTRICT JUDGE

Stephen Montes Not Reported

Deputy Clerk Court Reporter / Recorder Tape No. Attorneys NOT Present for Plaintiffs: Attorneys NOT Present for Defendants:

Proceedings: IN CHAMBERS (No Proceedings Held)


For the second time, Plaintiff Celedonia X. Yue has brought a putative class action against Defendant Conseco Life Insurance Company for allegedly raising the monthly cost of insurance ("COI") rates of a large group of policyholders. Plaintiff moves this Court to certify a California class and issue a preliminary injunction preventing Conseco from implementing the COI rate increase. For the following reasons, the Court GRANTS*fn1 Plaintiff's Motion for Preliminary Injunction and Certification of California Class, contingent upon certain modifications to the class definition and the appointment of a second class representative.


A. The Policies

The policies at issue in this action are Defendant's Valulife and Valuterm universal life insurance policies ("the policies"). In September of 1995, Plaintiff's mother Ruth S. Yue became an insured under a Valulife policy and named Plaintiff as the beneficiary ("Yue policy") . The Yue policy permits the insurer to deduct a "cost of insurance charge" from the account each month ("monthly COI charge"). (Dillon Decl. II*fn2 , Exh. A, p. 9.) The monthly COI charge is determined by a formula that includes a monthly COI as one of its variables. (Id.) When the policies were initially issued, they were accompanied by a chart that reflected the monthly COI rates that applied to each policyholder ("COI rate chart"). (See id., p. 4.)

The Yue policy contains language that explains the circumstances under which the insurer can change monthly COI rates:

Current monthly cost of insurance rates will be determined by the Company based on its expectation as to future mortality experience. Any change in such rates will apply uniformly to all members of the same age, sex, and premium class.

., p. 9.) The policies of the putative class members in this case have the same or substantially similar language. As to the merits, the crux of this dispute revolves around whether this language permits Defendant to raise COI rates even when the projected mortality rates, i.e., rates of death, of its policyholders have not increased.

B. Yue I and the 2002 COI Rate Increase

The Court considered this issue previously in Yue v. Conseco Life Ins. Co., 2011 WL 210943, at *2 (C.D.Cal. Jan. 19, 2011)("Yue I"). In that case, Plaintiff brought a class action against Defendant for announcing in 2002 its intention to increase COI rates for Valulife and Valuterm policies.*fn3 Evidence showed that the then-projected losses to Defendant for these policies were much higher than anticipated due to the fact that there were far fewer policy terminations than estimated by the initial policy designers.*fn4 Id. at *2. Thus, even though there had been no increase in expected mortality rates, there was still an increase in the projected amount of death benefits that policyholders would claim because a much higher-than-expected number of policies were still in effect. Taking into account the losses created by the low rate of terminations, Defendant set the COI rates in these policies to increase in their 21st year, using a formula that would eliminate projected losses but not result in any profits for Defendant. Id. at *8. Defendant argued that the rate increase complied with the language of the policies because the phrase "expectation as to future mortality experience" permitted an insurer to increase COI rates based on the anticipated amount of death benefits it would have to pay. Id. at *9.

On January 19, 2011, this Court granted summary judgment in favor of Plaintiff in , holding that (1) the word "current" in the policy prohibited Defendant from implementing a COI rate increase that would be deferred until a future time, and (2) the phrase "expectation as to future mortality experience" meant "expectation of the 'rate of mortality.'" Id. at *9. Under the Court's interpretation, the policies prohibited Defendant from basing the COI rate on persistency rates*fn5 and the expected amount of death benefits.

Instead, Defendant could base COI rate increases only on the expected rate of deaths.

C. The 2011 COI Rate Increase

In November of 2011, Defendant again changed the way it calculated the monthly COI rates of Valulife and Valuterm policies. This time, the change was effective immediately, but only until December 31, 2012, at which point Defendant would recalculate COI rates for the following year. The changes resulted in a COI rate increase for 94% of policyholders and a COI rate decrease for 6% of policyholders. (Prel. Inj. Opp. 4.) Defendant sent letters to affected policyholders in October of 2011 to notify them of this change and attached a new COI rate chart.

Previously, Conseco increased monthly COI rates by adjusting the rates reflected in the original COI rate charts. In other words, in the past, Conseco increased COI rates by multiplying the original COI rate chart for each policyholder by a certain percentage. Conseco's new methodology, however, has no relationship to previous COI rates and dispenses with the original COI rate chart entirely. Conseco instead devised the new COI rates by dividing the policyholders into six classes based on their gender and policy premium class: (1) female non-smokers, (2) male non-smokers, (3) female select policies, (4) male select policies, (5) female standard policies, and (6) male standard policies. (Turner Decl. ¶ 11.) It then calculated the expected mortality rate of each policyholder in those groups according to his or her age at the time of purchasing the policy and the age of his or her policy. (Turner Decl. ¶ 12.) Plaintiff's mother, for example, is a female nonsmoker policyholder who was 70 years old at the time the policy was issued. The policy is now in its 17th year (she is 87). (Turner Decl. ¶ 13.) Of female nonsmoker policyholders who purchased policies at age 70 and are now in their 17th year of the policy, 47.466 per 1000 of those policyholders are expected to die per year. (Turner Decl. ¶ 13.) In other words, policyholders like Plaintiff's mother have an expected mortality rate of 47.466 per 1000.

After calculating the expected mortality rate of each policyholder, Conseco then set the annual COI rates for that policyholder to "match" the expected mortality rate. Plaintiff, for example, now has an annual COI rate of $47.466 per $1000 in policy coverage. Conseco divides the annual COI rate by 12 to get a monthly COI rate (for Plaintiff, $3.9555 per $1000 in policy coverage per month). The new COI rate chart reflects these monthly rates. (See Compl., Exh. A, p. 4, attached as Exhibit A to this Order.)

The new methodology has caused the COI rates, and consequently the COI charges, of most policyholders to increase. The monthly COI charge deducted from the accounts of the putative class members is now so high that the members must significantly increase their premium payments to maintain their accounts at the same level as before. In the case of Plaintiff, for example, to adjust to the new COI rate, she must increase her annual premium payment from $7,890 to $36,517*fn6 per year. (Mot. 13; Gallagher Decl. ¶ 44.) Plaintiff has presented evidence showing that on average, COI rates have increased by 167% for putative class members. (Mot. 14; Gallagher Decl ¶ 36.) In turn, the COI charges deducted from these accounts each month are now on average 3.5 times higher. (Id.)

D. Expected Mortality Rates

In Yue I, this Court found that overall, expected mortality rates for policyholders had decreased. 2011 WL 210943, at *9. Under the new methodology, Defendant did not calculate expected mortality rates for policyholders as a whole but instead divided policyholders into six groups. By doing so, Defendant discovered expected mortality rates were higher for some groups and lower for others. Even by Defendants' calculations, however, the vast majority of policyholders still had a decrease in expected mortality rates. The following is an adaptation of the chart Plaintiff provided to reflect the relationship between the expected mortality rates of each group and the increase in COI charges:




Current COI Charge As a Percentage of Initial COI Charge Male Nonsmoker 46.3% 72% 316.3% Female Nonsmoker 33.1% 90% 320.9% Male Preferred (Select)


Percent of Putative Class Members

COLUMN C "Current" Expected Mortality Rate As a Percentage of Initial Expected Mortality Rate

11.5% 115% 429.0%

Female Preferred (Select)

6.4% 150% 468.9%

Male Smoker (Standard)

1.5% 85% 374.3%

Female Smoker (Standard)

1.2% 145% 507.0%

(Reply, Exh. A.)

The percentages listed in Column C of the above chart were calculated by Defendant. (See Turner Decl. ¶ 11.) Each percentage in Column C reflects what the expected mortality rate of a group is now ("Current" Expected Mortality Rate) in comparison to what the expected mortality rate was at the time the policies were initially priced ("Initial Expected Morality Rate"). (Id.) Female nonsmokers, for example, currently have an expected mortality rate that is 90% of what their expected mortality rate was at initial pricing. In other words, the expected mortality rate is now lower for this group. The percentages listed in Column D are taken from the declaration of Dr. Vincent Patrick Gallagher, an actuary retained by Plaintiff. (Dkt. 39, ¶ 37, n.25.) Although Plaintiff's counsel evidently thinks Column D reflects the increase in COI rates (Reply, Exh. A), Gallagher's declaration shows that the column reflects the increase in COI charges.

According to the chart, 80.9% of putative class members (in the male nonsmoker, female nonsmoker, and male smoker groups) have an expected mortality rate that is lower than it was at the time the policies were priced. Nonetheless, COI charges for all putative class members have more than tripled.

As of the filing of the Reply, 3,364 putative class members had surrendered their policies since the November 2011 announcement. (Dillon Decl. II ΒΆ 5.) At that ...

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