New York of Appeals Permits Policyholders of "Vanishing Premium" Life Insurance of Plead Cause of Action for Deceptive Practices Pursuant to Statute but Rejects Common Law Fraud Claim
Stempel, Jeffrey W., Journal of Risk and Insurance
Gaidon v. Guardian Life Insurance Co. of America, 94 N.Y.2d 330, 725 NE21 598, 704 N.YS 2d 177,1999 N.Y. LEXIS 3932 (New York Court of Appeals-December 20,1999).
A litigation issue of the current moment involves a life insurance product popular during the 1980s-"vanishing premium" life insurance. These products were a form of "universal" life insurance, a life insurance policy in which premiums were designed to exceed the amount strictly required to pay for the death benefit purchased by the policyholder. The additional premium dollars were to be invested by the insurer, with return on investment reinvested to pay future premiums. The idea was that after a few years of paying premiums, return on investment would equal the present value of required future premiums so that no further premium payments would be required to maintain the policy. Universal life is described as a "cash-value" insurance policy that combines "pure" life insurance (where the premium charged matches the mortality risk in light of the death benefit) and an investment component that seeks to accumulate the funds to pay future premiums.8
In traditional cash-value policies, any return on premium in excess of that required to immediately pay for coverage is returned to the policyholder in the form of dividends or interest. Early cash-value policies featured conservative investments by insurers. High interest rates during the 1980s made these unattractive products because of low return. In response, insurers began offering universal life policies in which the policyholder's accumulated money is tied to the current rate of interest. According to the Gaidon court:
Carriers marketed interest rate-sensitive insurance under a host of premium payment options, including the "vanishing premium" plan. Under this plan, the policyholder pays higher than normal premiums in the early years of the policy, resulting in a quicker accumulation of premium dollars for investment purposes. These policies are marketed on the premise that enough cash value will accumulate so that at a fixed date future administrative and insurance costs will be covered and the policyholder relieved of any further out-of-pocket premium obligations.
In the late 1980s, however, sharply declining interest rates "upset the economics" of these widely marketed policies. Accumulated cash values became insufficient to pay expected future insurance and administrative costs. By the early 1990s, many consumers who purchased such policies were required to continue out-of-pocket payment to keep their policies in force. And the lawsuits followed.
See 94 N.Y 2d at 342-43,1999 N.Y LEXIS 3932 at *11 *12 (citations omitted) 9
Specifically, class representative plaintiff Gaidon10 and others bought insurance from Guardian Life in the 1980s, allegedly on the strength of what proved to be false representations that they would absolutely be relieved of premiums after a few years. The plaintiffs also alleged that Guardian artificially inflated its current dividend rates "despite waning profits [on the invested premium] because it wanted to continue depicting competitive vanishing rates." However, on a separate page that accompanied insurer illustrations of various payment and investment return options, Guardian disclaimed:
Figures depending on dividends are neither estimated nor guaranteed, but are based on the current year's dividend scale.
The current year's dividend scale reflects current company claims, expense and investment experience and taxes under current laws. Actual future dividends may be higher or lower than those illustrated depending on the company's actual future experience.
See N.Y 2d at 339-40, 1999 N.Y LEXIS 3932 at *4-*5. In addition, the policies when delivered contained a statement saying that divisible surplus would be determined on an annual basis and that dividends would "reflect Guardian's mortality, expense, and investment experience. …