BHARWANI et al v. LINCOLN NATIONAL CORP. et al

Filing 50

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE GERALD J. PAPPERT ON 9/11/17. 9/12/17 ENTERED AND COPIES E-MAILED.(kw, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

IN RE:
LINCOLN NATIONAL COI
LITIGATION

:
:

PAPPERT, J.

CIVIL ACTION
No. 16-06605

September 11, 2017
MEMORANDUM

This case is a consolidated class action brought on behalf of the named
Plaintiffs1 and all similarly situated owners of JP Legend 300 and JP Lifewriter
Legend 100, 200 and 400 life insurance policies. Among other things, Plaintiffs
challenge a Cost of Insurance (“COI”) rate increase imposed on certain
policyholders by Lincoln National Life Insurance Co. (“Lincoln”), a wholly-owned
subsidiary of Lincoln National Corporation (“Lincoln National”). The Policies
give Lincoln discretion to determine the COI rate based on its expectation of
future mortality, interest, expenses and lapses. In September 2016, Lincoln
announced a COI rate increase for policies that have been in force for up to
eighteen years. Plaintiffs contend Lincoln based the COI increases on
Among the named Plaintiffs are the “US Life Plaintiffs,” LLCs that own policies
insuring the life of Texas-based Ms. Martindale; the “Kanter Plaintiffs,” Maryland residents
with a policy insuring Alan Kanter; Ivan Minlind, or the “Mindlin Plaintiff,” a California
resident and trustee of the Mindlin Irrevocable Trust, which holds a policy insuring
California resident Allen Mindlin; the “Weinstein Plaintiffs,” Georgia residents and coowners of a policy insuring Kay Weinstein; the “Rauch Plaintiffs,” North Carolina residents
who own a policy insuring Lillian Rauch; “Bharwani,” a New Jersey resident and
policyowner; “Zirinsky,” a New York resident and policyholder; “Milgrim,” a New Jersey
limited partnership that owns a policy; “Mikamal,” a Florida resident and trustee of the
Mutual Benefits Keep Policy Trust, and owns interests in five policies issued in Florida. See
(CC ¶¶ 9–17).
1

1

impermissible considerations, failed to apply the changes uniformly to
policyholders in the same rate class and wrongfully refused to provide some
policyholders with illustrations when requested.
On April 19, 2017, Plaintiffs filed a Consolidated Complaint in this Court
asserting eleven claims against Defendants on behalf of themselves and others
similarly situated.2 (ECF No. 30.) Specifically, the Complaint alleges claims for
(1) breach of contract; (2) breach of implied covenant of good faith and fair
dealing; (3) injunctive relief as to illustrations; (4) injunctive relief as to the COI
increase; and (5) declaratory relief as to the COI increase, as well as violations of
(6) the North Carolina Deceptive and Unfair Trade Practices Act, N.C. Gen. Stat.
§ 75-1, et seq.; (7) the Texas Administrative Code and the Texas Insurance Code,
28 Texas Admin Code §§ 21.2206–21.2212 and Tex. Ins. Code. Art. 21.21; (8) the
New Jersey Consumer Fraud Act, N.J. Stat. Ann. § 56:8-1, et seq.; (9) the New
York General Business Law § 349; (10) the California Unfair Competition Law,
Cal Bus. & Prof. Code §§ 17200, et seq.; and (11) the California Elder Abuse
Statute, Cal. Welf. & Inst. Code §§ 15610, et seq.
On June 8, 2017, Defendants filed a Motion to Dismiss the Complaint.
(ECF No. 40-1.) Plaintiffs responded on July 28, (ECF No. 44), and Defendants
replied on August 17, 2017, (ECF No. 47). On August 22, 2017, the Court heard
oral argument on the Motion (ECF No. 40.) which the Court, for the reasons
below, grants in part and denies in part.
I.
Some claims are brought only on behalf of certain sub-classes. For purposes of
analyzing the sufficiency of the allegations, however, the Court uses “Plaintiffs” generically
to refer to the particular Plaintiffs asserting the claim being discussed.
2

2

A.
Plaintiffs are all owners of flexible premium universal life insurance
policies (“the Policies”3) issued between 1999 and 2007 by Jefferson-Pilot Life
Insurance Company, a subsidiary of Jefferson-Pilot Corporation, which was
acquired by Lincoln National in a cash and stock merger in 2006. (CC ¶¶ 1, 18,
23.) Plaintiffs allege that as a result of the merger, the Policies “were absorbed,
owned and controlled by the combined company, Lincoln National, which sold
and operated its universal life insurance products through its subsidiary Lincoln
Life and Lincoln National’s marketing arm doing business as Lincoln Financial
Group.” (Id. ¶ 18.) The Policies differ from standard whole life insurance
policies in that the premium payments are flexible; policyholders can adjust both
the amount and frequency of their premium payments so long as they maintain
sufficient funds in the account to cover a Monthly Deduction, which consists of a
Cost of Insurance (“COI”) charge and certain other expenses. (Id. ¶ 25.) The
Policies also offer a savings or investment component; the Policy Account into
which policyholders make premium payments earns interest at a rate
determined by Lincoln, with a minimum guaranteed rate of four percent (4%).
(Id. ¶¶ 24, 28, 54.) Policyholders are able to adjust the face amount of their
coverage as well as allocate their contributions between the “term life insurance”
component and the savings or investment component. (Id. ¶¶ 24–29.)

Though Plaintiffs do not all own the same policy, the various policies owned by
Plaintiffs all contain the same language at issue and were all subject to significant COI
increases in 2016. (CC ¶ 36.)
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3

Thus, a policyholder makes payments into an individual, interest-bearing
“Policy Account.” Each month, Lincoln withdraws a Monthly Deduction from the
account and deposits a separate amount of interest. If a policyholder chooses to
pay premiums in excess of the amount of the Monthly Deduction, the excess
funds are then added to the Policy’s accumulated Policy Value. If the Monthly
Deduction exceeds the interest generated for the month (plus any amounts paid
into the Policy Account), however, the Policy Value (and interest generating
principal) is reduced by the amount of the Monthly Deduction. (Id.)
Policyholders must maintain a positive Policy Value in order to avoid a lapse of
the Policy. (Id. ¶¶ 25–29.)
According to Plaintiffs, the size of the COI charge is important for two
reasons: it is “typically the highest expense a policyholder pays” and it “is
deducted from the Policy Account (i.e., the savings or investment component), so
the policyholder forfeits the COI charge entirely.” (Id. ¶ 30.) Consequently, the
higher the COI charge, the greater the amount of the premiums required to
maintain a positive Policy Value and avoid a lapse. (Id. ¶¶ 27, 30.)
B.
The Policies specify how the Monthly Deduction is calculated:
Monthly Deduction
The Monthly Deduction for a policy
month will be computed as (1) plus (2) where
(1) is the cost of insurance and the cost of additional benefits
provided by rider for the policy month.
(2) is the sum of all administrative charges for the policy and any
attached riders shown on page 4 as being due for the policy
month.

4

...
Cost of Insurance
The cost of insurance is determined on a
monthly basis as the cost of insurance rate for the month
multiplied by the number of thousands of net amount at risk for
the month. The net amount at risk for a month is computed as (1)
minus (2) where
(1) is the death benefit for the month before reduction for any
indebtedness, discounted to the beginning of the month at the
guaranteed rate.
(2) is the policy value at the beginning of the month.
...
Cost of Insurance Rates
The monthly cost of insurance
rates are determined by us. Rates will be based on our
expectation of future mortality, interest, expenses, and
lapses. Any change in the monthly cost of insurance rates used
will be on a uniform basis for insureds of the same rate class.
Rates will never be larger than the maximum rates shown on page
11. The maximum rates are based on the mortality table shown on
page 4.
(Policy, at 8, ECF No. 40-3 (emphasis added).4)
The Policies also provide that “[u]pon request, we will provide, without
charge, an illustration showing projected policy values based on guaranteed as
well as current mortality and interest factors.” (Policy, at 9); (CC ¶ 35.) An
illustration depicts a series of future policy values, surrender values and death
benefits based on, inter alia, assumed future premium payments and currently
payable rates for non-guaranteed elements, including COI rate, interest rate and
policy expenses. (Policy, at 9); (SJR Decl., at 7–9, ECF No. 40-4.)
C.

The Policy is attached to Defendants’ Motion to Dismiss as Exhibit 1. (ECF No. 403.) The Court cites to the page numbers located on the bottom of the Policy itself.
4

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In August 2016, Lincoln announced that it would be increasing the COI
rate applicable to certain policies effective October 2016. (CC ¶ 37.) Lincoln
purported to explain the reasons behind the increases in a September 2016
notice sent to policyholders. (Id. ¶ 38); (Notice, ECF No. 40-5.) In relevant part,
the notice states:
We are operating in a challenging and changing environment as we
continue to face nearly a decade of persistently low interest rates,
including recent historic lows, and volatile financial markets.
Prudent management of our business and monitoring of the
external environment have been crucial to Lincoln’s 110-year track
record of helping people secure their financial futures, and remains
so today. This includes making fair and responsible adjustments
as necessary and appropriate to ensure we are providing value to
our customers while operating responsibly for the long-term.
(Notice, at 2.)
The Notice also contained an “FAQ” section:
1. Why are Cost of Insurance (COI) rates changing on my
policy and what does that mean?
Cost of Insurance (COI) rates are based on certain cost factors,
including mortality, interest, expenses and lapses. Our future
expectations for these cost factors have changes therefore policy
COI rates have been adjusted to appropriately reflect those future
expectations.
(Notice, at 3.)
Lincoln also made statements regarding the COI rate increase in an
August 29, 2016 update:5
The life insurance industry is operating in a
environment, notably with pressure from historically
rates, making it increasingly important for us to take
responsible steps necessary to ensure we both provide

challenging
low interest
the fair and
value to our

It is unclear whether the update was disseminated to policyholders; the bottom of the
document states: “For agent/Broker use only. Not for use with the public.” (ECF No. 40-6.)
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policyholder and partners, and operate responsibly for the longterm.
This includes taking prudent measures in managing interest ratesensitive products, while enhancing and expanding our broad
portfolio of products that are less interest rate sensitive. In
response to the persistent low interest rates, including the recent
historic lows, there will be pricing increases on the Lincoln
LifeGuarantee UL product effective 9/12/16.
While actions that impact customers are never a first course of
action, this decision is consistent with our philosophy of providing
valuable solutions appropriately priced for market conditions.
(Update, at 1.)
The update further explained:
These adjustments are based on material changes in future
expectations of key cost factors associated with providing this
coverage, including:




Lower investment as a result of continued low interest rates
Updated mortality assumptions, including instances of both
higher and lower expected mortality rates versus prior
expectations
Updated expenses, including higher reinsurance rates.

(Id. at 4.)
Plaintiffs contend that “[t]he COI rate is by far the most costly and
important component of the Monthly Deduction charge,” and “[s]mall changes in
the [COI rate] can produce a dramatic increase,” in the charge, particularly at
older attained ages. (CC ¶ 27.) Plaintiffs allege that the new rate produced
dramatic COI increases ranging from 50 to 95% depending on the policyholder,
significantly increasing the Monthly Deductions and, along with them, the
premiums necessary to maintain coverage. (CC ¶¶ 5, 27, 30, 41.) Plaintiffs point

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out that, due to the increases, many of Plaintiffs’ Policies no longer make
economic sense.
For instance, the COI charge for the Rauch Plaintiffs “rose by nearly 85%
between October and November 2016,” “rendering [the Policy] all but worthless
in a very short time without a significant additional cash outlay for the
remainder of the in-force time period.” (Id. ¶ 13.) Bharwani, who would have
paid off her Policy by age 65 paying her old premium of $4,700 per year, is now
subject to a $5,085 per year premium and will not have paid off her Policy until
age 100. (Id. ¶ 14.) Likewise, following the COI increases, the amount of
premiums required to maintain his coverage increased from $186.55 per year to
$4,203.00 per year for Zirinsky, and from $4,669.00 per year to $17,077.42 for
Milgrim. (Id. ¶¶15–16.) Mukamal’s COI rate increased by 68%, which doubled
the amount of his Monthly Deduction from $15,922 to $31,085. (Id. ¶ 17.)
D.
Plaintiffs allege that Lincoln is not permitted to set or increase COIs to
recoup past losses based on changes in interest rates or miscalculations in past
mortality assumptions. (Id. ¶¶ 31–34.) Likewise, Lincoln may not use its
discretion to set the COI rate to manage profitability, offset diminished returns
in Lincoln’s overall portfolio or offset its obligation to pay credited interest at the
minimum guaranteed rates. (Id.) Plaintiffs contend Lincoln nevertheless based
the COI increases on such impermissible factors such as lower investment
income, higher reinsurance rates, historic low interest rates, past losses and poor
portfolio management. See (id. ¶¶ 6, 38–39, 41, 52, 54–60).

8

Plaintiffs allege that because low interest rates have undermined the
profitability of Plaintiffs’ Policies (which guarantee higher interest rate accruals
on account balances), Lincoln is impermissibly using its discretion to recoup past
losses or “blunt the impact of the prevailing low interest rate environment.” See
(CC ¶¶ 51–56). They further allege that Lincoln intentionally increased the COI
rate by such a large magnitude in order to induce “shock lapses” and avoid
paying out death benefits to Plaintiffs. (Id. ¶¶ 56, 60, 120.) Plaintiffs further
contend that those hit the hardest by the increases are elder policyholders, many
of whom have dutifully paid premiums for over a decade expecting protection for
themselves and their families in their twilight years. See (CC ¶¶ 56–57, 59–60).
According to Plaintiffs, when Jefferson-Pilot priced and sold the Policies,
it established a Monthly Deduction schedule designed to generate high profits in
early durations followed by potential losses in later durations. (Id. ¶¶ 55, 57.)
Plaintiffs view Lincoln’s COI rate increase as an attempt to “reverse that
decision” and “impose unfair and excessive COI rate increases to recoup the
reduced profits and losses resulting from the rate schedule the company it
acquired affirmatively enacted,” specifically targeting those Policies that, by
design, are in the least profitable stage for Lincoln. (Id. ¶¶ 55, 57); see also (Tr.
101:21–102:11). Plaintiffs contend this effort to effectively shrink the size of an
“old, unprofitable block” of Policies is particularly injurious to this class of
elderly policyholders not only because they have contributed thousands of dollars
in premiums over longer periods of time, but also because, due to age-related

9

underwriting considerations, life insurance protection is now either unavailable
or prohibitively expensive for them to obtain. (Id. ¶ 59.)
II.
To survive a motion to dismiss under Rule 12(b)(6), a complaint must
provide “more than labels and conclusions” or “a formulaic recitation of the
elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007) (citation omitted). “Factual allegations must be enough to raise a right to
relief above the speculative level on the assumption that all the allegations in
the complaint are true (even if doubtful in fact).” Id. (citation omitted). While a
complaint need not include detailed facts, it must provide “more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555).
Twombly and Iqbal require the Court to take three steps to determine
whether the complaint will survive defendants’ motion to dismiss. See Connelly
v. Lane Const. Corp., 809 F.3d 780, 787 (3d Cir. 2016). First, it must “take note
of the elements the plaintiff must plead to state a claim.” Id. (quoting Iqbal, 556
U.S. at 675). Next, it must identify the allegations that are no more than legal
conclusions and thus “not entitled to the assumption of truth.” Id. (quoting
Iqbal, 556 U.S. at 679). Finally, where the complaint includes well-pleaded
factual allegations, the Court “should assume their veracity and then determine
whether they plausibly give rise to an entitlement to relief.” Id. (quoting Iqbal,
556 U.S. at 679).

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This “presumption of truth attaches only to those allegations for which
there is sufficient factual matter to render them plausible on their face.”
Schuchardt v. President of the United States, 839 F.3d 336, 347 (3d Cir. 2016)
(internal quotation and citation omitted). “Conclusory assertions of fact and
legal conclusions are not entitled to the same presumption.” Id. This
plausibility determination is a “context-specific task that requires the reviewing
court to draw on its judicial experience and common sense.” Id. (quoting
Connelly, 809 F.3d at 786–87).
III.
As an initial matter, Defendants contend the five contract-based claims
must be dismissed against Lincoln National because Plaintiffs have not
adequately alleged that Lincoln National is in contractual privity with Plaintiffs.
See (Defs.’ Mot., at 20–21). “[P]rivity of contract is a longstanding pillar in
Pennsylvania contract law.” Al’s Auto Inc. v. Hollander, Inc., No. 08-CV-731,
2008 WL 4831691, at *4 (E.D. Pa. Nov. 4, 2008). In their Complaint, Plaintiffs
allege that “Lincoln National is the successor-in-interest to Jefferson-Pilot.” (CC
¶ 1.) Plaintiffs support that allegation with the fact that Jefferson-Pilot issued
the life insurance policies, and Lincoln National acquired Jefferson-Pilot in a
$7.5 billion cash and stock merger in 2006. (CC ¶¶ 1, 18.)
Under Pennsylvania law, “[i]t is generally true that a company which
buys the assets of another company is not liable for the debt or liabilities of the
purchased company;” however, there is an exception to the general rule where
“the transaction amounts to a consolidation or merger.” Al’s Auto Inc., 2008 WL

11

4831691, at *4. In the case of a merger, the purchasing company becomes a
successor-in-interest and is in privity with those who contracted with their
predecessor. Id. Whether a transaction is considered a merger depends on four
factors, key among them whether there has been a transfer of stock, which
heavily favors finding a merger. Id. at *5. Defendants nevertheless argue that
Plaintiffs’ “successor-in-interest” assertion is conclusory and that the 2006
merger and acquisition is “not probative” because “a stock acquisition, for
example, would not have made any change in the parties to the acquiror’s or the
target’s policies.” (Defs.’ Mot., at 21.)
At this stage in the proceedings, Plaintiffs have adequately supported
their allegation that Lincoln National is successor-in-interest to Jefferson-Pilot,
in privity of contract with Plaintiffs and “in that capacity and in conjunction with
Lincoln Life, the Lincoln Defendants have subjected the plaintiff owners to
unlawful [cost of insurance] increases.” (CC ¶¶ 1, 18.) The standard is not
whether supporting facts are “dispositive,” but whether they make Plaintiffs’
allegation plausible. Here, given the billion dollar stock merger, and in the
absence of any counterarguments or forthcoming details from Defendants,
Lincoln National will continue as a party in this matter and Plaintiffs may
proceed with their contract-based claims against both Defendants. See Al’s Auto
Inc., 2008 WL4831691, at *5 (allegation that transfer of stock occurred sufficient
to keep potential successor-in-interest as a party past the pleading stage).
IV.

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In order to state a claim for breach of contract, a plaintiff must allege the
existence of a contract, including its essential terms, a breach of a duty imposed
by the contract and resultant damages.6 Ware v. Rodale Press, Inc., 322 F.3d
218, 225 (3d Cir. 2003) (citation omitted). Plaintiffs contend that Defendants
breached the contract by basing the COI increase on impermissible factors,
failing to apply the increases in a uniform manner across rate classes and
refusing to provide some policyholders with illustrations when requested. See
(CC ¶¶ 40–41, 51–52, 61–62, 64–66). The Court addresses each theory in turn.
A.
Plaintiffs first contend the Policies expressly limit the grounds upon
which Lincoln can raise COI rates to Lincoln’s “expectation of future mortality,
interest, expenses, and lapses,” and Lincoln breached by imposing the COI
increase to recoup past losses and for other impermissible reasons. See, e.g.,
Fleisher v. Phoenix Life Ins. Co., 18 F. Supp. 3d 456, 470 (S.D.N.Y. 2014) (“when
a universal life insurance policy states that the policyholder’s COI rate is ‘based
on’ certain pricing factors, that list of factors is exhaustive, not illustrative”)
(collecting cases); Yue v. Conseco Life Ins. Co., No. 08-1506, 2011 WL 210943, at
*7 (C.D. Cal. Jan. 19, 2011) (where policy specified that the COI rate would be
determined based on insurer’s expectation as to future mortality experience,
insurer breached by considering non-enumerated factors).

Though Pennsylvania’s choice of law rules may ultimately require the Court to
analyze various Plaintiffs’ breach of contract claims under the law of different states, both
parties have agreed that for the purpose of this Motion, no conflicts in state law exist and the
Court may apply the contract law of any of the relevant states. (Tr. 8:11–9:17.) Among
others, the parties cite Pennsylvania, California and North Carolina law in their briefs.
6

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Defendants appear to acknowledge that, if Lincoln did raise the COI
based on non-enumerated factors, it would constitute a breach of contract.
(Defs.’ Mot., at 3–4); (Tr. 17:14–18.) However, they deny doing so. They argue
that the considerations outlined in their statements all fall within the four
permissible factors and Plaintiffs have not otherwise alleged facts “showing that
Lincoln Life relied on anything other than the contractually permitted factors in
implementing the COI Adjustment.” (Defs.’ Mot., at 4.) In support of their
contention that Lincoln considered impermissible factors, Plaintiffs point to
Lincoln’s notice and update, a statement allegedly made by Lincoln’s CEO and
publicly available information relevant to some of the permissible factors.
i.
First, Plaintiffs point to Lincoln’s August 2016 update and September
2016 notice and argue that Lincoln’s statements therein demonstrate that the
COI rate increase was based on impermissible, backward-looking considerations.
Defendants disagree and contend that the grounds provided in the notice
“precisely mirror” the four permissible COI factors. (Defs.’ Mot., at 4.) In
particular, they point to the FAQ portion of the notice which parrots the
permissible factors and attributes the increase to them. (Id.) They likewise
point to the portion of the update that attributes the adjustments to “material
changes in future expectations of key cost factors associated with providing
this coverage.” (Update, at 4.)
The notice, however, also refers to “nearly a decade of persistently low
interest rates, including recent historic lows, and volatile financial markets.”

14

(Notice, at 2.) And the update states: “In response to the persistent low
interest rates, including the recent historic lows, there will be pricing
increases on the Lincoln Life Guarantee UL Product effective 9/12/16.” (Update,
at 1 (emphasis added)). Thus, while some of Lincoln’s statements mirror the
Policy language, attribute the increases to changes in future expectations and
suggest Lincoln was looking prospectively, other statements could be construed
as suggesting that the decision was backward-looking and based, at least in part,
on past “persistent low interest rates, including the recent historic lows” and
their past effects on the company’s “interest rate-sensitive products.” (Id. at 1.)
Plaintiffs further allege that “Lincoln’s President and CEO Dennis Glass
admitted to a reporter on or around September 16—during [the] same time [the]
increase was announced—that Lincoln sees in-force repricing (i.e., the COI
increase) as an opportunity to blunt the impact of the prevailing low interest
rate environment.” (CC ¶ 52); see also (Pls.’ Resp. in Opp., at 3 n.2).
Lincoln argues that its statements regarding the prevailing low interest
rate environment, in the notice or otherwise, do not suggest anything improper
since certainly “the recent interest rate environment may well change a
company’s future expectations of what interest would be.” (Tr. 15:24–16:1); see
also (Defs.’ Mot., at 5.) This may well be true and, if past interest rates were
only considered in an effort to formulate future expectations with respect to one
of the enumerated factors, permissible. However, construing documents and
drawing inferences in the light most favorable to Plaintiffs, as the Court must at
this stage, the documents are far from “unambiguous” and some of Lincoln’s

15

statements can fairly be read as suggesting Lincoln based the COI rate increase
on impermissible factors, such as past low interest rates and resulting losses.
Combined with Plaintiffs’ allegations that prevailing low interest rates have
rendered these Policies particularly burdensome to Lincoln due to their high
guaranteed interest rate, (CC ¶¶ 54–57), and the especially large magnitude of
the COI rate increase, Lincoln’s statements “nudge [Plaintiffs’] claims across the
line from conceivable to plausible.” Twombly, 550 U.S. at 570. Plaintiffs’
allegations are sufficient to state a claim for breach of contract. See DCD
Partners, LLC. v. Transamerica Life Ins. Co., No. 2:15-cv-03238-CAS, 2015 WL
5050513, at *6 (C.D. Cal. Aug. 24, 2015) (allegation that insurer increased COI
rate by massive amount was sufficient to make it plausible that insurer breached
by considering impermissible factors); Feller v. Transamerica Life Ins. Co., No.
2:16-cv-01378-CAS, 2016 WL 6602561, at *10 (C.D. Cal. Nov. 8, 2016) (allegation
that insurer raised COI rate to recoup past losses plausible where insurer
suffered significant losses on subject policies due to their high guaranteed
interest rate); Palumbo v. Nationwide Life Ins. Co., 3:16-cv-01143-WWE, 2017
WL 80405, at *3 (D. Conn. Jan. 9, 2017) (allegation that defendant insurer failed
to follow required formula in calculating the COI rate sufficient to state breach
of contract claim).
ii.
Next, Plaintiffs argue that even taking Lincoln’s explanation as true,
several of the factors on which it purported to base the COI rate increase, such
as “lower investment income as a result of continued low interest rates” and

16

“updated expenses, including higher reinsurance rates,” do not fit within the
permissible considerations. (CC ¶¶ 44–45); see also (Resp. in Opp., at 11–14).
Plaintiffs contend that “[l]ower investment income as a result of continued
low interest rates” is not a permissible consideration for two reasons. First,
neither Lincoln’s investment income nor its investment earnings is an
enumerated factor, and Plaintiffs allege Lincoln’s consideration of such
investment income is a “naked attempt to circumvent the guaranteed minimum
interest rate that the policies promise to credit to policyholders.” (CC ¶ 44.)
Plaintiffs’ argument, based on a potential distinction between “interest” and
“investment income as a result of interest rates,” is not implausible, see, e.g.,
Fleisher, 18 F. Supp. 3d at 470 (policy specifically enumerated “investment
earnings” as a permissible factor); see also U.S. Bank Nat. Ass’n v. PHL Variable
Life Ins. Co., 112 F. Supp. 3d 122, 130 (S.D.N.Y. 2015) (“Nothing . . . permits
Phoenix to . . . use COI rate increases to manage Phoenix’s profitability.”), and
the Court cannot at this stage decide that the Policy unambiguously permits
Lincoln to consider its investment income. Plaintiffs further claim that even if
the “interest” factor does permit Lincoln to base an increase on its future
expectations of investment income, Lincoln nevertheless breached by basing the
increase on its past or current low investment income. (CC ¶ 44.)
Plaintiffs also allege that “higher reinsurance rates” are not the type of
future “expenses” Lincoln is permitted to consider. (CC ¶ 45.) In their Motion,
Defendants reject this argument, claiming that “reinsurance is an expense
Lincoln incurred” and Plaintiffs failed to allege any basis for distinguishing

17

between various types of expenses. (Defs.’ Mem., at 8.) Plaintiffs, however,
alleged that the reinsurance costs cannot be included in the permissible category
of expenses because they are “not a cost of directly administering the policy.”
(CC ¶ 45.) At this stage, it is not implausible that the provision permitting
Lincoln to consider future “expenses” as part of the Charge of Insurance calculus
would be limited to certain expenses—such as those related to administering the
Policies—rather than all expenses incurred by the insurer.
Plaintiffs have adequately alleged that Lincoln’s admitted consideration of
lower investment income and higher reinsurance costs constituted breaches of
the Policies terms.
iii.
In addition to their allegations regarding Lincoln’s own statements, and
their arguments for why at least two of Lincoln’s admitted considerations were
impermissible, Plaintiffs also alleged various facts, statistics and publiclyavailable information regarding Lincoln’s income, expectation of mortality and
nationwide mortality trends generally. Because Plaintiffs’ allegations regarding
the nature of the policies, the significant magnitude of the COI increases and
Lincoln’s own stated reasons for the changes are sufficient to make Plaintiffs’
claims plausible, the Court only briefly addresses Plaintiffs’ additional
allegations and Defendants’ extensive objections thereto.7

The thrust of Plaintiffs’ argument is that particularly given trends of improving
mortality, Lincoln’s expectations with respect to mortality, expenses and investment income
(to the extent they are permissible considerations) could not have changed materially or to
the large degree necessary to justify a COI rate increase of this scale. (CC ¶¶ 40–50.)
7

18

Plaintiffs first alleged facts potentially relevant to Defendants’ investment
income, including return rates, fees from COI charges and investment income
growth. (CC ¶ 43.) However, Defendants’ objections—that (1) Plaintiffs’
economic analysis was too temporally limited, (2) fees derived from COI charges
include fees derived from products other than the Policies and, in any event, are
not a proxy for investment income and (3) investment income growth is
meaningless without reference to the size of the portfolio generating it—are welltaken. (Defs.’ Mem., at 6–8.)
More significantly, however, Plaintiffs alleged that mortality—“the most
important element” and the driving factor in setting the COI rate—has improved
nationwide since the Policies were issued and is expected to continue improving.
(CC ¶ 48.) Moreover, Plaintiffs contend that Lincoln filed interrogatories with
At oral argument, Defendants repeatedly tried to characterize “the theory of
Plaintiffs’ Complaint” as relying solely on these facts and the attendant deductive chain of
logical reasoning to conclude that “because changes in those factors could not have supported
a COI increase of this size, Lincoln must have considered other, impermissible factors.” See
(Tr. 19:11–20:16, 21:21–23:8, 26:11–20, 38:23–39:21, 41:4–22, 42:1-–43:1, 143:2–16 ).
Plaintiffs’ Complaint and briefing, however, bely this characterization. Rather,
Plaintiffs’ allegation that Lincoln based the increases on impermissible reasons is grounded
and “based in large part on Lincoln’s own stated reasons and admissions.” (Pls.’ Resp. in
Opp., at 7.) In Plaintiffs’ view, Lincoln’s statements constitute direct evidence that it relied
on impermissible considerations. To be sure, Plaintiffs also allege facts and publiclyavailable information regarding changes and trends in the relevant factors in an effort to
show that any such changes would be unlikely to support COI increases of this magnitude.
However, rather than the sole basis of their claim or a required link in their logic, this was
merely additional circumstantial evidence supporting its allegation—grounded primarily in
Lincoln’s own statements—that Lincoln considered non-enumerated factors.
Defendants, presumably due to their opinion that Lincoln’s statements were
unambiguous and “plainly show[ ] the COI Adjustment was based on permitted changes in
future expectations,” (Tr. 16:7–18:25; Defs.’ Mot., at 5), attempt to assign them no
evidentiary value and characterize Plaintiffs’ claim as supported solely by the information
relevant to the four factors. Defendants therefore spill much ink explaining why those
particular statistics or allegations do not accurately reflect Lincoln’s actual expectations with
respect to mortality or income, ultimately concluding that, due to defects in the proffered
information and Plaintiffs’ faulty conclusions drawn therefrom, Plaintiffs’ claim must be
implausible. (Defs.’ Mot., at 6–11.)

19

the National Association of Insurance Commissioners in each year from 2010 to
2014 stating its expectation that mortality will improve in the future.
(Id. ¶¶ 47–48.) Finally, Plaintiffs claim that the COI rate change, when applied
to certain policies, resulted in “a large and unusually sloped increase” that
requires policyholders to pay higher COI rates when younger than when older.
(Id. ¶ 50.) Plaintiffs argue that this further calls into question whether some
other factor was considered because mortality typically causes the COI to
increase with duration. (Id.)
Defendants respond that general nationwide mortality improvement does
not mean that mortality has improved for insureds of all ages and rate classes
and, in any event, is not necessarily consistent with Lincoln’s own mortality
assumptions or experience. (Defs.’ Mem., at 9.) But Defendants’ biggest
objection is that Plaintiffs have not alleged any facts about the future mortality
expectations that prevailed at the time the Policies were created and the COI
rates initially set nearly two decades ago. They argue Plaintiffs’ allegation that
mortality has improved and is expected to continue improving does not “mean
that such improvement as have been achieved have matched the improvements
that were expected nearly two decades ago.” (Id.) And if previously-used
mortality assumptions were overly optimistic, even improving mortality could
support a COI increase. (Id.)
Defendants objections with respect to the mortality factor do not render
Plaintiffs’ allegation “meaningless”; the fact that Lincoln expects mortality to
continue improving—even if at a reduced degree than previously expected—

20

nevertheless makes it less likely that expectations with respect to this factor
have changed so significantly so as to support an increase of the huge magnitude
alleged. In any event, Plaintiffs have stated a claim.
B.
Plaintiffs also contend Defendants breached the policies terms by failing
to apply the COI rate increase uniformly across policyholders in the same rate
class. They allege that an illustration provided by Lincoln of the COI increase on
the Martindale Policies shows increases of roughly 95% in the first year and 50%
in the remaining two years and results in the COI rates being higher when the
insured is 98 years old than when she is 99 years old. (CC ¶¶ 61–62.) Plaintiffs
contend “[t]his is illogical and contrary to how the policy was originally priced,
and was not replicated across the class. Other named plaintiffs, and other
victimized policyholders of the same rating class, did not receive an increase
with this strange and illogical slope.” (Id. ¶ 62.) These allegations are sufficient
to state a claim.
C.
Finally, Plaintiffs claim that Defendants breached the contract by
refusing to provide policyholders with illustrations during the Policy’s grace
period. (CC ¶¶ 64–66.) When the US Life Plaintiffs requested an illustration for
the Martindale Policy in January 2017, Lincoln allegedly refused, stating a
company-wide policy that “[w]hile a policy is in a grace period, we are unable to
provide an inforce illustration.” (Id. ¶ 65.) Plaintiffs contend that under the

21

language of the Policy, the Policy remains in force during the grace period, and
Lincoln is required to provide an illustration if requested during this time.
Two Policy provisions are relevant here: First, the Continuation of
Insurance provision states “[t]his certificate and all riders will continue in
force according to the terms as long as the cash surrender value is sufficient to
cover the monthly deduction. If such value is not sufficient, the certificate will
terminate according to the grace period provision.” (Policy, at 8 (emphasis
added).)
Second, the Grace Period provision states:
Grace Period
If on a monthly anniversary day the cash
surrender value is less than the monthly deduction due, a grace
period of 60 days from that date will be allowed for the payment of
the minimum amount needed to continue the policy. If the no
lapse guarantee provision is in effect and the no lapse test has been
met, the grace period will not begin and the policy will not be
subject to termination under this provision.
We will notify you and any assignee of the minimum amount due at
least 30 days before the end of the grace period. If the amount
specified is not paid within the grace period, the policy will
terminate without value at the end of such period. If the
Insured dies within the grace period, the amount needed to
continue the policy to the end of the policy month of death will be
deducted from the amount otherwise payable.
(Policy, at 7 (emphasis added).)
Relying on the “will terminate at the end of such period” language,
Plaintiffs contend that the Policy is still in force during the grace period because
it has not yet terminated. (Pls.’ Resp. in Opp., at 19–20.) Defendants, however,
relying on the “Continuation of Insurance” provision, argue that the Policy only
remains in force “as long as the cash surrender is sufficient” and, though it does

22

not terminate until the end of the grace period, it is not in force during that time.
(Defs.’ Mem., at 17–18.) In theory, the “needed to continue the policy” language
could support either interpretation. (Tr. 49:6–51:1.) Moreover, both parties
contend that Couch on Insurance supports their reading of the provisions. (Tr.
51:2–52:11, 114:22–115:25.) The Court cannot say that the Policy language is
unambiguous or plainly inconsistent with Plaintiffs’ reading at this stage, and
Plaintiffs have stated a claim.
V.
In Count two, Plaintiffs assert a claim for breach of the implied covenant
of good faith and fair dealing and contend the implied covenant requires Lincoln
to act in a manner that does not frustrate policyholders’ reasonable expectations
under the Policies, and—to the extent it has limited discretion to set the COI
rates—to exercise that discretion reasonably and in good faith. See, e.g.,
Palumbo, 2017 WL 80405, at *3; Feller, 2016 WL 6602561, at *11–13; U.S. Bank
Nat. Ass’n, 112 F. Supp. 3d at 128; DCD Partners, 2015 WL 5050513, at *7–8.
Defendants contend that Plaintiffs’ claim is defective because it is based
on the same facts as the breach of contract claim and therefore duplicative and
cannot be brought as a separate cause of action. (Defs.’ Mot., at 11–14.)
Defendants also argue that state law does not recognize implied covenants that
are based on breaches of express contract terms. (Id. at 14–16.)
For one, Plaintiffs’ claims are not based on the same underlying facts. See
Feller, 2016 WL 6602561, at *12 (“Plaintiffs allege more than a mere breach of
contract. Plaintiffs allege that defendant used its discretion over MDRs in bad

23

faith to wrongfully induce forfeiture of death benefits among elderly
policyholders. Although the two claims share many of the same predicate
allegations, plaintiffs’ allege that [Defendant] used its, allegedly limited,
discretion over the MDR in bad faith rather than merely in violation of the
contract’s express terms. Accordingly, plaintiffs’ claim for breach of the implied
covenant of good faith and fair dealing is not duplicative.”).
Moreover, while Defendants are correct that state law does not recognize
implied covenants based on breaches of express contract terms, state law does
recognize an implied covenant of good faith where, as here, the defendant is
expressly given a constrained amount of discretion under the Policy. See U.S.
Bank Nat. Ass’n, 112 F. Supp. 3d at 129–30 (“Nothing suggests that Phoenix
need not set COI rates in good faith.”); see also McNeary-Calloway v. JP Morgan
Chase Bank, N.A., 863 F. Supp. 2d 928, 956 (N.D. Cal. 2012) (“[W]here a contract
confers on one party a discretionary power affecting the rights of the other, a
duty is imposed to exercise that discretion in good faith and in accordance with
fair dealing.”); Montanez v. HSBC Mortgage Corp. (USA), 876 F. Supp. 2d 504,
513 (E.D. Pa. 2012) (“The covenant of good faith may also be breached when a
party exercises discretion authorized in a contract in an unreasonable way.”
(citation omitted)).
Plaintiffs have therefore adequately alleged that Defendants breached the
implied covenant by exercising their limited discretion under the Policies in an
unreasonable and unfair manner with the bad faith intent of inducing lapses,
frustrating policyholders’ expectations and depriving them of the benefit of the

24

agreement. See, e.g., Palumbo, 2017 WL 80405, at *3 (upholding claim on same
or similar theories); Feller, 2016 WL 6602561, at *11–12 (same); DCD, 2015 WL
5050513, at *7–8 (same); U.S. Bank Nat. Ass’n, 112 F. Supp. 3d at 129–30
(same).
VI.
In Count three, Plaintiffs seek injunctive relief prohibiting Defendants
from refusing to provide illustrations during the grace period and requiring
Defendants to provide certain Plaintiffs with illustrations. Plaintiffs base this
claim on the same allegations and contract interpretation arguments discussed
supra in Subpart IV.C, which the Court determined were sufficiently plausible to
survive the Motion to Dismiss. Defendants argue the claim seeking injunctive
relief is defective for the additional reason that it does not allege a threat of
irreparable injury. (Defs.’ Mem., at 18.)
While a party seeking preliminary injunctive relief must show that
“irreparable injury will result if this relief is not granted prior to the final
adjudication of the claims on their merits” and “a reasonable probability of
success on the merits and that the possible harm to the opposing party is
minimal,” see Panayotides v. Rabenold, 35 F. Supp. 2d 411, 417 (E.D. Pa. 1999),
aff’d, 210 F.3d 358 (3d Cir. 2000), Plaintiffs do not appear to seek preliminary
injunctive relief prior to the final adjudication of their claims. Rather, they
request only that injunctive relief be included among the various remedies
available to them should the Court find, pursuant to their breach of contract
claim, that Lincoln is obligated to contractually provide the requested

25

illustrations. See (Pls.’ Resp. in Opp., at 20–21). At this stage, such a remedy
appears to be appropriate in these circumstances and does not require Plaintiffs
to plead irreparable harm. See Restatement (Second) of Contracts § 357 (1981)
(an injunction may be appropriate if performance due under the contract consists
of doing an act and the injunction would require less supervision with respect to
compliance than order specific performance).
VII.
In Count four, Plaintiffs seek injunctive relief prohibiting Defendants
from continuing to collect the allegedly unlawful COI charges and ordering
Defendants to reinstate any Policies that were forfeited or terminated due to the
COI increase. (CC ¶¶ 98–102.) Defendants do not move for the dismissal of this
claim.
VIII.
In Count five, Plaintiffs request declaratory relief resolving the parties’
obligations under the Policies, the factors on which Lincoln may base a COI rate
increase, the lawfulness of the COI increases and whether the policyholders
must continue to pay the allegedly unlawful COI charges. (CC ¶¶ 104–106.)
Defendants contend that Plaintiffs’ claim for declaratory relief should be
dismissed because it is duplicative of the breach of contract claim, would not be
practical or useful and is not ripe for review. (Defs.’ Mem., at 18–20.)
Under the Declaratory Judgment Act, the Court “may,” but is not
required to, “declare the rights and other legal relations of any interested party
seeking such declaration, whether or not further relief is or could be sought.” 28

26

U.S.C. § 2201(a). Courts consider four factors when determining whether to
grant declaratory relief: “(1) the likelihood that the declaration will resolve the
uncertainty of obligation which gave rise to the controversy; (2) the convenience
of the parties; (3) the public interest in a settlement of the uncertainty of
obligation; and (4) the availability and relative convenience of other remedies.”
Terra Nova Ins. Co. v. 900 Bar., Inc., 887 F.2d 1213, 1224 (3d Cir. 1989).
Moreover, courts routinely decline to consider claims for declaratory relief that
are duplicative of other claims already alleged, including breach of contract
claims. See Fleisher, 858 F. Supp. 2d at 301–03 (dismissing plaintiffs’ request for
a declaratory judgment in a case involving COI increases because “adjudication
of the breach of contract claim [would] address the issues of the validity of the
COI Increases on which the claim for declaratory relief rests”); Danny’s Tustin at
the Mkt. Place LLC v. Greenwich Ins. Co., 2013 WL 12128814, at *7–8 (C.D. Cal.
June 6, 2013) (“Plaintiffs’ claim for declaratory relief is essentially the same as
their breach of contract claim” because “a declaration of [d]efendant’s obligations
under the Policy is duplicative of the issues that will already be determined
through [p]laintiffs’ breach of contract claim.”).
In response to Defendants’ contention that the declaratory relief sought
requires adjudication of precisely the same issues as Plaintiffs’ breach of contract
claim, Plaintiffs state: “The claim for declaratory relief is distinct from the
breach of contract claim in that it seeks a declaration on the proper
interpretation of the Policies regarding the factors Lincoln may consider when
increasing COI rates. This issue is independent of the success of Plaintiffs’

27

breach of contract claim, and very much ripe given Lincoln’s ongoing
withdrawals from the Plaintiffs’ accumulation accounts.” (Pls.’ Resp. in Opp., at
22.) The Court nevertheless fails to see how the issue of “the factors Lincoln may
consider when increasing COI rates” is “independent of the success of Plaintiffs’
breach of contract claim,” as adjudication of the latter will necessarily require
resolution of the former. The Court therefore declines to exercise its
discretionary jurisdiction and grants Defendants’ Motion with respect to this
claim.
IX.
Plaintiffs also contend that Defendants violated the consumer protection
laws of various states. Though the applicable standard varies slightly by state,
the supporting allegations proffered by Plaintiffs are generally the same with
respect to each. Defendants argue that Plaintiffs have not alleged sufficient
facts to state consumer protection claims and that the claims are duplicative of
Plaintiffs’ breach of contract claims.
A.
In Count six, Plaintiffs contend Defendants violated the North Carolina
Unfair and Deceptive Trade Practices Act, N.C. Gen Stat. § 75-1, et seq.
(“UDTPA”). The statute makes unlawful “[u]nfair methods of competition in or
affecting commerce, and unfair or deceptive acts or practices in or affecting
commerce.” N.C. Gen. Stat. § 75-1.1. “The purpose of G.S. § 75-1.1 is to provide
a civil means to maintain ethical standards of dealings between persons engaged
in business and the consuming public . . . and applies to dealings between buyers

28

and sellers at all levels of commerce.” Shepard v. Bonita Vista Properties, L.P.,
664 S.E.2d 388, 395 (N.C. Ct. App. 2008) (citations omitted).
To state a claim for unfair and deceptive trade practices, a plaintiff must
show that: (1) the defendant committed an unfair or deceptive act or practice; (2)
the act in question was in or affecting commerce; and (3) the act proximately
caused injury to the plaintiff. SmithKline Beecham Corp. v. Abbott Laboratories,
No. 1:15-CV-360, 2017 WL 1051123, at *11 (M.D. N.C. March 20, 2017) (citing
Dalton v. Camp, 548 S.E.2d 704, 711 (N.C. 2001)). “An act or practice is unfair if
it ‘offends established public policy’; if it is ‘immoral, unethical, oppressive,
unscrupulous, or substantially injurious to consumers’; or if it ‘amounts to an
inequitable assertion of [a party’s] power or position.’” Id. at *12 (citations
omitted).
Defendants first argue that Plaintiffs claim must fail because the
underlying allegations are “entirely duplicative of the allegations forming
Plaintiffs’ breach of contract claim.” (Defs.’ Mem., at 22.) “[I]t is well recognized
that actions for unfair or deceptive trade practices are distinct from actions for
breach of contract, and that a mere breach of contract, even if intentional, is not
sufficiently unfair or deceptive to sustain an action” under the UDTPA. Birtha
v. Stonemor, N.C., LLC, 727 S.E.2d 1, 10 (N.C. Ct. App. 2012) (quoting Eastover
Ridge, L.L.C. v. Metric Constructors, Inc., 533 S.E.2d 827, 832-33 (N.C. Ct. App.
2000)). Where the misconduct involves a contract, a plaintiff asserting a UDPTA
claim must prove the contract breach was surrounded by “substantial
aggravating circumstances” in order to state a claim. Id. at *13.

29

To satisfy a showing of substantial aggravating circumstances,
courts have opined that unfairness or ‘deception either in the
formation of the contract or in the circumstances of its breach’ may
be adequate. Courts have also found that aggravating factors can
‘include an intentional misrepresentation for the purpose of
deceiving another and which has a natural tendency to injure the
other.’ Obtaining a contract without intending to adhere to the
contract or abandoning and frustrating its performance can give
rise to an action for unfair and deceptive trade practices as well.
Id. (internal citations omitted).
Here, Plaintiffs contend that Defendants’ conduct rises to the requisite
level because it “amount[ed] to an inequitable assertion of [their] power or
position” and was “substantially injurious to consumers.” (Pls.’ Resp. in Opp., at
26–28.) Plaintiffs’ allegations are sufficient to meet their burden at this stage.
They allege more than just a breach, or even an intentional breach of the Policy
on the part of Defendants.
Plaintiffs contend that Defendants acted with the intent of abusing their
discretion in order to force policy lapses by policyholders and frustrate the
reasonable expectations of policyholders. (CC ¶¶ 56, 120.) Plaintiffs claim the
breach was especially egregious because Defendants did not just raise the COI
rate for impermissible reasons; they raised it by an enormous amount with the
knowledge or intent that doing so would cause devastating injuries to
policyholders, which Plaintiffs allege has occurred as intended. (CC ¶¶ 111,
137.) Plaintiffs also assert Defendants’ attempt to conceal the breach and
represent the COI rate increase was justified under the Policy further
aggravated the breach.

30

Taking these allegations as true, Plaintiffs have adequately alleged the
requisite aggravating circumstances. See SmithKline Beecham Corp. v. Abbott
Labs., No. 1:15CV360, 2017 WL 1051123, at *13 (M.D.N.C. Mar. 20, 2017)
(knowingly abandoning or frustrating the performance of a contract can give rise
to a UDTPA claim); see also S. Atl. Ltd. P'ship of Tennessee, L.P. v. Riese, 284
F.3d 518, 536 (4th Cir. 2002) (allegation that party to a contract “manipulated
and exploited” the timing of its conduct to ensure that the other party did not
receive benefit of the bargain is “the kind of inequitable assertions of power that
North Carolina deems to be unfair trade practices”).
Defendants also argue that Plaintiffs’ UDTPA claim must fail because
Plaintiffs did not allege “actual reliance” on an alleged misrepresentation and
thus cannot show causation. (Defs.’ Mot., at 25–26.) North Carolina law,
however, “only requires allegations of reliance where a claim arises from an
alleged misrepresentation.” In re: Checking Account Overdraft Litig., No. 1:10CV-22190-2036, 2016 WL 5848729, at *4 (S.D. Fla., Feb. 5, 2016). Here, though
Plaintiffs allege that Defendants engaged in deceptive conduct when they failed
to disclose the true reasons behind the COI increase, “the UDTPA claim stands
apart from the contention that Plaintiffs’ injuries arise out of or stem from any
misrepresentation.” (Pls.’ Resp. in Opp., at 28.) The court in In re: Charles
Ernest Hester, No. 11-04375-8-DMW, 2015 WL 6125308, at *4 (E.D. N.C. Bankr.,
Oct. 16, 2015), addressed this very issue:
[W]hile misrepresentations by the Defendant are certainly alleged
in the 75-1.1 Claim, the claim itself does not “stem from” alleged
misrepresentations. In other words, the alleged injuries suffered by
the Plaintiffs are not the result of inducement through
31

misrepresentations by the Defendant for Plaintiffs to take some
sort of action. Rather, the alleged misrepresentations comprise the
broader claim that the Defendant engaged in systemic behavior
that might qualify as unfair and deceptive under §75-1.1.
Id. at *4.
As in Hester, Plaintiffs do not allege they were injured as a result of
relying on Lincoln’s misrepresentation; rather, they contend that the alleged
misrepresentation was just one part of Defendants’ alleged overall scheme to
recoup losses or force policy lapses by effectuating a pretextual COI rate
increase, which not only constituted a breach of contract but also the kind of
“systemic behavior” that may qualify as unfair and deceptive under the UDTPA.
In Defendants’ Reply, they contend that Hester is inapposite because “[h]ere, the
alleged misrepresentation is the claim.” (Defs.’ Reply, at 14.) The Court
disagrees; Plaintiffs’ Response articulates their theory: they do not contend that
Plaintiffs were injured as the result of being induced into a course of action by a
misrepresentation made by Defendants. Plaintiffs’ injuries resulted from the
overall course of conduct, which they contend was inherently deceptive and
unfair. Plaintiffs therefore need not allege reliance, and have stated an
actionable UDTPA claim. See Hester, 2015 WL 6125308, at *4 (plaintiff need not
demonstrate reliance to assert a claim that defendant’s conduct qualified as
unfair and deceptive acts under Section 75-1.1).
B.
In Count seven, Plaintiffs assert a claim for violation of Tex. Admin. Code
§§ 21.2206 to 21.2212 and Tex. Ins. Code § 541.061 (formerly Article 21.21). The
statute prohibits an insurer from “us[ing] an illustration that at any policy
32

duration depicts policy performance more favorable to the policy owner than that
produced by the illustrated scale of the insurer whose policy is being illustrated.”
28 TEX. ADMIN. CODE § 21.2206(2)(E). An “illustrated scale” is “a scale of nonguaranteed elements currently being illustrated that is not more favorable to the
policy owner than the lesser of: (A) the disciplined current scale; or (B) the
currently payable scale.” 28 Tex. Admin. Code § 21.2204. Section 21.2212
provides:
Any violation of this subsection shall constitute a misrepresentation of the
terms of an issued and unissued policy in violation of the Insurance Code,
Article 21.21 § 4(1) and (2), and to be a misrepresentation of the terms,
benefits, and advantages of a policy within the meaning of the Insurance
Code, Article 21.20. Violations of this subsection shall subject the insurer
and agent to the penalties provided in the Insurance Code, Article 21.21
and other applicable provisions of the Insurance Code.
(28 Tex. Admin. Code § 21.2212). Tex. Ins. Code § 541.061 (formerly Article
21.21) provides:
It is an unfair method of competition or an unfair or deceptive act
or practice in the business of insurance to misrepresent an
insurance policy by:
(1) making an untrue statement of material fact;
(2) failing to state a material fact necessary to make other
statements made not misleading, considering the circumstances
under which the statements were made;
(3) making a statement in a manner that would mislead a
reasonably prudent person to a false conclusion of a material fact;
(4) making a material misstatement of law; or
(5) failing to disclose a matter required by law to be disclosed,
including failing to make a disclosure in accordance with another
provision of this code.
(Tex. Ins. Code Ann. § 541.061). The Texas Insurance Code provides a
private right of action for violations of § 541.061. See Tex. Ins. Code §
541.151.

33

Plaintiffs allege that the illustrations provided in 2010 projected a COI
charge of 1.4% per month for the period from 3/19/2018–3/18/2019. (CC ¶ 114.)
The new illustration, after the COI increase, projected a COI charge of 2.0% per
month for that same period. (CC.¶ 114.) Plaintiffs allege that the 1.4%
illustrations “depicted performance more favorable to the policy holder” in
violation of Rule 21.2206(2)(E). Plaintiffs only allege that use of the disciplined
current scale could not have depicted the performance it did, because
Defendant’s expectations “could not have changed…in a large enough manner to
justify such a massive increase.” (CC ¶ 114.) Plaintiffs allege this based on
Defendants representation that “their illustrations were based on their current
expected future expenses.” (CC ¶ 113.) Plaintiffs’ allegation is conjectural and
Plaintiffs do not provide facts as to why the illustrations could not have depicted
the performance as it did. Instead, Plaintiffs make conclusory statements that
Defendants’ expectations could not have changed in a large enough manner to
justify the increase. (CC ¶ 114.) Plaintiffs will be allowed to amend their
complaint to allege facts that support this claim.
Defendants argue that Plaintiffs have not pled injury. (Defs.’ Mem., at
32.) Plaintiffs have done so by alleging that the “misleading illustrations caused
US Life to pay more in premiums than it otherwise would have.” (CC ¶ 114.) As
they assert, if Policyholders were “aware of the massive COI increases that
would be imposed in the last years for which premiums were due, that would
have significantly changed their calculus about whether to continue paying
premiums or cash out or surrender their policies.” (Pls.’ Resp. in Opp. at 42.)
34

C.
In Count eight, Plaintiffs assert claims for violations of the New Jersey
Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1, et seq. (the “NJCFA”). The
NJCFA prohibits “[t]he act, use or employment by any person of any
unconscionable commercial practice, deception, fraud, false pretense, false
promise, misrepresentation, or the knowing concealment, suppression, or
omission of any material fact with intent that others rely upon such
concealment, suppression or omission, in connection with the sale or
advertisement of any merchandise . . . .” N.J. Stat. Ann. § 56:8-2. To state a
claim under the NJCFA, plaintiffs must allege “(1) an unlawful practice; (2) an
ascertainable loss; and (3) a causal relationship between the unlawful conduct
and the ascertainable loss.” Gonzalez v. Wilshire Credit Corp., 25 A.3d 1103,
1115 (N.J. 2011) (citation omitted).
As with North Carolina’s UDTPA, “a mere breach of contract, without
more, is not sufficient to support a claim under NJCFA,” Hunt Constr. Grp., Inc.
v. Hun Sch. of Princeton, 2009 WL 1312591, at *4 (D.N.J. May 11, 2009); accord
Barry v. N.J. State Highway Auth., 585 A.2d 420, 423-24 (N.J. 1990), and a
plaintiff must allege that the breach was accompanied by “substantial
aggravating circumstances.” Nickerson v. Quaker Grp., 2008 WL 2600720, at
*13-14 (N.J. Ct. App. July 3, 2008).
For the same reasons discussed in Subpart IX.A, Plaintiffs allegations are
sufficient to state a claim. See, e.g., Petri Paint Co. v. Omg Ams., Inc., 595 F.
Supp. 2d 416, 421 (D.N.J. 2008) (breach of contract accompanied by bad faith or

35

lack of fair dealing constitutes a substantial aggravating circumstance); Cox v.
Sears Roebuck & Co., 647 A.2d 454, 463 (N.J. 1994) (same).
D.
In Count nine, Plaintiffs assert a claim for violation of New York General
Business Law § 349. (CC ¶¶ 127–33.) Section 349 prohibits “[d]eceptive acts or
practices in the conduct of any business, trade or commerce or in the furnishing
of any service. . .” (N.Y. GEN. BUS. LAW § 349). To state a claim under Section
349, a plaintiff must demonstrate: (1) the act or practice was consumer-oriented;
(2) the act or practice was misleading in a material respect; and (3) the plaintiff
was injured as a result. Spagnola v. Chubb Corp., 574 F.3d 64, 74 (2d Cir. 2009)
(citing Maurizio v. Goldsmith, 230 F.3d 518, 521 (2d Cir. 2000)). Claims brought
under Section 349 are not subject to a heightened pleading-with-particularity
requirement set forth in Rule 9(b). Pelman ex rel. Pelman v. McDonald’s Corp.,
396 F.3d 508, 511 (2d Cir. 2005).
Defendants contend that Plaintiffs failed to “identify deceptive conduct.”
(Defs.’ Mem., at 37.) Whether an act or practice is deceptive “is usually a factual
question.” Fero v. Excellus Health Plain, Inc., 236 F. Supp. 3d 735, 775–76
(W.D.N.Y. 2017) (citing Quinn v. Walgreen Co., 958 F. Supp. 2d 533, 543
(S.D.N.Y. 2013)); see also Buonasera v. Honest Co., Inc., No. 16 Civ. 1125 (VM),
208 F. Supp. 3d 555, 566 (S.D.N.Y. 2016) (“Courts have generally held that since
this second factor requires a reasonableness analysis, it cannot be resolved on a
motion to dismiss.”).

36

A “deceptive act or practice” is “a representation or omission likely to
mislead a reasonable consumer acting reasonably under the circumstances.”
Gaidon v. Guardian Life Ins. Co. of Am., 725 N.E. 2d 598 (N.Y. 1999). In
Gaidon, plaintiffs contended that “vanishing” premium (which go away or vanish
within a stated period of time) illustrations “were premised on dividend
projections that Guardian knew or should have known were untenable.” 725
N.E. 2d at 600. Plaintiffs also alleged that defendants “lured them into
purchasing policies by using illustrations that created unrealistic expectations as
to the prospects of premium disappearance upon a strategically chosen
‘vanishing date.’” Id. at 604. The plaintiffs asserted that defendants “allegedly
knew or should have known” that it was unlikely that interest rates would
continue at a high rate. Id. The defendants relied on a disclaimer in the policies
stating that the illustrated rates were not guaranteed nor estimates of future
results, but the court stated that consumers vary in levels of sophistication and
concluded that the plaintiffs alleged enough to state a claim under Section 349.
Id.; id. at 606.
In this case, Plaintiffs allege that Defendants hid the increase through
misleading illustrations “to induce policyholders to continue paying premiums
under false pretenses.” (CC ¶ 131.) Drawing all reasonable inferences in
Plaintiff’s favor, the allegations are sufficient to state a claim. The illustrations
provided to Plaintiffs “in at least 2014 and 2016 showed improperly favorable
non-guaranteed elements and illustrated non-guaranteed elements in a
misleading manner, if Lincoln’s story is to be believed.” (CC ¶ 131.) “There has

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been no change for the worse in mortality, or other experience factors, between
the time of those illustrations and the time of the increase that would justify
such a massive change in Lincoln’s expected future costs.” (CC ¶ 131.) Plaintiffs
contend that an objectively reasonable policyholder would assume that the
illustrations “accurately reflected Defendants’ current, reasonable assumptions
about future increases.” (Pls.’ Resp. in Opp., at 44.)
Defendants also argue that Plaintiffs claim fails for lack of injury. (Defs.’
Mem., at 36.) When a plaintiff asserts a breach of contract claim and a Section
349 claim in the same case, the alleged monetary loss from the Section 349 claim
“must be independent of the loss caused by the alleged breach of contract.”
Spagnola, 574 F.3d at 74; see also e.g., Yang Chen v. Hiko Energy, LLC, No. 14
CV 1771 VB, 2014 WL 7389011, at *5 (S.D.N.Y. 2014) (Plaintiffs alleged
damages as a result of the defendant’s breach of contract and also alleged that
they would not have switched from the prior electricity and gas supplier had the
defendant not deceived them. Those losses are distinct from the breach of
contract losses.).
Plaintiffs have adequately alleged independent losses. The “breach of
contract claims rest upon payments after the increase or Policyholders being
forced to surrender or cash out policies prematurely.” (Pls.’ Resp. in Opp., at 43–
44.) Plaintiffs allege alternatively that Lincoln “has hidden this increase for a
long time through misleading illustrations designed to induce policyholders to
continue paying premiums under false pretenses. These misleading illustrations
caused Zirinsky to pay more in premiums than he otherwise would have.” (CC ¶

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130.) Plaintiffs allege that the premium payments made before the COI increase
“would not have been made if Policyholders had been provided with an accurate
picture of the impending rate increases that Lincoln is alleged, in the
alternative, to have known would be imposed.” (Pls.’ Resp. in Opp., at 42.) As in
Yang Chen, Plaintiffs may not have chosen Lincoln had they not been deceived.
E.
In Count ten, Plaintiffs assert claims for violations of the California
Business and Professional Code §§ 17200, et seq. (the “UCL”). To state a claim
under § 17200, a plaintiff must allege an “unlawful, unfair, or fraudulent
business act or practice.” See id. “Because [the UCL] is written in the
disjunctive, it establishes three varieties of unfair competition – acts or practices
which are unlawful, or unfair, or fraudulent.” Feller, 2016 WL 6602561, at *13
(citation omitted). Here, Plaintiffs allege that Defendants violated the UCL by
engaging in conduct that was “unlawful” and “unfair.” (CC ¶¶ 60, 135.)
To state a claim based on an “unfair” practice, the plaintiff must allege
facts supporting that the practice “offends an established public policy or when
the practice is immoral, unethical, oppressive, unscrupulous or substantially
injurious to consumers.” Smith v. State Farm Mut. Auto. Ins. Co., 93 Cal.App.
4th 700, 719 (2001) (internal quotation marks and citation omitted). A business
practice may be “unfair” even if not specifically proscribed by some other law.
Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1143 (2003). For
the same reasons discussed supra in Subpart IX.A, Plaintiffs’ allegations that
Lincoln has used the COI rate increase to force Policyholders to subsidize its own

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interest guarantees, recoup its past losses and force “shock lapses” falls squarely
within the ambit of the statute. See, e.g., Feller, 2016 WL 6602561, at *13-14
(California court sustaining “unfair” prong claim premised on wrongful increase
in COI rates).
F.
In Count eleven, Plaintiff Mindlin and the California Sub-Class members
aged 65 years or older assert a claim for violations of the California Elder Abuse
Statute. The statute defines “elder” as “any person residing in this state, 65
years of age or older” and provides in part:
(a) “Financial abuse” of an elder or dependent adult occurs when a person
or entity does any of the following:
(1) Takes, secretes, appropriates, obtains, or retains real or
personal property of an elder or dependent adult for a wrongful use
or with intent to defraud, or both.
(2) Assists in taking, secreting, appropriating, obtaining, or
retaining real or personal property of an elder or dependent adult
for a wrongful use or with intent to defraud, or both.
Cal. Welf. & Inst. Code § 15610.30 (a). Plaintiffs allege that each member of the
California Sub-Class was 65 years or older and residents of California when the
policy was issued. (CC ¶ 142.) The law only requires that a defendant “know or
should know their wrongful conduct is likely to harm an elder” rather than
purposely target an elder. Feller v. Transamerica Life Insurance Co., 2016 WL
6602561, at *15 (C.D. Cal. 2016).

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Defendants argue that a claim under the California Elder Abuse Statute
must satisfy the Rule 9(b) heightened pleading requirement, requiring
allegations of fraud to be stated with particularity. Fed.R.Civ.P. 9(b).
Allegations must be “specific enough to give defendants notice of the particular
misconduct which is alleged to constitute the fraud charged so that they can
defend against the charge and not just deny that they have done anything
wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). “Averments of
fraud must be accompanied by “the who, what, when, where, and how” of the
misconduct charged.” Vess v. Ciba–Geigy Corp., USA, 317 F.3d 1097, 1107 (9th
Cir. 2003). Plaintiffs “may aver scienter generally, just as the rule states—that
is, simply by saying that scienter existed.” In re GlenFed, Inc. Sec. Litig., 42
F.3d 1541, 1547 (9th Cir. 1994), superseded by statute on other grounds as stated
in SEC v. Todd, 642 F.3d 1207, 1216 (9th Cir. 2011).
California Elder Abuse claims “grounded in fraud” are subject to a
heightened pleading standard. See Vess v. Ciba–Geigy Corp., USA, 317 F.3d
1097, 1103–04 (9th Cir. 2003) (“In cases where fraud is not a necessary element
of a claim, a plaintiff may choose nonetheless to allege in the complaint that the
defendant has engaged in fraudulent conduct. In some cases, the plaintiff may
allege a unified course of fraudulent conduct and rely entirely on that course of
conduct as the basis of a claim. In that event, the claim is said to be “grounded
in fraud” or to “sound in fraud,” and the pleading of that claim as a whole must
satisfy the particularity requirement of Rule 9(b).”)

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In addition to prohibiting actions with the intent to defraud, the
California Elder Abuse Statute prohibits actions “for a wrongful use”: A person
or entity shall be deemed to have taken, secreted, appropriated, obtained, or
retained property for a wrongful use if, among other things, the person or entity
takes, secretes, appropriates, obtains, or retains the property and the person or
entity knew or should have known that this conduct is likely to be harmful to the
elder or dependent adult. Cal. Welf. & Inst. Code § 15610.30 (b).
Plaintiffs initially are not clear in their complaint as to whether
Defendants acted “for a wrongful use” or “with intent to defraud” because they
simply restate the words of the statute. (CC ¶ 145.) Plaintiffs then allege
“Defendants are guilty of oppression, fraud, and malice…” indicating the claim is
grounded in fraud. (CC ¶ 146.) Drawing inferences in the light most favorable to
Plaintiffs as the Court must at this stage, Plaintiffs have met the heightened
pleading requirement of 9(b). Plaintiffs allege that “[u]nder the language of the
policies, Defendants offered flexible premiums that would allow policyholders to
fund only enough premiums to cover the monthly deductions, that the Company
would not raise the COI Rate and consequent Monthly Deduction except based
on certain anticipated future expense factors stated in the policies and as,
acknowledge by its NAIC filings, would not raise the cost of insurance in order to
recoup past losses.” (CC ¶ 136.) These representations were made in the Policies
themselves, on Defendants’ website, marketing materials and press releases, and
responses to the NAIC. (CC ¶ 136.) Subsequently, Defendants increased “COI
Rates in order to recoup past losses despite assurances and representations that

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it would not do so, and [did] so as part of an unfair and deceptive scheme
designed to force policy lapses by virtue of burdensome premium increases – a
tactic known as “shock lapses.” (CC ¶ 137.)
Defendants argue that Plaintiff Mindlin does not have standing because
Plaintiff is the Trust (through its trustee), rather than Allen I. Mindlin, the
insured (Defs.’ Mem. at 42; Defs.’ Reply at 20.) In Mahan v. Charles W. Chan
Insurance Agency, Inc., No. A147236, 2017 WL 3614276, at *1 (Cal. Ct. App.
2017), the plaintiffs were the Mahans (whose lives were insured under two life
insurance policies) and the trustee of the trust that held the policies. The
defendants argued that the only proper plaintiff was the trust, which was not 65
years old. Id. The plaintiffs did not allege that the individuals suffered a harm,
but alleged that the trust did and the court dismissed the claim for failure to
allege a deprivation of property. Id. at *2.
The Court of Appeals reversed because the defendants’ alleged scheme
drained cash from the trust due to the annual insurance premium increase. Id.
at 6. Additionally, the Mahans needed to put more money into the trust to pay
the insurance premiums and interest to prevent the policies from lapsing. Id.
The court noted that “a remedial statute is to be liberally construed on behalf of
the class of persons it is designed to protect.” Id. at *11. Because the defendants’
misconduct “made the donation or voluntary transfer of the Mahans’ chosen gift
assets in their estate plan much more expensive and of lesser value, [their] right
to dispose of their property has been damaged.” Id. at *12. The court noted that
the adverse financial consequences flowing from the defendants’ actions “could

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not be awarded twice in damages, both to the Trust and to the Mahans” but that
the damages apportionment issues must be dealt with not as a matter of
pleading, but as a matter of proof. Id. at *13. Here, The Mindlin Irrevocable
Trust holds a policy insuring the life of Allen I. Mindlin. (CC ¶ 11.) The
Complaint fails to allege whether the trust or Allen I. Mindlin funded the
increased premiums and Plaintiffs will be allowed to amend the complaint
accordingly.
Finally, Defendants argue that Plaintiff Mindlin is not permitted to seek
punitive damages under California Civil Code § 3294(a) because the Elder Abuse
claim “is premised on the same allegations underlying the breach of contract
claim.” (Defs.’ Mem. at 43.) California courts have held that punitive damages
should not be granted in actions based on breach of contract though they may be
recovered in a tort action upon a showing of malice, fraud or oppression even
though the tort incidentally involves a breach of contract. Crogan v. Metz, 47 Cal.
2d 398, 405 (1956); Chelini v. Nieri, 32 Cal. 2d 480, 486–87 (1948) (“It has long
been settled that “Under this section exemplary damages may not be recovered
in an action based upon a contractual obligation even though the breach of
contract is willful or malicious. If on the other hand the action is one in tort,
exemplary damages may be recovered upon a proper showing of malice, fraud or
oppression even though the tort incidentally involves a breach of contract.’”). As
stated above, Plaintiffs have satisfied the heightened pleading requirement
required for claims of fraud, encompassed in the allegation of the violation of the
California Elder Abuse Statute.

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An appropriate order follows.
BY THE COURT:

/s/ Gerald J. Pappert
GERALD J. PAPPERT, J.

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