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Kalodner v. Genworth Life and Annuity Insurance Co.

United States District Court, E.D. Pennsylvania

June 26, 2017



          Padova, J.

         Plaintiff Philip P. Kalodner commenced this breach of contract action a§ai#st Defendant Genworth Life and Annuity Insurance Company in order to challenge the methods by which Defendant calculated the Cost of Insurance in assessing Plaintiffs premiums under a Whole Life Insurance Policy. Defendant has moved to dismiss the First Amended Complaint ("the Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. For the following reasons, we grant Defendant's Motion.

         I. BACKGROUND

         The Complaint alleges that, in 1999, when Plaintiff was 68 years old, he purchased a $500, 000 flexible premium adjustable life insurance policy (the "Policy") from Defendant. (Compl. ¶¶ 1-2, 8.) The Policy provides that Plaintiff will pay monthly premiums and, consistent with that obligation, Plaintiff has made more than $145, 000 in premium payments over the life of the Policy. (Id. ¶¶ 6, 21.) Defendant charges against the paid premiums a monthly "Cost of Insurance" fee as well as other charges and fees. (Id. ¶ 6.) At the same time, Defendant credits Plaintiffs account with monthly interest on the accumulated premiums, and the Policy guarantees that the monthly interest credited will be calculated at an annual rate of at least 4%. (Id., ¶¶6, 8.)

         The Cost of Insurance rate is calculated by means of a formula set forth in the policy, which is '"based on [Defendant's] expectation of future: mortality; interest; expenses; and persistency.'" (Id. ¶ 6 (quoting Policy, attached as Ex. A to Compl., at 12).) Specifically, the Policy provides that Defendant will use this four-factor formula to develop a "monthly mortality rate, " and then will use this monthly mortality rate to calculate the Cost of Insurance rate, which, in turn, it will use to calculate the Cost of Insurance. (Policy at 12.) The Policy therefore provides that "[a] change in [the Cost of Insurance] rate will be due to a change in [Defendant's] expectation in one or more of [the four] factors, " i.e., mortality, interest, expenses, and persistency. (Id.) The Policy also states that the Mortality Table that Defendant will use to calculate rates under the Policy will be the "Commissioners 1980 Standard Ordinary Smoker or NonSmoker Mortality Table, Sex Distinct, Age Nearest Birthday."[1] (Compl. ¶ 9 (quoting Policy at 3); see also Policy at 3.) Finally, attached to the Policy is a schedule of guaranteed maximum monthly mortality rates, which reflect the maximum monthly mortality rates that Defendants will use each year from Plaintiffs age 68 to age 99. (Id. ¶ 8; Policy at 12 and 3B).)

         The insurance agent who sold the Policy to Plaintiff provided Plaintiff with a "Life Insurance Illustration." (Id. ¶ 10; see also Life Insurance Illustration, attached as Ex. B. to Compl.) "The Illustration contained tables setting forth policy values at various future points [in time], i.e., [Policy] years 2, 5, 10, 20, 26." (Compl. ¶ 12.) The Illustration was based on an "assumption that the planned annual premiums would be paid on schedule, " and set forth three scenarios, one with an assumption of the guaranteed interest rate of 4%, one with a continuation of the current interest rate of 6%, and one with a midpoint interest rate of 5%. (Id. ¶ 12; Compl. Ex. B at 4.) The Illustration further stated that it '"assumes that the currently illustrated non-guaranteed elements' (i.e. the interest rate and [the mortality rates calculated based on Defendant's expectations]), 'will continue unchanged for all years shown.'" (Compl. ¶ 16 (quoting Compl. Ex. B. at 2.) It simultaneously warned that "this is not likely to occur" and that "actual results may be more or less favorable than those shown" because "[c]urrently illustrated non-guaranteed elements may change at any time." (Compl. Ex. B. at 2.) The Illustration further indicated that, with a continued interest rate of 6%, and timely payment of annual premiums, the Policy would continue in force for 26 years, i.e., until Plaintiff reached the age of 95. (Compl. ¶¶ 13.) At the same time, the Illustration showed that, if the interest rates decrease to either 5% or 4%, the Policy would terminate at year 16 "unless a higher premium is paid." (Compl. Ex. B at 4, 5.) Plaintiff was required to sign the Illustration both to acknowledge that he received it and to memorialize his understanding that the "non-guaranteed elements illustrated are subject to change and that actual values and benefits based on these non-guaranteed elements may be more or less favorable than those shown." (Compl. ¶ 17; Compl. Ex. B at 4.)

         Neither the Illustration nor the insurance agent identified the applicable Cost of Insurance rates used for the Illustration or provided Plaintiff with the schedule of annual current mortality rates that were used. (Id. ¶ 14.) Specifically, the insurance agent did not provide Plaintiff with the "Schedule of Annual Current Mortality Rates dated September 6, 1995" (the "1995 Mortality Schedule"), which Defendant used to calculate the Cost of Insurance rates that it ultimately employed. (Id. ¶ 15; 1995 Mortality Schedule, attached as Ex. C to Compl.) Defendant has continued using the 1995 Mortality Schedule to calculate the Cost of Insurance rates. (Id., ¶ 18.) Defendant nevertheless acknowledges that it was authorized under the Policy to change the Cost of Insurance rates based on its expectations of mortality, interest, expenses and persistency. (Id. ¶ 18.) Significantly to Plaintiff, the 1995 Mortality Schedule reflects a very large, 46%, increase in mortality between age 82 and 83, after only a 9% increase the prior year. (Id¶19.)

         Over the life of the Policy, Defendant continuously changed the interest rates used to calculate the interest credited to the Policy, such that the rates have ranged from 4% to more than 6%. (Id. ¶ 22.) Defendant has not, however, strayed from using the mortality rates in the 1995 Mortality Schedule in calculating the Cost of Insurance charged against the Policy, in spite of "a subsequent study by the Commissioners (based on 1990-1995 mortality experience) [that] reflected a decline in mortality rates of 15%-17%." (Id. ¶¶ 23-24.)

         On March 5, 2014, Defendant responded by letter to a request from Plaintiff for an explanation of the Cost of Insurance rates that it was using. (Compl. ¶ 18; March 5, 2014 letter, attached as Ex. 2 to Def's Mot.) Defendant provided Plaintiff with a copy of the 1995 Mortality Schedule, explained that it divided the annual rates listed on that Schedule by 12 to determine a monthly mortality rate, and then did a calculation using the monthly mortality rate and the interest rate to determine the monthly Cost of Insurance rate. (Def's Mot. Ex. 2 at 2.) At the same time, Defendant reminded Plaintiff that the mortality rates in the 1995 Mortality Schedule were not guaranteed, and that it could "change the[] mortality rates due to a change in [its] expectation of one or more of these factors: mortality, interest, expenses, and persistency." (Id. at 3.)

         On April 1, 2014, Defendant responded to a follow-up inquiry from Plaintiff as to how it developed the nonguaranteed mortality rates set forth in the 1995 Mortality Schedule. (April 1, 2014 Letter, attached as Ex. 4 to Def's Mot.) Defendant explained that it "first developed pricing assumptions with respect to anticipated future mortality, lapses, interest, expenses; including reserves, commissions and required surplus, and anticipated distribution of premium patterns to be paid by policyowners." (Compl. ¶ 20; Def's Mot Ex. 4.) It further stated that "[t]hese assumptions were then modeled to arrive at a profit margin consistent with the goal of producing a policy that would be highly competitive with whole life policies. The result of this process is the table of nonguaranteed mortality rates." (Compl. ¶ 20; Def's Mot. Ex. 4.)

         Plaintiffs First Amended Complaint includes three Counts. Count I asserts that Defendant breached its contract with Plaintiff by calculating Cost of Insurance rates in a manner that is inconsistent with the formula set forth in the policy, i.e., by not only considering mortality, interest, expenses and persistency, but by also engaging in unspecified "modeling." Count II asserts that Defendant breached its contractual duty of good faith and fair dealing by setting Cost of Insurance rates that increased by 46% in the Policy's 16th year, which the Complaint "presume[es] was motivated by a desire to obtain [Plaintiffs] abandonment of the Policy." (Compl. ¶ 32.) Count III asserts that Defendant breached its contract with Plaintiff by failing to reset the Cost of Insurance to reflect decreases in mortality rates.


         When considering a motion to dismiss pursuant to Rule 12(b)(6), we "consider only the complaint, exhibits attached to the complaint, [and] matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents." Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)). We take the factual allegations of the complaint as true and draw all reasonable inferences in favor of the plaintiff. DelRio-Mocci v. Connolly Props., Inc., 672 F.3d 241, 245 (3d Cir. 2012) (citing Warren Gen. Hosp. v. Amgen, Inc., 643 F.3d 77, 84 (3d Cir. 2011)). Legal conclusions, however, receive no deference, as the court is '"not bound to accept as true a legal conclusion couched as a factual allegation.'" Wood v. Moss, 134 S.Ct. 2056, 2065 n.5 (2014) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

         A plaintiffs pleading obligation is to set forth "a short and plain statement of the claim, " r Fed.R.Civ.P. 8(a)(2), which gives the defendant '"fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twomblv. 550 U.S. 544, 555 (2007) (alteration in original) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). The complaint must contain '"sufficient factual matter to show that the claim is facially plausible, ' thus enabling 'the court to draw the reasonable inference that the defendant is liable for [the] misconduct alleged.'" Warren Gen. Hosp., 643 F.3d at 84 (quoting Fowler v. UPMC Shadyside. 578 F.3d 203, 210 (3d Cir. 2009)). "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged - but it has not 'show[n]' - 'that the pleader is entitled to relief.'" Iqbal, 556 U.S. at 679 (alteration in original) (quoting Fed.R.Civ.P. 8(a)(2). "The plausibility standard is not akin to a 'probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." L± at 678 (citing Twomblv, 550 U.S. at 556). In the end, we will grant a motion to dismiss brought ...

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