Contract, Fraud Claims Tied to Insurer Brochure

By Don R. Sampen, published, Chicago Daily Law Bulletin
[March 20, 2018]

The 7th U.S. Circuit Court of Appeals, reversing the U.S. District Court, recently found that a long-term care insurance policyholder adequately alleged consumer fraud and common-law fraud against an insurer for misrepresenting policy premiums she would have to pay.

The policyholder in Newman v. Metropolitan Life Insurance Co., 2018 U.S. App. Lexis 2890 (Feb. 6, 2018), Margery Newman, was represented by Duncan Law Group LLC. Drinker Biddle & Reath LLP represented the insurer, MetLife.

Newman purchased long-term care coverage from MetLife pursuant to a so-called reduced pay and 65 option. A brochure she received prior to purchasing the policy indicated that, by paying more than the regular premium amount for the coverage each year prior to her 65th birthday, she would “pay half the amount of your preage 65 premiums thereafter.”

The brochure also indicated that it provided only an overview of the insurance plan and that the policy itself would govern the terms of the insurance.

The policy contained only one reference to the reduced-pay option. Referring to the policy premium, it indicated that “before policy anniversary at age 65 $3,231.93,” and “on or after policy anniversary at age 65 $1,615.97.”

Four other references in the policy, however, advised the policyholder of MetLife’s right to change the premiums. In one section, MetLife reserved “the right to change premium rates on a class basis.” The term “class” was not defined.

Newman paid the elevated premium from the outset. And when she reached age 65, her premium was cut in half. When she reached age 67, however, MetLife more than doubled the premium. MetLife claimed that it increased the premium on a classwide basis, meaning for all long-term care policyholders.

Thereafter, Newman filed her complaint as a class action, claiming that by raising premiums to more than half of what she paid before turning 65, MetLife breached the policy, violated the Illinois Consumer Fraud Act and engaged in fraud.

The district court dismissed for failure to state a claim, based on the language in the policy stating that MetLife had the right to increase policy premiums. Newman brought this appeal.

Breach of contract

In an opinion by Chief Judge Diane P. Wood, the 7th Circuit reversed. She noted initially MetLife’s position that the only guarantee from the policy language was that, following her 65th birthday forward, Newman’s premium would be half that of a reduced-pay policyholder who had not yet reached age 65. Under Newman’s understanding, however, her post-65 premium was to be fixed at half the amount of her pre-65 premium.

Based on the brief description of the reduced-pay option in the policy, Wood agreed with Newman that a reasonable reader easily could believe that the “on or after” language fixed her post-65 premium at half her pre-65 premium.

MetLife’s reference to changing the premium on a class basis, moreover, according to Wood, did not help matters. The only “class” of which Newman was aware was the one that exchanged an increased, and possibly variable, premium pre-65 for the right to have a stable and lower premium after 65.

None of the references to the right to change the premium thus sufficed to inform a reasonable person that she was at risk of a post-65 premium increase. For this reason, Wood found that Newman stated a valid claim for breach of contract.

Consumer and common-law fraud

Wood then addressed the elements for violation of the Illinois Consumer Fraud Act. They include a deceptive act by the defendant and an intent that the plaintiff rely on the deception. Wood said that both the brochure and the policy language had to be taken into account.

MetLife argued there was no deception in the brochure because Newman’s premiums after she reached 65 became half of what they were prior to 65. And any confusion about what occurred thereafter was cleared up by the policy.

Wood found MetLife’s interpretation strained, particularly given the fact that the brochure indicated that Newman would pay “half the amount of your preage 65 premiums” after age 65, suggesting an individualized reduction tied to her personal baseline.

As for whether MetLife intended Newman to rely on the brochure, it argued that it did not since the brochure indicated that the policy language itself would control. The problem with this argument, Wood said, was that there was nothing in the policy that corrected the impression left by the brochure.

She also found that MetLife’s practices, as alleged, were unfair, among other reasons, because Newman essentially claimed that MetLife engaged in a bait-and-switch strategy that offended Illinois public policy. Given that she also alleged significant injury, her complaint adequately set forth a violation of the Consumer Fraud Act.

Finally, Wood described the elements of common-law fraudulent misrepresentation and concealment. Finding that Newman reasonably relied on the MetLife brochure because it was the only information available to her before she purchased the policy, Wood concluded that the requirements for these causes of action also were alleged.

The court, therefore, reversed the order of dismissal and remanded.

Key point

An insurer’s failure to adequately articulate premium charges either in an explanatory brochure or the policy itself can give rise to causes of action for breach of contract and fraud.