General American Life Insurance Co. has agreed to pay $55 million to settle a class action lawsuit alleging the company deceived life insurance policyholders. If approved by a federal judge, the money would go to 251,000 people who bought whole and universal life policies between 1982 and 1996.
General American has also been fined $120,000 by the Missouri Department of Insurance for alleged deceptive sales practices. Policyholders would likely receive payment in the form of higher dividends or free insurance. The full $55 million is earmarked for policyholders.
The amount plaintiff’s attorneys will receive has not been decided. According to department of insurance information, General American salespeople misrepresented life insurance policies through claims of “vanishing” premiums.
General American’s fine agreement with the department of insurance would close a department market conduct investigation, dating from 1995, of vanishing premium and other sales misrepresentations. That market conduct exam was separate from, but eventually dovetailed with the class-action lawsuits, which were filed in 1996 and 1997.
MDI alleged the vanishing premium violations took two forms: General American and its agents misrepresented that life insurance policies would be paid up within a set time and premiums would “vanish.” Instead, further premiums were necessary to keep the policies in force. In other cases, so-called “churning” was combined with vanishing premium misrepresentations.
Existing policyholders were convinced to convert their coverage into policies with a higher face value that supposedly would require few if any future premium payments. Instead, policyholders had to pay extra premiums on those policies.
Since the mid-1990s, state regulators and class-action litigation nationally have secured hundreds of millions of dollars in policyholder awards for “vanishing premium” violations by such insurers as MetLife, Prudential, Phoenix Home Life, Equitable Life, Connecticut General, Crown Life, Sun Life, American Family Mutual and even the Knights of Columbus.
The lawsuits and regulatory action materialized after companies began adapting to the low-inflation and -interest economy of the 1990s on policies sold under high-inflation and interest-rate assumptions of the previous decade. Missouri in 1998 tightened its life insurance sales illustration laws, in part responding to the nationwide abuses.
The litigation against General American originally was filed in Massachusetts, Illinois and Mississippi, but was consolidated into a single action in 1997 in the federal Eastern Missouri District Court. The MDI market conduct exam – an audit of an insurer’s marketing and claims practices – legally is not complete until the judge enters the class-action case’s final order, which will be incorporated into the MDI exam settlement. Under state law, the report itself is closed to the public until those actions occur.