State Farm Sued Over Policies Backed by Distressed Insurer PHL

State Farm Mutual Automobile Insurance Co. faces a lawsuit accusing it of fraud and unjust enrichment for selling products from PHL Variable Insurance Co., which authorities say has a $2.2 billion capital shortfall that left policyholders with less-than-promised payouts.

Three people who bought PHL life insurance and annuity contracts from State Farm agents are seeking class-action status for their complaint, which was filed in Chicago federal court Nov. 26. They allege State Farm knew about PHL’s deteriorating finances and concealed information about the potential consequences on their policies.

One plaintiff, Jenny Nappo, said she got only $300,000 from a $2 million life insurance policy after losing her husband to cancer last year. Patrick McLaughlin said he bought a $1.5 million life policy and Gordon Jason got one for $500,000, but both now say their payouts are capped at $300,000 each, according to the suit.

Connecticut-based PHL has faced a variety of challenges over the past decade, including obsolete actuarial assumptions and disappointing investment performance. Even after the insurer’s private equity owner Golden Gate Capital used complex risk-shifting transactions to bolster PHL’s finances, they continued to deteriorate, leaving thousands of policyholders in limbo.

Golden Gate did not respond to a request for comment. State Farm said it was aware of the suit, but that the company “has not been served with the litigation, and we do not know the particulars of what is alleged. So, it is premature to comment.”

In the complaint, the plaintiffs allege State Farm failed to inform its clients that it had stopped selling products issued by the Phoenix Cos., which used to own PHL, after its credit downgrade to junk in 2009. State Farm, whose agents were still providing services to pre-existing Phoenix clients, received millions of dollars in compensation following that downgrade.

The plaintiffs are seeking unspecified damages — including the difference between the value of their policies when they were purchased and what they’re worth now — and disgorgement of any ill-gotten gains by State Farm.

The case is Jason v. State Farm, 25-cv-14507, US District Court, District of Northern Illinois (Chicago).

Photo: A State Farm insurance office California / Bloomberg