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Buck v. American General Life Insurance Co.

United States District Court, D. New Jersey

October 31, 2018

DUANE BUCK and ANN BUCK, on behalf of themselves and all others similarly situated, Plaintiffs,


          ANDREW P. FISHKIN ZACHARY W. SILVERMAN S. AARON LOTERSTEIN FISHKIN LUCKS LLP THE LEGAL CENTER Attorneys for Defendant American General Life Insurance Company


          NOEL L. HILLMAN, U.S.D.J.

         This case is a putative class action alleging the breach of a universal life insurance policy. Presently before the Court is Defendant American General Life Insurance's Motion to Dismiss Plaintiffs' First Amended Complaint and Motion to Strike Class Allegations. For the reasons expressed herein, Defendant's Motion to Dismiss will be denied, in part, and granted, in part. Defendant's Motion to Strike Class Allegations will be denied without prejudice.


         We take our brief recitation of the facts from Plaintiffs' first amended complaint. In 1984, Plaintiffs Duane and Ann Buck (collectively, “Plaintiffs”) purchased a universal life insurance policy (the “Policy”) on the life of Duane Buck with his wife, Ann Buck, as an additional insured. The Policy was issued by The Old Line Life Insurance Company of America, a company later acquired by Defendant American General Life Insurance Company (“Defendant” or “AGLIC”).

         Before discussing the specifics of the Policy and the dispute which later arose under it, it is important to establish the basic principles of a universal life insurance policy. Universal life insurance is a form of permanent life insurance, also known as flexible premium or adjustable life insurance. This refers to the fact that a policy is for a term of years with a set periodic premium, but the premium, benefits, and beneficiaries may all be modified during the term of years.

         This type of insurance is meant to give a policyholder coverage for her entire lifetime, while allowing her to vary premium payments, adjust death benefits, and build a cash value while young to offset the higher premiums charged later in life. In other words, as Plaintiffs explain, this type of policy has three elements: (1) the premium, payable periodically, (2) the death benefit, payable to the beneficiary upon death of the insured, and (3) the cash surrender value, the value the policyholder receives if the policy is surrendered prior to death. The cash value built up in the policy receives preferred tax treatment and may be used to pay the cost of insurance in place of a premium, to borrow money against the policy, or merely saved to build cash value.

         These types of policies are governed, in part, by the Internal Revenue Code. This provides an outer limit for the amount of cash value that may accrue within a policy while still qualifying for preferred tax treatment. See I.R.C. § 7702, et seq. If the cash value exceeds this outer limit, a policy may lose preferred tax treatment as “life insurance.” Besides this penalty, it is unclear from the parties briefing whether there are any other consequences to the owner or insurer. Both parties note that the actual calculations to determine the premium amount to pay to keep this preferred tax treatment and build cash value are too complicated to explain and, in any event, those calculations are irrelevant to this case.

         Initially, the Policy provided a $70, 000 death benefit for Duane Buck, a $25, 000 rider for Ann Buck, and three $5, 000 riders, one for each of the couple's children. The Policy guaranteed an interest rate of 4.5%, compounded yearly, for all premiums paid in excess of cost. The Policy also granted Plaintiffs the right to effectuate a partial or total surrender of the Policy at certain points with certain predetermined fees. AGLIC also provided “Annual Reports” which show the policy's current death benefit, current cash value, total amount of premiums paid, total accumulated growth, and total charges assessed. As the name suggests, the Policy promised that these Annual Reports would be sent - at least - on a yearly basis.

         At some point thereafter, Plaintiffs increased Duane Buck's death benefit to $100, 000 and Ann Buck's death benefit to $50, 000. In 2008, Plaintiffs requested that AGLIC reduce the death benefit for both Duane and Ann Buck to $25, 000 and that it eliminate the $15, 000 in riders the couple had maintained for their children. AGLIC complied.

         In connection with the 2008 decrease in death benefit, AGLIC provided the Bucks with a “Supplemental Illustration” (the “Illustration”) dated September 29, 2008. The Illustration provides policyholders with projections to help them decide how desired changes to their policy may affect the ability of their investment to grow while maintaining preferred tax status.[1]Plaintiffs allege the Illustrations provided by AGLIC determined the amount of yearly or monthly premiums they paid. The Bucks paid the premium as described in the Illustration.

         On January 7, 2016, AGLIC sent Plaintiffs a letter which claimed the Policy had been funded to its limit and was at risk of losing its preferred tax status. Plaintiffs allege that the reason the Policy was at risk of losing its preferred tax status was because Defendant used faulty compliance procedures and software which failed to adequately predict the amount of premiums required to keep the Policy tax compliant throughout its life. Defendant, in this letter, claimed that it was a combination of the decrease in death benefits and premium amount which led to this compliance issue.

         AGLIC presented the Bucks with three options that would allow the Policy to maintain its tax status: (1) increasing the death benefit (which would have required additional underwriting), (2) surrendering the Policy, or (3) maintaining the Policy, allowing annual refunds, and ceasing premium payments until the cash value of the Policy was exhausted. AGLIC, in the letter, reserved the right to completely surrender the Policy if Plaintiffs did not choose one of the three listed options.

         Plaintiffs chose none of these options. Each option presented Plaintiffs with either a loss of the Policy, increased premiums, or loss of the benefit of the 4.5% interest rate being applied to their future premium payments (as they would be prohibited from making any further premium payments until a later date). AGLIC continued to send letters over the following year, reiterating the options available and that it reserved the right to unilaterally surrender the policy if no option was chosen.

         On January 13, 2017, AGLIC sent a letter stating (1) the Policy remained non-compliant, (2) a check would be sent in the amount of $3, 260 representing the amount the Policy was overfunded, and (3) the cash value of the Policy would be used to pay premiums until it had been exhausted, at which time Plaintiffs could resume paying premiums.

         Finally, on December 11, 2017 AGLIC sent a letter stating Plaintiffs “may pay enough into the policy each year as necessary to maintain . . . coverage without building up any excess policy value.” Plaintiffs allege this prohibits them from gaining the benefit of the 4.5% interest rate and building any cash value within the Policy. In effect, Plaintiffs allege, the Policy has been transformed into a year-to-year term policy.

         On December 19, 2017 Plaintiffs filed a complaint in this Court, which included class action allegations. Plaintiffs present two claims for relief: breach of contract and rescission. Defendant filed its Motion to Dismiss and Motion to Strike Class Allegations on March 5, 2018. It has been fully briefed and is ripe for adjudication.


         A. Subject Matter Jurisdiction

         This Court has jurisdiction over this action under the Class Action Fairness Act of 2005. See 28 U.S.C. § 1332(d) (granting United States district courts jurisdiction over putative class claims, which, in aggregate, exceed $5, 000, 000 and include one putative class member who is diverse from defendants). Plaintiffs are individual citizens of New Jersey and AGLIC is a citizen of Texas having been incorporated there and maintaining its principal place of business in that state.

         As for amount in controversy, the First Amended Class Action Complaint is unfortunately vague and internally inconsistent - or at least redundant. First, while it alleges AGLIC has approximately 100, 000 individual life insurance policies in force in New Jersey, it fails to distinguish between universal life policies - at issue here - and other forms of life insurance. Second, in one sentence the First Amended Class Action Complaint alleges AGLIC received “over $100 million in premiums annually” and then in the next sentence alleges AGLIC received over $600 million in premiums “in 2016 alone” both numbers attributed to its New Jersey life insurance customers. [Doc. No. 8 at para. 6.]

         Despite the lack of clarity and specificity, it seems plausible at this stage of the proceedings that a large enough percentage of AGLIC life insurance customers are universal life customers and given the large dollar volume of premiums for all life insurance policies in force - whichever alleged number is more accurate - that the putative class damages exceed the statutory minimum.

         B. Standard for Motion to Dismiss

          When considering a motion to dismiss a complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), a court must accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff. Evancho v. Fisher, 423 F.3d 347, 351 (3d Cir. 2005). It is well settled that a pleading is sufficient if it contains ...

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