LITIGATION ISSUES IN LONG TERM CARE INSURANCE:
REPRESENTING INSURANCE COMPANIES IN A COMPLEX
AND DEVELOPING MARKET
By: Paul P. Bolus
Bradley Arant Boult Cummings, LLP
www.babc.com
I. INTRODUCTION
Long term care insurance (“LTCI”) is an insurance product that allows consumers
to insure against the risk of needing expensive nursing home care. As Americans are
living longer and as medical costs increase, consumers have become increasingly
motivated to seek LTCI. Simultaneously, Medicaid has applied more stringent
restrictions on the ability of long term care patients with substantial assets to get
government assistance, meaning that the average consumer will be unlikely to get
Medicaid benefits as soon as long term care is needed. Consumers want to insure
against these risks, and insurance companies are writing policies.
At the same time, however, serious uncertainties about the LTCI market exist.
Because LTCI is a relatively new insurance product, underwriting criteria and claims
patterns are hard to predict. It is difficult to price these policies effectively. Many early
entrants to the field are now having to raise rates or restrict coverage. As a result, it
should come as no surprise that long term care insurance issues are more frequently
being litigated.
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This paper will seek to address the primary issues relating to long term care
insurance litigation from the perspective of the insurance company. After briefly
examining the insurance product itself, this paper will proceed to examine the market
forces that are creating uncertainty for insurers. The next section addresses common
themes in LTCI litigation. Finally, this paper will conclude with a brief examination of
emerging issues in LTCI litigation.
II. LONG TERM CARE INSURANCE
a. Traditional Health-Insurance Based LTCI
The traditional model of long term care insurance looks much like supplemental
health insurance. The insurance covers certain expenses up to a maximum level in
exchange for a premium. As always, the key to making these types of policies
profitable is to set the premiums at a level that will suffice to cover the benefits that will
have to be paid under the policies. As a general rule, early attempts at setting
premiums resulted in serious underpricing.
This underpricing came from the fact that insurance companies miscalculated
several different kinds of risks in pricing their policies. Initially, many companies thought
that most consumers would allow their policies to lapse before ever claiming benefits.
Actual claims far exceeded early estimates. Moreover, long term care costs increased
faster than expected, meaning that more policies were paying out at higher rates than
had been anticipated. In addition, some insurers priced their policies on the expectation
that consumers would use LTCI as a “bridge” until the consumer qualified for Medicaid
assistance; however, more insureds decided to keep paying premiums and making
claims under the policies. In all of these areas, it could be said that insurance
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companies failed to predict correctly the claims that would be made under their LTCI
policies; however, some adverse effects have been caused by forces much more
difficult to predict. For example, many early policies provided benefits for home health
care. Even though these benefits were fairly narrowly defined, an entire home health
care cottage industry has blossomed specifically to make claims under LTCI policies.
Providers are tailoring their services to qualify as home health care providers and the
value of the claims made by insureds in this area has far exceeded the insurance
companies‟ initial estimates. While insurance companies have learned from these
growing pains and are writing policies that may prove to be more profitable now, there is
still a large number of policies in force that have very little likelihood of being profitable
for insurance companies unless substantial price increases are allowed.
b. Asset-Based Long Term Care Insurance
Owing in large part to the lack of profitability from traditional LTCI products, some
companies are looking at creating a form of long term care insurance that is asset-
based. This new model is based on allowing a consumer to use the proceeds of a life
insurance policy or annuity (the assets) to pay long term care expenses. The obvious
advantage to an asset-based policy is that the consumer can still get the value of the
money paid to the insurance company even if he or she never needs long term care.
An additional driving force behind the creation of asset-based policies is the
Pension Protection Act of 2006, a law that allows holders of life insurance policies or
annuities to withdraw money tax free to pay for long term care expenses. Because of
this law, many insurance companies expect that consumers who want to protect their
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assets will seek an asset-based policy. For a consumer with an existing annuity, adding
a long term care benefit is a viable option.
It is unlikely, however, that asset-based LTCI will completely supplant traditional
LTCI policies. Consumers that lack the means to purchase assets will not be able to
take advantage of an asset-based policy. Moreover, many asset-based policies provide
only limited benefits and are paired with a traditional policy that would pick up any
amounts owed beyond the maximum benefit under the asset-based policy. The
traditional model will continue to provide the paradigm for most consumers and
providers of long term care insurance.
III. MARKET FORCES DRIVING UP LONG TERM CARE INSURANCE RATES
To understand the litigation issues facing providers of long-term care insurance,
it is critical to appreciate that the cost of the insured risk – the cost of long term care – is
increasing rapidly. The causes of this increase are myriad, but three are salient.
a. Demographic Shift
The baby boomers are beginning to face the onset of the diseases common to
advanced age. Accordingly, the demand for long term care is almost certain to increase
dramatically over the next decade or two. As baby boomers realize the likelihood of
their need for long term care, they will increasingly look to purchase LTCI to offset the
costs. The problem for insurers is that the benefits that are sufficient to meet a
consumer‟s long term care needs today will be insufficient as inflation and demand-
driven price increases take effect. Consumers are insuring today against risks that they
will likely not face for another ten or twenty years, and insurance companies have to try
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to price their policies with their best guess of what long term care insurance will cost
when claims are made.
For many insurance companies, more LTCI policies means more losses. Many
insurers have not found a way to make these policies profitable without drastic
increases in premiums. However, some scholars expect an off-setting trend to emerge.
For example, some see “propitious selection,” a new theory that predicts that risk-
averse people are both more likely to purchase insurance and less likely to make claims
on their insurance, as a market force that will return LTCI policies to profitability.
According to this theory, as long term care insurance becomes more common, the rise
in the amount of premiums from policyholders will outstrip the growth of claims. See
Peter Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113
YALE. L.J. 1223 (2003).
In conclusion, the demographic changes present insurers with a vast potential
market for long term care insurance policies, but several insurers have not found
dependable ways to make these policies profitable because they cannot accurately
predict the costs of long term care in the future. While there may be some stabilizing
market forces that cause LTCI policies to steer back towards profitability, there is
nothing that currently suggests that the present policies, without significant premium
increases, will be a good investment for insurers. As a result, policies are becoming
more expensive.
b. Rise in Nursing Home Litigation Costs
Long-term care facilities face rapidly increasing litigation costs. Litigation
expenses cause costs to rise in two ways. First, litigation costs, both in terms of paying
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defense costs and satisfying adverse judgments, decrease profitability and drive many
for-profit firms from the market. This point must not be understated, as a report in 2005
showed that every nursing home in Florida had, on average, five lawsuits pending
against it and that Florida nursing homes paid over $1.1 billion in damages in 2001.
Annual liability costs per bed nationally exceeded $2,500. Litigation costs are
ubiquitous but not trivial, and companies are exiting the markets. Of special note is the
rise of class actions in the long term care field, as plaintiffs have become more adept at
pleading class-wide injuries stemming from understaffing or budgeting instead of
bringing common negligence actions that are rarely suited for class-wide resolution.
While nonprofit long term care providers are striving to meet the existing demand, the
current supply of long term care beds is decreasing relative to demand. This relative
decrease is causing prices to rise.
A second cause of rising prices is that litigation operates as a kind of de facto
regulation of the long term care industry. If a provider is found liable for certain conduct,
it must eliminate that conduct and prevent similar instances from recurring. Other
providers will follow in an attempt to avoid liability. As a result, even those providers
that survive potentially ruinous litigation face higher operating costs. Furthermore, the
cost of liability insurance increases because insurers are rightly concerned about having
to pay large judgments on behalf of their insureds. In Florida, for example, each long
term care facility is required to carry at least $1 million of professional liability insurance,
but some insurance companies are charging premiums near $1 million for coverage that
complies with the state law. In some instances, the annual premiums exceed the
maximum indemnified loss. All of these costs are passed along to consumers.
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c. Regulation
Insurance regulation is almost exclusively handled at the state level, so there are
few laws of general application that merit discussion. However, the National
Association of Insurance Companies (NAIC) regularly propounds model rules and
regulations that have a noted impact on state departments of insurance and
legislatures.
1
A proposal from the NAIC is a bellwether for changes in state-level
regulations.
In particular, the NAIC has recently considered changing Section 7 of the NAIC‟s
Long Term Care Insurance Model Act, the section that address incontestability. The
current version provides that an insurer cannot rescind a policy that has been in effect
for two years or more without showing that the insured knowingly and intentionally
misrepresented material facts relating to the insured‟s health. The proposed change
would make the incontestability standard even more onerous for insurance companies,
requiring them to prove by clear and convincing evidence that the insured committed
intentional fraud that was material to the acceptance for coverage and that the fraud
was related to the same preexisting condition for which the insured seeks benefits.
California has adopted the new rule. See CAL. INS. CODE § 10232.3(d). Furthermore,
even if amending Section 7 would have only a small effect on the majority of clams
made under LTCI policies, the intent of the modification – making it more difficult for
1
Every state has adopted some form of the NAIC‟s model rules or model act relating to LTCI, but each
state tweaks the provisions to its liking. As a result, it is critical to consider the laws and regulations of
each individual state and not to rely solely on the NAIC.
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insurance companies to avoid paying benefits under LTCI policies – is clear and will
lead to higher costs for insurance providers.
2
Other regulations, such as NAIC Model Regulation No. 641, which established
limitations on the ability of insurance companies to change LTCI rates and requires, in
some instances, that the insurance company either lower its rates or increase its
benefits if a rate increase is more profitable (i.e., leads to greater “excess premiums”)
than expected. Florida adopted this rule and several insurance companies
subsequently stopped writing new business in Florida as a result.
The net effect of new proposed and adopted regulations has been increasing the
burden and cost of providing long term care insurance. While each regulation will
usually have some provision that is favorable to insurance companies, and while it is
true that the costs of providing long term care insurance were seriously underestimated
in the last decades, most insurers find these changes detrimental to their business.
d. Conclusion
The high degree of volatility in the price of long term care creates corresponding
challenges in providing insurance at profitable rates. There is also significant volatility in
the price that an insurance company can charge for its long term care policies, volatility
that stems both from market forces and from regulatory actions. As long as this two-
headed volatility persists – and it will be around for a long time – there will be a ready
supply of potential litigants. The next section of this paper will attempt to examine both
the over-arching trends in long term care insurance litigation and highlight specific areas
where rapid or interesting developments are occurring.
2
A recent report by the State of Florida stated (perhaps “understated” would be more accurate) that
“representatives of the [insurance] industry did not seem immediately receptive to [the idea of establishing
a strict two-year incontestability cut off with no exceptions].”
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IV. LITIGATION
Trying to analyze “litigation” is like trying to analyze “the economy” or “literature.”
In order to get a good grasp of what is happening in courtrooms across the country that
is affecting long term care insurers, it is necessary to break litigation down into
manageable categories. The broadest categorical distinction to be drawn is between
private litigation – i.e., litigation involving private parties, like individual insureds and
insurers – and public litigation – i.e., litigation brought by a governmental or regulatory
body that affects parties beyond just the parties to the case.
a. Private Litigation
In the category of private litigation, it is most helpful to further subdivide the
analysis into who is bringing the claims. The prototypical case is a suit by an insured
(or putative insured) against an insurance company. Other areas to be considered are
reinsurance litigation and class actions, with the latter existing on the blurry line
between private and public litigation.
i. Insureds v. Insurers
1. Disputing Claims
Litigation by insureds against insurers is the most common type of litigation
facing companies that provide long term care insurance. These types of suits usually
arise when the insurer denies coverage or benefits to a claimant. Plaintiff insureds
commonly allege breach of contract and bad faith. Because these suits arise out of
individual transactions, there is little to distinguish them from bad faith or breach of
contract suits arising out the denial of a claim under a supplemental or major health
insurance policy. Liability hinges on specific facts relating to the merits of the insured‟s
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claim and the manner in which the insurer investigated the claim and communicated its
findings to the plaintiff. Another factor insureds must take into consideration is how
state regulation may expand the coverage of a policy.
In many states, courts are less willing to find instances of bad faith than they
used to be. Where the difference between breach of contract and bad faith may have
been treated as a question of degree in the past, courts have increasingly separated the
concepts of breach of contract and the tort of bad faith into clearly distinct claims. The
standards for proving breach of contract are stable and not onerous, but plaintiffs
bringing a bad faith claim must prove that an insurer had enough evidence to pay a
claim and yet denied it. While a broadly-accepted test for what conduct rises to the
level of bad faith has not gained acceptance, the conceptual shift toward viewing bad
faith as a tort has created a recent trend away from findings of bad faith in insurance
claim litigation, especially where the insurance company relies upon a reasonable
interpretation of its policies. See Shelter Mut. Ins. Co. v. Barton, 822 So. 2d 1149 (Ala.
2001) (holding that an insurer is liable for bad faith only where it either had no basis to
refuse a claim under the insurance contract or it intentionally failed to determine if such
a basis existed); White v. American Cas. Ins. Co., 756 N.E.2d 1208 (Mass. App. Ct.
2001) (holding that an insurance company that relied upon plausible interpretation of
insurance contract cannot ordinarily be held liable for unfair claims settlement practice).
In light of this emerging trend, the best practice is for insurance companies to focus on
complying with their claims review procedures. Where these procedures are followed, it
will be very difficult for a potential plaintiff to allege that the company acted in bad faith.
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It should be noted, however, that a denial of benefits under an LTCI policy may
expose the insurer to enhanced liability, including consequential damages. As is the
case with health insurance policies, a denial of benefits under an LTCI could prevent a
plaintiff from getting long term care. While, relative to the costs associated with treating
cancer, long term care costs are low, insurers should be aware that their denial of
benefits may result in a court ordering the insurance company to pay the reasonable
costs of a successful plaintiff‟s long term care.
Also relevant in any discussion of damages is the fact that elderly plaintiffs can
often both arouse great sympathy from a jury and be eligible to receive heightened
damages because of their age. The elderly are a vulnerable demographic and the
general public is sensitive to any perceived mistreatment. For example, the New York
Times ran an article by Charles Duhigg on March 26, 2007 entitled “Aged, Frail, and
Denied Care by Their Insurers” that highlighted the plight of people whose claims for
long term care insurance benefits had been denied. As a result of this perception, and
even though the compensatory damages flowing from a denial of benefits in the LTCI
context may be low, the prospect of punitive damage awards can drastically increase an
insurance company‟s exposure to potentially massive verdicts. In California, for
example, senior citizens have a statutory right to seek treble damages for claims
alleging unfair business practices in any context, including insurance. See CAL. CIV.
CODE § 3345; Hood v. Hartford Life & Accident Ins. Co., 567 F.Supp. 2d 1221 (E.D. Cal.
2008) (applying § 3345 against a provider of long term care insurance).
Finally, insurers must be aware that state regulations can often force a policy to
provide more coverage than originally intended by the insurer, creating liability where
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the insurer did not expect it ex ante. For instance, in Arizona, a “long term care” policy
must provide coverage for at least twenty-four consecutive months. Ariz. Rev. Stat.
§ 20-1691.03(c). Even though an insurer provided for a maximum benefit under its
policy, the court forced it to provide benefits, no matter the cost, for 24 months because
the policy was considered a “long term care” policy by the court. Rowe ex rel. Rowe v.
Bankers Life and Cas. Co., 572 F.Supp. 2d 1138 (Sept. 17, 2008). The Court also ruled
that a limitation on benefits was invalid because it did not comply with the requirements
of the “long term care” policy regulations. The policy limited benefits to a maximum
amount per “period,” that reset after the insured did not require treatment for six months.
Because the limiting term was not properly labeled per the “long term care” regulations,
it was invalid.
Rowe and Hood are good examples of the increased risks associated with LTCI
and particular state laws. It is likely that the insurer in Rowe did not value the policy
based on the expanded coverage implemented by the court‟s decision. When drafting
LTCI policies, insurers must carefully consider the applicable regulations and other
regulations that courts might find applicable. If an insurer can comply with multiple
regulations that may be deemed applicable, it decreases the risk of a judicial expansion
of the scope of coverage. Because of the recent nature of LTCI policies and the
extended time-frame in which claims can be made, insurers must carefully consider the
terms of their policies. It is inevitable that insureds will sue when their claims are
denied. However, through careful drafting of policies and implementation of
procedures, insurers can limit their liability to denied claims.
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2. Disputing Rates
Because of the high degree of volatility in the market for long term care
insurance, insurers are increasing the rates they charge or are canceling policies. To
the surprise of no one, these actions are leading to litigation. Unfortunately for insurers,
these claims are similar for every policyholder. Accordingly, they are brought as class
actions and will be discussed below.
3. Disputing a Duty to Insure
Another interesting area of law that is developing in the LTCI field is growing out
of plaintiffs claiming that an insurance company wrongfully denied their applications for
insurance. For example, in Neily v. CALPERS, 2004 WL 3030069 (N.D. Cal. Dec. 21,
2004), the court upheld summary judgment in favor of an insurance company that
declined to insure a couple where the husband had diabetes and the wife suffered from
polio. In the court‟s view, the potential insurer based its decision not to insure on
medical data, actuarial principles, and actual experience. Because the insurer was able
to show that its decision was based on “actual and reasonably anticipated experience,”
the court found that the plaintiffs‟ claims could not proceed to trial.
The Neily case highlights two important points. First, as the court specifically
discussed, long term care insurers face a tough burden of showing that their
underwriting criteria are satisfactory. Because LTCI is so new, the depth of statistical
data that exists for other insurance products (automobile or life insurance, for example)
simply do not exist. Without these historical data to provide a clear record of “actual
experience,” insurers have to rely upon what they think “reasonably anticipated
experience” will show. While this different standard is not so difficult that insurers will
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routinely be found liable violating it, it is a more difficult standard to meet than the
“actual experience” standard.
The second lesson to learn from Neily is that providers of long term care
insurance must keep very careful records to document all client interactions, from
receipt of initial forms all the way through the claims process or termination. Because
the insurer in Neily had records that could show what it reasonably anticipated the claim
experience of the plaintiffs to be, it could meet the burden required by the court.
Especially because the statistical data is relatively immature compared to other
insurance products, long term care insurers must keep thorough records.
In conclusion, while most plaintiffs have been unsuccessful in holding a company
liable for refusing to insure them, the fact that these types of claims are being brought
shows the wide spectrum of litigation that long term care insurers are facing from
individuals.
4. Disputing Definitions:
“Nursing Home” vs. “Assisted Living”
The distinction between “nursing home” and “assisted living” facility must be
carefully drafted if an insurer hopes to limit the type of facility its policies cover for the
duration of the policy. Current litigation shows that insurers are relying on state
regulations to define what type of facility is governed by their policy. Although the
decisions to date have favored insurers, medical treatment will surely change during the
life of these policies such that the distinctions drawn between “nursing home” care and
“assisted living” care will become less clear. Inevitably, regulations will also vary. To
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avoid costly litigation with individual policyholders, insurers need to carefully consider
how they define the terms that govern what facilities are covered by their policies.
The potential ambiguity in these terms and reliance on malleable state
regulations create a potential for litigation. In Gillogly v. GE Capital Assurance
Company, the 10th Circuit relied exclusively on Oklahoma regulations to determine
whether a facility was covered under a LTCI policy where the policy referred to state
licensing regulations. 430 F.3d 1284 (10th Cir. 2005). The policy provided for care at a
“Nursing Home” which was defined as a facility “licensed . . . to engage primarily in
providing nursing care and related services to inpatients.” The Court relied on the fact
that in Oklahoma, the facility was registered as a “resident care home” rather than a
“nursing facility.” If Oklahoma were to change its licensing regulations, the coverage of
this policy could be greatly expanded.
In Geary v. Life Investors Insurance Company, the court granted summary
judgment in favor of the insurer where the plaintiff sought coverage for an “assisted
living” facility and the policy only provided for “nursing home” care. 508 F.Supp. 2d 518
(N.D. Tex. 2007). The court, however, recognized that the policy was “dependent on”
state licensing rules. By relying on state regulations to define the terms of the contract,
the insurer creates the possibility that many more facilities will be covered under the
policy than intended by the insurer.
Assisted living facilities, as they are known today, did not become widespread
until the 1990‟s. If a LTCI policy was written prior to the emergence of the assisted
living facility and did not properly exclude these facilities from its coverage, the insurer
might find itself paying for care at facilities it never intended to cover. Similarly, if
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today‟s LTCI policies are not carefully drafted; the next method of long-term care might
unexpectedly be covered by a policy resulting in more harm to an already unprofitable
policy. For example, as we discussed above, insurers did not anticipate the creation of
a home health care industry. States can easily update their regulations to
accommodate new methods of treatment, whereas, the policies will be fixed as of the
time they are issued. In a subsequent opinion in the Tenth Circuit, Judge Henry noted
that “predicting the kind of facility” where a policyholder will need services will become
more difficult as medical technology improves. Milburn v. Life Investors Ins. Co. of Am.,
511 F.3d 1285 (10th Cir. 2008). Insurers need to carefully draft the definitions of
facilities covered by LTCI policies to avoid litigation that attempts to expand the
intended scope of the policies. With respect to existing policies, open-textured
definitions are already forcing insurers to litigate the scope of coverage.
Against the backdrop of the rule of contra proferentem, insurance companies
attempt to draft policies to avoid any ambiguity; however, because many policies make
reference to underlying state regulations that are in flux, it is not always possible for
even carefully drafted policies to escape a judicial finding of ambiguity.
5. Fraud for the Actions of Agents
A theory common to almost all types of insurance litigation is liability for the
insurer based on fraudulent misrepresentations of agents. 4 Lee R. Russ & Thomas F.
Segalla, Couch on Insurance, §56:11 n.77. LTCI insurers will not escape this theory of
litigation. Especially in the light of premium increases that are and will be required to
keep these policies profitable, insurers will face claims that policyholders were
fraudulently induced to purchase the policy. Claims for fraudulent inducement are
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common in the health insurance arena. See e.g., Mehaffey v. Boston Mutual Life Ins.
Co., 31 F. Supp. 2d 1329 (M.D. Ala. 1998) (remanding claim for fraudulent inducement
to state court). These types of claims are of particular concern because of the
availability of punitive damages. Finally, as this paper discusses below, these types of
claims are starting to arise against LTCI insurers in the class action context which
substantially increases the insurer‟s exposure to liability.
ii. Reinsurance Litigation
The next area of private litigation requires less explanation because the issues it
presents are not unique to long term care insurance. Because insurers are
uncomfortable with the degree of risk in their long term care insurance portfolios, they
seek reinsurance. As recent events have shown, financial institutions are prone to
underestimate the risk in their portfolios. Whenever reinsurers are forced to pay,
litigation is likely to ensue.
iii. Class Actions
The most ominous development for insurance companies in the LTCI field is the
prospect of class action litigation relating to increased premiums. As we have
discussed, there is tremendous pressure to increase premiums on LTCI policies. As
companies succumb to this pressure, litigants are bringing class actions alleging fraud
and bad faith against insurance companies. Plaintiffs are arguing that the insurance
company fraudulently induced the plaintiffs to purchase the policies. They allege that
the policies were fraudulently underpriced to increase sales when the company had
every intention of raising the premiums. Another claim is that representations by the
insurer created an obligation to maintain premiums at the original price. For example, in
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Carl v. North Carolina, the plaintiffs alleged that the insurer made representations that
the LTCI premiums “would remain „level‟” and that increases in the premiums violated
those representations. 665 S.E. 2d 787 (N.C. Ct. App. Sept. 2, 2008); see also, Landau
v. CAN Fin. Corp., 886 N.E. 2d 405 (Ill. App. Ct. 2008). Although there are not a lot of
these actions pending around the country, they will only become more frequent as
policyholders are squeezed between ever increasing premiums and a sluggish
economy.
Indeed, in April 2009, American Heritage Life Insurance Company and Mutual of
Omaha Insurance Company settled a Missouri class action of this type for an estimated
potential value of $15,000,000. In that case, the plaintiffs alleged that the insurers used
low premiums to entice customers while intending all along to implement steep rate
increases. In another case, a putative class of 150,000 individuals claiming they were
fraudulently induced to purchase a LTCI policy survived a motion to dismiss in Federal
Court in Iowa. Rakes v. Life Investors Insurance Company, 2007 WL 2122195 (N.D.
Iowa July 20, 2007). The plaintiff alleged that the insurer sold the LTCI policies with
knowledge that the premiums would have to be increased. Over a period of four years,
the insurer raised the premiums on the plaintiff‟s policies by thirty percent, forty percent,
and thirty-five percent. For every dollar in original premium, the policyholders were
paying $2.45 after the increases. The plaintiffs alleged that the insurer always intended
to “pass the cost of the defective under pricing back to the plaintiffs.” The plaintiffs‟
allegation focused on the underwriting procedures of the insurer. They claimed that the
lapse rate was set too high, that the failure to conduct health evaluations created a risky
premium class, and that the insurer failed to disclose the risk of “closing the block” to
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the policyholders. As more companies are forced to increase premiums, close the
block, and send books of business into a “death spiral,” actions like Rakes will become
more frequent.
These cases are instructive on two levels. First, the allegations of the plaintiffs
are instructive as to what insurance companies might face in litigation. Second, they
highlight the possibility that many of these class actions – like the Missouri action – will
be litigated in state court. Because insurance policies vary from state to state, the
putative class of plaintiffs will likely fall within a single state. Assuming plaintiffs‟ counsel
can find a diversity-destroying defendant in the forum state, it will be difficult for the
insurer to remove the case to federal court.
The removability of class actions involving LTCI policies will hinge on the district
courts‟ application of the Class Action Fairness Act. Plaintiffs that limit their class to
policies sold within a state will have a strong argument that federal courts should not
exercise jurisdiction. The district courts cannot exercise jurisdiction over class actions
where two-thirds of the plaintiffs reside in the same state and at least one defendant
resides in the state that significant relief is sought from and whose conduct forms a
significant basis of the claims. 28 U.S.C. § 1332(d)(4)(A). It is likely that insurance
brokers in the state will have made representations that form the basis of the complaint.
Of course, class actions based on nation-wide classes will be removable to federal
court. See e.g., Rakes, 2007 WL 2122195.
If an insurer thinks that increased premiums will be the panacea to an
unprofitable policy, it must consider the litigation risks. This form of litigation is not very
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developed, but it is rapidly emerging as a large risk for insurers with under-priced
policies.
b. Public Litigation
Apart from private litigation, insurance companies should be aware that states
and other administrative bodies have the power to bring suits against companies in the
long term care insurance field. While public litigation is not yet widespread, recent
events have taught us to prepare for doomsday scenarios. It is not too far of a stretch
to imagine that an insurer weakened by recent financial problems and suffering from an
underperforming book of LTCI business could attract the attention of a crusading
attorney general when it attempts to raise its premiums. Indeed, in 2001, the attorney
general of Texas filed an action on behalf of 10,000 insureds against two major insurers
alleging that the insurer failed to disclose the fact that premiums rates could increase.
The attorney general of Iowa has an active fraud investigation pending against long
term care insurers.
Attorneys general are most concerned with consumer protection issues,
especially rate increases that make insurance unaffordable for existing policyholders.
Unfortunately, rate increases are ongoing and are likely to continue, meaning that rate
litigation will continue. Insurance companies must emphasize to their clients from the
very beginning of the sales process that LTCI rates are subject to change and that rates
have been rising. Clear and well-documented disclosures immunize a company against
the most damaging public litigation and can do much to avoid private litigation as well.
One area where insurers have recently been seeking protection is the filed rate
doctrine. Under the filed rate doctrine, entities required to charge a rate set by the
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Bradley Arant Boult Cummings, LLP
government are entitled to a presumption that the rate charged is unassailable by
litigation. The issue to consider when raising the filed rate doctrine as a defense is that
the industries to which the doctrine has historically applied – public utilities – are even
more heavily regulated than the insurance industry. Only where an insurance company
can show that it is heavily regulated will it get the benefit of the filed rate doctrine.
Every state requires insurers to notify the state‟s department of insurance of the
premiums charged on its policies in force in that state. In states where the department
of insurance requires nothing more than mere notification, the filed rate doctrine has not
been employed as a successful defense. However, other states, including important
LTCI jurisdictions like California and Florida, require that the department of insurance
actually approve the premiums charged. In these “approval” jurisdictions, where
insurers are already subject to public regulation of the rates they charge, the filed rate
doctrine is an important defense that insurance companies have used successfully. In
the insurance context, it is perhaps more accurate to call the filed rate doctrine the
“approved rate” doctrine, as only those states that require public approval allow
insurance companies to get the benefit of a presumption that the filed rate is
acceptable.
V. Emerging Issues
As we have repeatedly emphasized, long term care insurance is new and filled
with uncertainty. It could be argued that all issues in LTCI are emerging issues;
however, some potential developments on the horizon stand out as particularly
noteworthy.
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Bradley Arant Boult Cummings, LLP
a. Governmental Involvement
The political landscape in this country is changing. President Barack Obama has
endorsed the expansion of the federal government‟s role in expanding seniors‟ access
to long term care, and it appears that Congress is following his lead. In March of 2007,
the House Committee on Energy and Commerce called Conseco and Penn Treaty, two
important companies in the LTCI industry, to testify about why they were paying so few
LTCI claims. The two insurers had to produce documents outlining their claims
procedures and showing substantial justifications for denying claims. While there has
been no Congressional action taken yet, it is reasonable to expect expansive federal
regulation before long.
Even if Washington does not engage in regulation, the states are heading
towards a Medicaid funding crisis arising from the likely increase in long term care
costs. If current predictions hold true, seventy percent of Americans will require long
term care before they die. Under the current system, it is unlikely that the states will be
able to afford their current Medicaid obligations as more and more citizens need long
term care. As a result, either the states or the Federal Government is likely to rework
the current approach. The solution they reach will almost certainly lead to greater
government involvement. To an even greater extent than is true now, consumers
purchasing long term care insurance will be looking for a gap-filling solution, not
insurance under which they plan to make claims for years on end.
The net result should be that long term care insurance will be increasingly
regulated. Insurance companies will face fewer common law suits and more regulatory
actions.
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Bradley Arant Boult Cummings, LLP
b. Tension in Equity Markets
The recent Wall Street problems have taken a heavy and very public toll on
insurance companies. It is unclear to what extent the confidence of investors in the
soundness of asset-based insurance has been shaken, but it is safe to assume that any
lack of confidence will lessen the wide acceptance of asset-based long term care
insurance and will keep most consumers focused on the traditional model. Asset-based
insurance will fill a niche market, but will have a hard time gaining wide acceptance.
Moreover, because asset-based policies straddle the line between insurance and
investments, it is possible that the investment side of these policies will prove
insufficient to meet the costs of claims made under the policies. Ironically, the asset-
based policies may turn out to be a greater liability to insurance companies because the
policyholders did not appreciate that their insurance benefits could be affected by
changes in equity markets. Raising rates on traditional plans has led to large amounts
of litigation; certainly litigation will arise when an insured discovers that the expensive
asset he purchased (assume an average annuity of $50,000) is insufficient to meet his
needs. The extra volatility of the equity market will combine with the existing volatility in
the long term care market and many insureds will not be willing to take on the extra risk.
c. Independent Trusts
One insurance company, Conseco Senior Health Insurance Company (Conseco
Senior”), has taken an innovative approach to dealing with its existing unprofitable long
term care policies. It created, after lengthy discussions with the Pennsylvania
Department of Insurance, an independent trust into which it transferred roughly 144,000
long term care policies. The trust, capitalized with Conseco Senior reserves at the
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Bradley Arant Boult Cummings, LLP
outset, will receive the premium payments from the policyholders whose policies the
trust holds. Part of the advantage of creating the trust for Conseco Senior is that it
allows Conseco Senior to charge off the losses from its long term care insurance
policies at once instead of having them hanging around in their financial statements.
The other potential effect, and the one that has drawn much attention, is that the
policies held by the trust are effectively cut off from the rest of the Conseco Senior risk
pool.
Unsurprisingly, this idea has attracted a lot of attention. At least one prominent
plaintiff‟s attorney organized a grassroots campaign in Pennsylvania to prevent the
creation of the trust. Even though his efforts were unsuccessful and the Pennsylvania
Department of Insurance allowed Conseco Senior to create the independent trust, the
firestorm surrounding the creation of the trust is sure a signal that the trust has the
attention of the state DOIs. And – because Conseco Senior was successful in creating
the trust in Pennsylvania – it is reasonable to expect more insurers in more states to
attempt to replicate the trust model. It is too early to tell, but this development could
have far-reaching implications in the LTCI market.
VI. Conclusion
It is easy to understand why an insurance company would decide to get out of
the long term care insurance business. Many policies have been historically under-
priced and are now unprofitable. The push to move these policies out of the red has
spawned individual, class-wide, and increasing public litigation. Potential ambiguities in
policy language linger and cause uncertainty about how the policies will be interpreted
by courts in the future. Regulation is ongoing and likely to continue. The underlying risk
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Bradley Arant Boult Cummings, LLP
the policies insure against – the cost of long term care – is rising quickly and shows no
sign of slowing.
Insurance companies, however, are in the business of taking risks. Companies
will find ways to serve their insureds and to make a profit. New policies are performing
much better than older policies, both for the insured and the insurer. As insurers
become more adept at pricing their policies and as underwriting criteria become more
established and reliable, much of the uncertainty will dissipate. Until then, a major
factor in the success of insurance companies in the long term care insurance industry
will be the ability of insurers to get favorable decisions in the courtroom. Litigation
provides a backdrop against which regulation and legislation occur. Through this period
of instability in the industry, core issues will continue to be litigated across the country.
