A federal district court in New York has dismissed an employer’s claims against an insurance company under a number of variable universal life insurance (VUL) policies for losses it sustained as a result of its investment’s exposure to Bernard Madoff’s massive Ponzi scheme.

The case

After Cummins Inc. created the Cummins Inc. Grantor Trust to manage assets that would be used to fund its employees’ retirement plans or other forms of deferred compensation, it alleged that it purchased several VUL policies from New York Life Insurance Company, paying about $123 million in premiums.

Cummins alleged that, through the policies, Cummins’ investment was exposed to Madoff’s fraud, and more than 22 percent of Cummins’ $123 million investment was lost when it was revealed that Madoff was using the assets to fund his Ponzi scheme.

Cummins sued New York Life (and other defendants), alleging that New York Life’s offering memorandum contained a number of representations upon which Cummins relied in deciding to purchase the VUL policies. Among those representations, Cummins alleged, were statements that Cummins’ assets would be invested in diversified portfolios of securities managed by one or more fund managers and that New York Life would monitor those portfolios to ensure they remained adequately diversified, as required by the Internal Revenue Code. 

In addition, Cummins alleged that New York Life’s offering memorandum represented that New York Life would provide the offering memoranda, along with any supplements or amendments, for any fund in which VUL policyholders could invest. However, according to Cummins, New York Life failed to provide Cummins with an amended version of the offering memorandum of the fund of funds into which it invested through the VUL, which allegedly disclosed the fund’s intention to invest as much as 30 percent of its funds with any single manager. 

Based on these allegations, Cummins pleaded claims against New York Life for (1) fraud in the inducement; (2) negligent misrepresentation; (3) breach of the implied covenant of good faith and fair dealing; (4) breach of fiduciary duty; (5) aiding and abetting fraud and breaches of fiduciary duty; (6) civil conspiracy; (7) unjust enrichment; and (8) violations of New York General Business Law § 349.

New York Life moved to dismiss. 

The court’s decision

The court granted New York Life’s motion.

It first found that Cummins had not sufficiently alleged any misrepresentations made by New York Life and that, as a consequence, Cummins’ fraud-in-the-inducement and negligent misrepresentation claims against New York Life had to be dismissed. The court added that because claims against the fund also were dismissed, Cummins’ related vicarious liability claim against New York Life for its “conspiracy” with the fund also had to be dismissed.

Then, the court decided that Cummins’ claim for breach of the implied covenant of good faith and fair dealing, in which Cummins alleged that New York Life failed to reasonably exercise its sole discretion and exclusive rights to make changes to Cummins’ investments in Madoff and avoid loss of the cash value of the VUL policies, had to be dismissed.

According to the court, Cummins’ claim failed because Cummins could not transform New York Life’s reservation of rights into a requirement that it actively manage the accounts on its policyholders’ behalf. Cummins’ “proposed monitoring and due diligence by New York Life” was “not the type of oversight contemplated by the agreement,” the court decided.

Moreover, it ruled, Cummins failed to adequately allege that New York Life had acted in bad faith.

Next, it rejected Cummins’ claims that New York Life was unjustly enriched “by receiving excessive revenue derived from the fees” it collected, noting that the fees were “entirely governed by contract.”

The court also rejected Cummins’ argument that New York Life breached its fiduciary duty because of the alleged misrepresentations, reasoning that Cummins had not alleged that its dealings were anything other than an arms-length commercial transaction between two sophisticated parties and that it failed to allege that New York Life owed it a fiduciary duty.

Finally, the court rejected Cummins’ claim that New York Life violated New York General Business Law § 349, which prohibits deceptive acts or practices in the conduct of any business, trade, or commerce or in the furnishing of any service. The court decided that the transactions were “not the type of consumer transactions for which §349 was intended to provide a remedy.”

The case is In re Tremont Securities Law, State Law, and Insurance Litigation, No. 08 Civ. 11117 (S.D.N.Y. Sept. 26, 2013).

 

Originally published on FC&S Legal: The Insurance Coverage Law Information Center. FC&S Legal is theindustry’s ONLY single-source, comprehensive portal developed specifically for insurance coverage law professionals.To find out more, visit www.fcandslegal.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

 

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