A federal judge has denied a motion by Nationwide Life Insurance Co. to dismiss a family’s lawsuit accusing the insurance giant of fraud and breach of contract related to two $500,000 life insurance policies purchased in the 1990s.

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In his six-page ruling on Jan. 9 denying Nationwide’s bid to dismiss, Senior U.S. District Judge Warren W. Eginton wrote the family’s claims that Nationwide increased its fees to boost profits while disregarding factors included in the policy are plausible. Those cost factors include future earnings, mortality and taxes.

In the underlying 46-page lawsuit filed in July, the Palumbo family of Connecticut and Florida claims Nationwide falsely represented the costs of insurance charges and insurance rates over a period of time. The lawsuit alleges not only fraud and breach of contract, but also breach of the implied covenant of good faith and fair dealing; unjust enrichment; violation of the Connecticut Unfair Trade Practices Act; and violation of the Connecticut Unfair Insurance Practices Act.

“Since the inception of the Nationwide policies, Nationwide repeatedly has increased the amount of the cost of the insurance charges deducted from the Nationwide policies for reasons wholly unrelated to changes in future expectations for such factors as investment earnings, mortality, persistency, expenses and taxes, contrary to the clear and explicit terms of the policies,” the lawsuit states.

At one point in 2014 the Palumbo family thought there could be a problem with the policies, according to the lawsuit. As a result, Laura Palumbo, a Connecticut resident and trustee of the William J. Palumbo Trust, obtained documents from Nationwide on the policy’s status. Laura Palumbo is the daughter of William Palumbo, a Florida resident covered by the two policies.

“To Laura Palumbo’s shock and dismay, the new policy illustrations … showed ever escalating cost of insurance charges and planned premiums of $29,443 with respect to (one policy) and $32,084 with respect to (a second), making the Nationwide policies completely unaffordable and in imminent danger of lapsing,” the claim alleges.

At the time of purchase, the planned premiums were $9,800 and $9,500 annually.

In 1994 as part of his estate planning, William Palumbo purchased a life insurance policy via Nationwide that would pay heirs a benefit of $500,000 on his death and to establish the Palumbo Trust. Four years later, Palumbo purchased a second life insurance policy that would pay those heirs an additional $500,000 on his death. The policies are known as variable universal life insurance policies.

Laura Palumbo, the lawsuit states, “attempted to obtain additional information from Nationwide regarding the cost of insurance charges under the Nationwide policies and how they were calculated.” The efforts were, for the most part, useless.

Laura Palumbo then wrote a complaint to the company in April 2015 “setting forth claims based on the hidden and escalating cost of insurance charges under the Nationwide policies and the substantial risk that, due to these exorbitant cost of insurance charges, the policies would expire worthless with no death benefit available upon William Palumbo’s death.”

In response, the lawsuit alleges, Nationwide “filed a false, defamatory and malicious U-5 (uniform termination notice) amendment against Laura Palumbo in act of retaliation and in an effort to intimidate plaintiffs and coerce them into not pursuing their claims against Nationwide.”

According to the suit, William Palumbo has suffered a heart attack and had other medical issues since the original policies were purchased, “making him uninsurable” under a new policy.

In his memorandum of decision on Nationwide’s motion to dismiss, Eginton wrote that the Columbus, Ohio-based company “has failed to determine and apply to the policies current cost of insurance rates based on its expectations as to future mortality costs and expenses, contrary to the clear and explicit terms of the policies.”

Among other things, the lawsuit seeks “compensatory damages in the form of two paid life insurance policies on the life of William Palumbo (with no future premiums required), each with a death benefit of $500,000 plus the cash value of the policy.”

The Palumbos were represented by Linda M. Marino, a former assistant U.S. attorney for the Eastern District of New York, Civil Division, who is working in Connecticut on pro bono cases and other matters. The family was also represented by Erica Weyer Todd, who is affiliated with the New Haven law firm of Trotta, Trotta & Trotta. Both declined to comment.

Nationwide was represented by Robert J. Mancuso of Philadelphia’s Drinker, Biddle & Reath and Thomas Rowe Jr. of Bridgeport-based McNamara & Kenney. Mancuso and Rowe were unavailable for comment Friday.

Robert Storace can be reached at 860-757-6642 or at rstorace@alm.com.

See also:

The most terrifying acts of life insurance fraud

Former Oklahoma agent gets prison for annuities fraud

Agents, attorneys charged with $50M life insurance fraud

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