This story is reprinted with permission from FC&S Legal, an ALM digital resource for insurance coverage law professionals. Visit the website to subscribe.
The 7th U.S. Circuit Court of Appeals has affirmed a decision by the U.S. District Court for the Northern District of Illinois, rejecting claims by insureds with participating life insurance policies that the dividend provisions in their policies violated the Illinois Insurance Code.
Rick Ochoa and Irene Anderson held participating life insurance policies from State Farm Life Insurance Company and Country Life Insurance Company, respectively. The policies guaranteed policyholders annual dividends from their insurers’ surpluses, but the insurers decided the dividend amounts.
Dissatisfied with their dividends, Ochoa and Anderson filed nearly identical class-action complaints claiming that the dividend provisions in their policies violated the Illinois Insurance Code.
(Related: Two Big Mutuals Post 2019 Dividend Estimates)
In a single decision, the district court dismissed the complaints.
Ochoa and Anderson appealed to the 7th Circuit. They conceded that their annual dividends satisfied the terms of their respective policies, but they contended that their policies did not contain a standard dividend provision mandated by the Illinois Insurance Code.
The Insurance Policies
The dividend provision in the State Farm policy provided:
We may apportion and pay dividends each year. Any such dividends will be paid at the end of the policy year if all premiums due have been paid.
The Country Life provision stated:
This is a participating policy, which means it may share in any dividends We pay to policy Owners. Each year We determine how much money may be paid to Our policy Owners as divisible surplus. We then determine how much of that divisible surplus should be allocated to this policy as an annual dividend. Dividends may be allocated to this policy only while it is in full force or continued as paid-up life insurance. If the policy is Extended Term Insurance, no dividends will be paid.
The 7th Circuit’s Decision
The 7th Circuit affirmed.
In its decision, the circuit court said the claims brought by Ochoa and Anderson were based on an interpretation of Section 224 of the Illinois Insurance Code, which describes the standard provisions that all life insurance policies issued in Illinois must “contain in substance.” The standard provisions required by statute “form a part of” a life insurance policy and control when they conflict with the actual policy provisions.
The particular issue in this case, the circuit court said, arose under Section 224(1)(e), the standard provision governing dividends, which requires “that the policy shall participate annually in the surplus of the company beginning not later than the end of the third policy year.” Specifically, the circuit court said, the issue was whether an insurance policy that provided for annual dividends but allowed insurers discretion to set dividend amounts complied with this provision.
The circuit court ruled that the answer is “yes.” It found nothing in Section 224(1)(e) that required “full annual participation” in the insurers’ surpluses. Rather, the 7th Circuit reasoned, the section required only that policyholders “participate” in the company’s surplus. According to the circuit court, the ordinary meaning of “participate” at the time of the section’s enactment (in 1907) did not speak to the extent of participation, and the meaning had not changed since then.
Therefore, the 7th Circuit rejected the argument put forth by Ochoa and Anderson that “participate” was a term of art that required a set dividend amount or that required insurers to distribute any surplus above the contingency-reserve limit as dividends to policyholders.
Accordingly, the circuit court concluded that the State Farm and Country Life policies complied with Section 224(1)(e).
Steven A. Meyerowitz is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. He is a graduate of Harvard Law School. He was an attorney at a Wall Street law firm before he founded Meyerowitz Communications.