On November 8, 2017, a federal judge in the United States District Court for Massachusetts approved a final judgment settling a class action filed in 2012 against Massachusetts Mutual Life Insurance Company (“MassMutual”). The final settlement approves a $37.5 million payout to some 2.71 million MassMutual participating policies held between January 1, 2001 and December 31, 2016.
The original suit was brought in 2012 by Karen L. Bacchi on behalf of a class of purported similarly situated MassMutual policyholders claimed MassMutual retained improper amounts of surplus that it should have distributed to policyholders as dividends.
Payment of surplus to participating policies and statutory “Safety Fund”
The paradigm of mutual life insurance is insureds protect themselves and other members of the insurer by paying premiums into a common fund. The mutual insurer holds and invests the common fund to administer and pay death claims received against it from its participating policyholders. When the common fund grows large enough to establish reserves sufficient to cover the company’s policy obligations and other funds sufficient to cover operating expenses and other liabilities, the participating policyholders should receive a return of the excess surplus through the payment of dividends.
Historically, the responsibility for determining when the mutual insurer has a sufficient surplus to repay the participating policyholders was left to the business judgment of the company’s management. However, in 1905, the state of New York conducted a major investigation of life insurers that found that company management had in some instances hoarded the surpluses of mutual companies by not paying appropriate dividends to participating policyholders.
Following these well-publicized hearing Massachusetts followed New York in enacting a law, M.G.L. c. 175, § 140, that provided Massachusetts-domiciled mutual life insurers must (1) provide in every participating policy’s contract “that the proportion of the divisible surplus of the company contributed by said policy shall be ascertained and distributed annually,” and (2) to distribute as dividends all such divisible surplus “to all policies entitled to share therein.” However, § 140, provided that the mutual life insurer could withhold a statutorily defined “Contingency Reserve or Safety Fund.”
Dispute over MassMutual’s Safety Fund calculations basis of Ms. Bianchi’s suit.
At the time Ms. Bianchi filed her suit, the “Safety Fund” law in Massachusetts set an annual limit of twelve (12%) percent as the maximum amount of the divisible surplus a Massachusetts-domiciled mutual life insurance company could withhold from its policyholders without approval of the Commissioner of Insurance.
The Supreme Judicial Court had ruled in a prior case involving the Surplus Fund: “Once the … threshold has been reached in a Safety Fund, whatever ‘surplus funds or profits’ that remain must be returned to its policyholder in additional dividends unless the Commissioner specifically authorizes to keep a greater amount in the Safety Fund ‘for cause shown.’”
According to the plaintiff, Ms. Bianchi, the fundamental dispute was whether MassMutual was incorrectly calculating Safety Fund limit. Ms. Bianchi argued that despite its claimed compliance with Massachusetts’ Safety Fund law MassMutual’s dividend payout percentage had dwindled while its retained surplus had soared. By 2014 the MassMutual Safety Fund had reached $19.5 billion, an amount that the plaintiff claimed was double, the actual participating surplus of $9.9 billion and greater than the entire surplus held by MassMutual of $14.2 billion.
MassMutual defended its surplus retention practices and asserted its dividend practices had “led industry”
For its part, MassMutual noted Ms. Bianchi held a single participating life insurance policy with a face amount of $10,000 was seeking to override the judgment of the company’s Board and to compel MassMutual to pay out billions of dollars of additional dividends to participating policyholders and argued:
- Plaintiff and her counsel were not contending that MassMutual was overcapitalized relative to its peers as MassMutual’s level of capital was consistent with its peer companies;
- Nor were they contending that MassMutual’s payment of dividends has fallen behind the company’s competitors as MassMutual had led the industry in that respect in the years involved in the litigation; and.
- Plaintiff and her counsel expressed no concern for the long-term health of the company or for MassMutual’s ability to provide for its policyholders in good economic times and bad.
Instead, in MassMutual’s opinion, “The sole apparent motivation for Plaintiff’s action is to extract a contingent fee windfall for her counsel by urging this Court to adopt a strained and unsupportable reading of Massachusetts insurance law that would require such an extraordinary payment.”
Settlement after five years of litigation and doubts about plaintiff and class prevailing
After extensive litigation, Ms. Bianchi and MassMutual agreed to the settlement with the establishment of a common fund to pay $37.5 million to participating policyholders for the class period from 2001 to 2015.
In certifying a settlement class of approximately 2.71 million class members and approving the settlement, the federal judge noted that notwithstanding the plaintiffs’ arguments “any favorable outcome for the class in this case on the merits was, at best, unclear.”
The judge noted MassMutual had a motion for summary judgment pending at the time of the settlement and that an August 2016 amendment to the Massachusetts Safety Fund statute increased the permissible level of retained surplus from twelve (12%) percent to twenty (20%) percent.
The Safety Fund statute, as amended permits a domestic life insurer, such as MassMutual, to:
…accumulate and hold, or hold if already accumulated, as a Safety Fund, an amount not in excess of 20 percent of its reserve …” (Emphasis added).
Since it was undisputed that MassMutual’s retained surplus never exceeded 20 percent during the period applicable to the lawsuit, the five words in the amended statute, “or hold if already accumulated,” had the effect of validating MassMutual’s Safety Fund retention. As a result, the legislation granted MassMutual a potentially dispositive defense to the plaintiff’s class action.
Few opt out of settlement class with 2.71 million members
Of the total of 2.71 million class members of which only .01 percent opted out of the settlement and approximately 35, or .001 percent, objected to any aspect of the proposed settlement. The judge in his settlement order addressed the objections and found none of them material to not approving the settlement agreement.
Lawyers get $9 million plus with average class member getting $22.02
Under the settlement as approved by the judge, the lawyers for Ms. Bianchi requested and were awarded from the settlement $9,375,000 in attorneys’ fees and $1,533,575.85 in unreimbursed litigation expenses. Ms. Bianchi received $3,000 for acting as named plaintiff. The attorneys’ fees represented 25% of the total $37.5 million settlement fund.
The average payout to each of the locatable policyholders of the 2.7 million member class based on the settlement agreement was expected to average $22.02.
The settlement agreement provided for a web site with information on the settlement that can be found at http://mmlisettlement.com.