Dennis Norem v. Lincoln Benefit Life Company

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-1816
DENNIS NOREM, M.D.,
Plaintiff-Appellant,
v.
LINCOLN BENEFIT LIFE CO.,
Defendant-Appellee.
Appeal from the United States District Court for the
Northern District of Illinois, Western Division.
No. 10 CV 02233 — Philip G. Reinhard, Judge.
ARGUED OCTOBER 22, 2012 — DECIDED DECEMBER 13, 2013
Before BAUER and ROVNER, Circuit Judges and RANDA,
District Judge.*
ROVNER, Circuit Judge. Dennis Norem, M.D., is the current
owner of a variable life insurance policy issued by Lincoln
Benefit Life Company. Dr. Norem filed this putative class
action on behalf of himself and other similarly situated
*
The Honorable Rudolph T. Randa, United States District Court for the
Eastern District of Wisconsin, sitting by designation.
2 No. 12-1816
policyholders. Specifically, Dr. Norem claimed that Lincoln
Benefit breached the terms of its insurance policies with him
and other policyholders in its method of calculating what is
known as the cost of insurance (“COI”) rate on its policies.
Before deciding the issue of class certification,1 the district
court granted summary judgment to Lincoln Benefit after
concluding that its calculation of COI rates did not breach Dr.
Norem’s contract. Dr. Norem appeals, and we affirm.
I.
In 1994, Dr. Norem purchased a “Flexible Premium
Variable Life Insurance Policy” from Lincoln Benefit. Unlike a
term life insurance policy, which provides benefits only for a
finite period while premiums are being paid, a universal life
policy is a form of permanent insurance intended to provide
protection for the life of the insured. Variable universal life
insurance policies combine the premium flexibility of universal
life insurance with the investment flexibility of variable life
insurance. With variable life insurance, a portion of the
premium is allocated to the insurer’s investment funds, called
subaccounts. Policyholders may move their investments within
1
Neither party raises the issue of class certification on appeal. Thus we
need not address the propriety of the district court’s decision to grant
Lincoln Benefit’s motion for summary judgment before issuing a ruling on
class certification. See Wiesmueller v. Kosobucki, 513 F.3d 784, 787 (7th Cir.
2008) (noting that in certain circumstances a district court may “dismiss a
case on summary judgment without first ruling on the plaintiff’s motion to
certify a class” (citing Cowan v. Bank United of Texas, FSB, 70 F.3d 937, 941
(7th Cir. 1995) (recognizing defense “tactic” of moving for summary
judgment before district court decides whether to certify suit as a class
action)).
No. 12-1816 3
the subaccounts and the policy’s death benefit, which is
guaranteed not to fall below a certain amount. With variable
universal life, the policyholder may easily invest and alter
insurance coverage. The policy is comprised of the policy
value, which represents the investment component, and its net
amount at risk, which represents the insurance component.
Dr. Norem purchased his variable universal life policy because
he wanted both life insurance and an investment vehicle for
the proceeds from the sale of his ownership interest in a
medical business.
Although Dr. Norem’s policy specifies several periodic
charges owed by a policyholder, only one is relevant here—the
COI charge, which is deducted monthly from the policy. The
description of the COI charge appears in a section of the policy
along with other charges, such as a premium charge, an annual
administrative expense charge, and an annualized “risk
charge.” This section of Dr. Norem’s policy, entitled “Policy
Value,” contains an explanation of how the COI rate is calcu-
lated. The COI rate is calculated first by the insurer and then
multiplied by the policy’s “net amount at risk” to arrive at the
ultimate COI charge. As relevant here, the policy states that:
“The cost of insurance rate is based on the insured’s sex, issue
age, policy year, and payment class. The rates will be deter-
mined by us, but they will never be more than the guaranteed
rates shown on Page 5.”2
2
The cost of insurance clause states in its entirety: “1. Divide the death
benefit as of the prior monthly deduction day by 1.003273739[;] 2. Subtract
the policy value as of that prior monthly deduction day less the policy fee
(continued...)
4 No. 12-1816
Dr. Norem brought this putative class action suit alleging
breach of contract based on the express terms of this COI rate
clause. He alleges that Lincoln Benefit contravenes the terms of
the policy because it considers factors beyond the insured’s
sex, issue age, policy year, and payment class when it calcu-
lates the COI rates. Lincoln Benefit concedes it considers a
number of factors beyond those listed when setting its COI
rates. Among other things, Lincoln Benefit considers expected
policy lapse rates, agent commissions, and anticipated death
benefit costs. Notwithstanding these other considerations,
Lincoln Benefit maintained that the COI rate was “based on”
the enumerated factors so long as those factors taken together
made up a significant portion of the COI rate calculation—in
short, that by limiting Lincoln Benefit solely to the enumerated
factors Dr. Norem was reading into the contract a nonexistent
guarantee that the COI rates would be based exclusively on sex,
issue age, policy year, and payment class. The district court
agreed, and granted summary judgment to Lincoln Benefit.
The court noted that under Illinois law, undefined contract
terms should be given their ordinary meaning. Using the
ordinary dictionary definition of the verb “base” or “based,”
the court concluded that as long as the insured’s sex, issue age,
policy year, and payment class were principal components of
the COI rate, they need not be the exclusive factors used to set
2
(...continued)
and less the cost of insurance of any benefit riders attached to this policy;
3. Multiply the results by the current cost of insurance rate divided by 1,000.
The cost of insurance rate is based on the insured’s sex, issue age, policy
year, and payment class. The rates will be determined by us, but they will
never be more than the guaranteed rates shown on Page 5.”
No. 12-1816 5
the rates. The district court further emphasized that Lincoln
Benefit had never exceeded the guaranteed rates in the
contract, which served as a limit on its discretion in calculating
the COI rate. Dr. Norem appeals.
II.
The sole issue on appeal is whether the policy allows
Lincoln Benefit to include factors beyond an insured’s sex,
issue age, policy year, and payment class when it calculates
COI rates. It is uncontested that Lincoln Benefit incorporates a
variety of components beyond those enumerated in the policy
when it calculates the COI rate. Dr. Norem argues that these
additional, undisclosed factors are used to inflate the COI rate,
thereby increasing Lincoln Benefit’s profit margin and decreas-
ing the cash value of the policy. According to Dr. Norem, this
practice breaches the COI rate clause.
We review de novo the district court’s grant of summary
judgment in favor of Lincoln Benefit, construing all facts and
reasonable inferences in the light most favorable to Dr. Norem,
the non-moving party. E.g., Nature Conservancy v. Wilder Corp.,
656 F.3d 646, 648 (7th Cir. 2011); see also CIMCO Commc’n, Inc.
v. Nat’l Fire Ins. Co., 943 N.E.2d 276, 279 (Ill. App. Ct. 2011)
(noting that construction of an insurance contract presents a
question of law appropriate for disposition by summary
judgment). The parties agree that Illinois law applies in this
diversity suit. As the forum state, the choice of law principles
of Illinois determine which state’s substantive law governs the
action. See West Bend Mut. Ins. Co. v. Arbor Homes LLC, 703 F.3d
1092, 1095 (7th Cir. 2013). Dr. Norem’s policy contains a choice
of law clause providing that it is subject to the laws of the state
6 No. 12-1816
where the application was signed—in this case, Illinois, where
Dr. Norem continues to reside. Cf. Dunn v. Meridian Mut. Ins.
Co., 836 N.E.2d 249, 251 (Ind. 2005) (“An insurance policy is
governed by the law of the principal location of the insured
risk during the term of the policy.”).
A breach of contract under Illinois law requires a valid
contract, performance by the plaintiff, breach by the defendant,
and damages. See Elson v. State Farm Fire & Cas. Co., 691 N.E.2d
807, 811 (Ill. App. Ct. 1998). Insurance contracts are interpreted
under the same rules of construction applicable generally to
contracts. Cont’l Cas. Co. v. Donald T. Bertucci, Ltd., 926 N.E.2d
833, 839 (Ill. App. Ct. 2010). Words and phrases that are not
defined in the policy are to be given their plain and ordinary
meaning. Id.; Klemp v. Hergott Group, Inc., 641 N.E.2d 957, 962
(Ill. App. Ct. 1994). Policy provisions that are reasonably
susceptible to more than one meaning are considered ambigu-
ous. Ambiguous provisions in the policy, especially those that
exclude or limit coverage, will be construed against the insurer.
Katz v. State Farm Mut. Auto Ins. Co., 965 N.E.2d 636, 643 (Ill.
App. Ct. 2012). However, a provision is not rendered ambigu-
ous simply because the parties disagree over its meaning. E.g.,
West Bend Mut. Ins. Co. v. Talton, 997 N.E.2d 784, 2013 WL
5437049, at *4 (Ill. App. Ct. Sept. 27, 2013) (“An ambiguity is
not created merely because the parties disagree.”). Nor is a
provision ambiguous because the parties can suggest creative
possibilities for its meaning. See Midway Park Saver v. Sarco
Putty Co., 976 N.E.2d 1063, 1069 (Ill. App. Ct. 2012) (“The
reviewing court will not strain to find ambiguity where none
exists, and disagreements as to the interpretation of a contract
must be reasonable.”); Profitt v. OneBeacon Ins., 845 N.E.2d 715,
No. 12-1816 7
718–19 (Ill. App. Ct. 2006) (noting that creative possibilities
may be suggested, but only reasonable interpretations will be
considered).
Both Lincoln Benefit and Dr. Norem insist that the unam-
biguous language of the policy supports their respective
positions. Several state and district courts have considered
similar clauses in life insurance policies and reached divergent
results. Compare Yue v. Conseco Life Ins. Co., 282 F.R.D. 469, 481
(C.D. Cal. 2012) (rejecting insurer’s claim that provision stating
that a monthly COI rate was “based on” expected mortality
rates as long as expected mortality rates constituted “one factor
in determining COI rates”) with Thao v. Midland Nat’l Life Ins.
Co., No. 09-C-1158, 2013 WL 119871, at *1-2 (E.D. Wis. Jan. 9,
2013) (insurer is not limited to considering five listed factors in
provision stating that COI rate will be “based on the Issue Age,
completed Policy Years, Sex, Specified Amount, and Premium
Class of the Insured”), aff’d, Nos. 13-1272 & 13-2366, order (7th
Cir. Dec. 13, 2013) (nonprecedential decision). And although at
least one court to address the issue has concluded that these
conflicting approaches render the “based on” provision
ambiguous, see Bezich v. Lincoln Nat’l Life Ins. Co., No. 12-
1816/02C01-0906-PL-73, at 7 (Ind. Allen Cir. Ct. Jan. 14, 2013),
we are not entirely convinced by this approach.
Because the policy fails to explicitly define the phrase
“based on” as it is used in the COI rate clause, we begin with
the plain and ordinary meaning of the phrase. See Hess v.
Kanoski & Assoc., 668 F.3d 446, 453 (7th Cir. 2012) (“Under
Illinois law, undefined terms are generally given their ‘plain,
ordinary, and popular meaning’ as found in dictionary
definitions.”) (quoting Outboard Marine Corp. v. Liberty Mut.
8 No. 12-1816
Ins. Co., 607 N.E.2d 1204, 1215 (Ill. 1993)). As relevant here, the
dictionary defines the word “base” as (1) “a main ingredient;”
(2) “a supporting or carrying ingredient;” or (3) “the funda-
mental part of something.” Merriam-Webster’s Collegiate
Dictionary, 101 (11th ed. 2007). Other definitions are in accord:
(1) “Something on which a thing stands or by which it is
supported;” or (2) “The principal ingredient, the fundamental
element.” Shorter Oxford English Dictionary Vol. I, 192 (6th ed.
2007). Most notably for our purposes, none of the definitions
lends itself to Dr. Norem’s proposed interpretation: that “base”
or “based on” implies exclusivity. In other words, no one
would suppose that a cake recipe “based on” flour, sugar, and
eggs must be limited only to those ingredients. Thus, neither
the dictionary definitions nor the common understanding of
the phrase “based on” suggest that Lincoln Benefit is prohib-
ited from considering factors beyond sex, issue age, policy
year, and payment class when calculating its COI rates.
This conclusion is buttressed by what we know of the COI
rate calculation process. In support of its motion for summary
judgment, Lincoln Benefit submitted a declaration by Dean
Way, its Associate Vice President and Illustration Actuary. As
Way’s declaration explains, there is no formula or method set
forth in the policy for calculating COI rates because Lincoln
Benefit considers numerous factors when setting the COI rate
scales (a practice that is standard in the insurance industry).
Specifically, Lincoln Benefit’s actuaries test different pricing
scenarios, the specifics of which are proprietary in nature and
are not disclosed to policyholders or the public at large.
Critically for our analysis, however, is the fact that the charac-
teristics enumerated in the policy itself—sex, issue age, policy
No. 12-1816 9
year, and payment class—are precisely those characteristics
that demonstrate how a COI rate is likely to vary from one
individual policyholder to the next. Thus, it is logical that the
policy spells out these factors for the policyholder so that he
might have a sense of which factors unique to him will affect
his ultimate COI rate.
When Dr. Norem purchased his policy in 1994, he was
shown an illustration demonstrating how his policy would
perform given different COI rate assumptions. His policy also
included the table of “guaranteed maximum rates” referenced
in the COI rate clause (stating that “[t]he rates will be deter-
mined by us, but they will never be more than the guaranteed
rates shown on Page 5”). It is undisputed that Dr. Norem’s COI
rates have remained unchanged and have also never exceeded
these guaranteed maximums. It is also undisputed that the
guaranteed maximum rates are taken directly from an industry
standard actuarial table called the 1980 Commissioners
Standard Ordinary Mortality table. Presumably, these guaran-
teed rates are “based on” mortality, given that they are
approved by regulators for use in actuarial reserving. This is
relevant because Dr. Norem insists that the COI charge is
intended to compensate Lincoln Benefit for its anticipated
mortality costs, and that Lincoln Benefit inflates the charge to
include factors beyond mortality. But this argument collapses
when one considers the relationship between Dr. Norem’s COI
rate and the guaranteed maximum rates. No one disputes that
the guaranteed maximum rates in the 1980 CSO table are
“based on” mortality. It is thus difficult to characterize his COI
rate, which is less than the guaranteed rate in the 1980 CSO
10 No. 12-1816
table, as an inflated figure over and above what he identifies as
“mortality experience.”
Dr. Norem also attacks Lincoln Benefit’s interpretation of
the COI rate clause as running afoul of numerous rules of
contract interpretation, but none of his claims persuade us that
the interpretation urged by Lincoln Benefit is erroneous. For
example, Dr. Norem attacks Lincoln Benefit’s reading of
“based on” as violating the presumption against writing terms
into a contract that could have easily been included but were
not. See Pritchett v. Asbestos Claims Mgmnt. Corp., 773 N.E.2d
1277, 1283 (Ill. App. Ct. 2002) (“[A] presumption exists ‘against
provisions that easily could have been included in the contract
but were not.’”) (quoting Klemp, 641 N.E.2d at 962). But
application of this rule in fact favors Lincoln Benefit, not
Dr. Norem. This is because it is Dr. Norem’s interpretation that
requires the insertion of an additional term. Essentially, he
would have the COI provision state that the rate “will be based
exclusively or solely on sex, issue age, policy year, and payment
class.” But nowhere does the policy specify that these listed
considerations are the sole or exclusive components of the COI
rate. See Coffman v. Pruco Life Ins. Co., No. 10-CV-03663, 2011
WL 4550152 at *3 (D.N.J. Sept. 29, 2011) (noting that “ironi-
cally” plaintiff seeking to limit insurer to considering solely
expected cost of mortality when calculating COI rate was
herself guilty of wanting court to rewrite policy by inserting
word “only” into expected cost of mortality). If Lincoln Benefit
had intended the phrase “based on” to be so limiting, it could
certainly have phrased the contract accordingly.
Nor are we persuaded by Dr. Norem’s argument that Lee v.
Allstate Life Ins. Co., 838 N.E.2d 15 (Ill. App. Ct. 2005), requires
No. 12-1816 11
a different result. Lee was an interlocutory appeal from the
circuit court’s certification of a class of universal life policy-
holders alleging that Allstate unlawfully raised their COI
charges to increase profits and improperly recoup deferred
acquisition charges on other life insurance products. Id. at 18.
Specifically, the court assessed whether a COI policy provision
similar to that found in Dr. Norem’s policy was ambiguous
because each party advanced a different reading of it (the
policy stated that COI rates would be “based on the insured’s
sex, attained age, and payment class”). In assessing Allstate’s
argument that it should be allowed to offer extrinsic evidence,
the court summarized the parties’ positions as follows:
Allstate asserts that the COI rates may also depend
on expenses, taxes, and profits. Plaintiffs would
argue that, if Allstate wanted to include such items
in calculating its COI rates, the policy language
could have said so in a straightforward manner.
However, a presumption exists ‘against provisions
that easily could have been included in the contract
but were not.’ A contract does not become ambigu-
ous just because the parties do not agree on its
meaning. It is clear that, contrary to Allstate’s
arguments, no party to this litigation claims that an
ambiguity exists, as each party asserts that the
policy language clearly and unambiguously man-
dates that party’s desired result.
Id. at 24 (internal citations omitted).
This passage is not as persuasive as Dr. Norem suggests for
several reasons. First, as the district court here recognized, the
12 No. 12-1816
quoted section is most reasonably read as a recitation of the
plaintiff’s arguments, not a conclusion by the Lee court that
Allstate was forbidden to include expenses, taxes, and profits
in its COI rate calculation. Second, the Lee court was address-
ing on appeal the limited issue of class certifi-
cation—specifically whether class certification was inappropri-
ate because determining the meaning of the COI provision
would require extrinsic evidence. Id. at 23–24. As such, Lee is
not a decision on the merits that illuminates whether Illinois
courts would read the “based on” language in Dr. Norem’s
policy as limiting Lincoln Benefit to considering only the
factors listed in the COI provision. See Chultem v. Ticor Title Ins.
Co., 927 N.E.2d 289, 298 (Ill. App. Ct. 2010) (issues going to
“merits of the underlying actions” inappropriate for consider-
ation when determining propriety of class certification); Cruz
v. Unilock Chicago, 892 N.E.2d 78, 91–92 (Ill. App. Ct. 2008)
(when analyzing question of class certification court assumes
merits of plaintiff’s claim and inquires only whether claim
itself satisfies requirements for certification).
Dr. Norem also claims that allowing Lincoln Benefit to
consider factors beyond those listed renders the entire COI
clause meaningless. Specifically, he asserts that the COI rate
clause must be read as incorporating two distinct limitations
on Lincoln Benefit’s rate-setting authority: first, a requirement
that the COI rate be based only on sex, issue age, policy year,
and payment class, and second, a requirement that it not
exceed the guaranteed maximum rates. Dr. Norem argues that
allowing Lincoln Benefit to consider factors beyond those
enumerated would erroneously conflate these two limitations
into a single prohibition against exceeding the guaranteed
No. 12-1816 13
maximum rates. But this argument is fundamentally flawed
because Dr. Norem fails to adduce any evidence that the
contested “based on” provision is in fact intended to serve as
an independent limitation on rate-setting authority. As
discussed above, the provision is most reasonably read as a
description of those components of the COI rate relevant to an
individual insured. This conclusion is buttressed by the
sentence immediately after the “based on” clause, which states
that, “The rates will be determined by us but they will never be
more than the guaranteed rates shown on Page 5.” (Emphasis
supplied.) This sentence makes clear that Lincoln Benefit will
utilize its own formula to determine the rates, subject to the
limitation that they cannot exceed the guaranteed maximum
rates. See Baymiller v. Guar. Mut. Life Co., No. SA CV 99-1566
DOC AN, 2000 WL 1026565, at *2 (C.D. Cal. May 3, 2000)
(explicit statement that COI rates will remain below guaran-
teed rates gives insurer discretion to use reasonable formula
and does not limit insurer to considering only insured’s sex,
age, and rating class). Thus, far from reading the “based on”
provision out of the contract, interpreting it as informational
gives meaning to the provision as a whole.
Beyond his own contention that “based on” must be a
limiting phrase defining the universe of considerations for the
COI rate, Dr. Norem offers no evidence that such an interpreta-
tion is necessary or even reasonable. Notably, he provides no
evidence as to what a rate based solely on the listed factors
would even look like, and whether it would indeed be less
than both the guaranteed rate and his current COI rate. It is
unsurprising that he offers no such calculations; according to
Lincoln Benefit, it is impossible to generate a numerical COI
14 No. 12-1816
rate based solely on an individual’s sex, issue age, policy year,
and payment class without some sort of mathematical formula
or underlying data and assumptions. This impossibility further
buttresses our conclusion that, contrary to Dr. Norem’s
assertion, the phrase “based on” does not amount to an express
limitation on the components that make up the COI rate.
Instead, the only express limitation is found in the explicit
guarantee that the COI rates never be more than the listed
maximum rates. In short, the rate provision is more reasonably
read as containing two parts: first, an explanatory clause listing
key components of the COI rate; and second, a guaranteed rate
that allows a policyholder to see the maximum COI charge that
could be deducted from his policy value. This would be a
different case entirely if Dr. Norem had some evidence that
Lincoln Benefit actually did not consider sex, issue age, policy
year, and payment class as part of its rate-setting process. But
he wants them to be exclusive elements, and the policy simply
does not say that.
Nor do we think this reading of the policy somehow
eviscerates purported policy limitations on other listed
charges, which include a “premium charge,” a “monthly
deduction,” an “annual administrative expense charge,” and
an annualized “risk charge.” Dr. Norem argues that if Lincoln
Benefit is allowed to factor these listed expenses into the COI
charge, it will amount to “double-dipping,” in violation of
what he reads as a promise that each listed charge correspond
with a particular expense. But this argument fails for the
simple reason that the policy does not in fact tether certain
expenses to the specific listed charges within the policy.
Although the explanation of the “risk charge” refers generally
No. 12-1816 15
to Lincoln Benefit’s “assumption of certain mortality and
expense risks,” none of the other charges say anything about
what expenses they are intended to cover. Dr. Norem’s own
expert recognized as much, testifying in his deposition that
“policy pricing is viewed as a whole” and that although
“certain efforts” are made “to match expenses within the cost
structure of a universal life, such matching is generally not
absolute.” See also Thao, 2013 WL 119871 at *3 (rejecting plain-
tiff’s attempt to tether each separately identified charge in
universal life policy to specific internal expenses and costs of
insurer). There is thus no reason to believe that the COI rate
must exclusively cover what Dr. Norem identifies broadly as
a “mortality cost” or that Lincoln Benefit is prohibited from
considering factors such as its administrative expenses or its
need to make a profit when calculating its COI rates.
We have carefully considered the cases Dr. Norem cites to
the contrary, which he characterizes as “overwhelmingly”
holding that undisclosed factors may not be included in the
COI rate calculation. Between the different procedural postures
(as with Lee, supra) and other differences discussed below, we
are ultimately unpersuaded by these cases, none of which are
binding authority. For instance, in In Re Conseco Life Ins. Co.,
920 F. Supp.2d 1050 (N.D. Cal. 2013), the district court denied
summary judgment to the insurer, Conseco Life, on a claim by
a class of insureds alleging that certain increases to COI
charges breached their policies, id. at 1061–62. Specifically, the
plaintiff class maintained that the insurance contracts tied COI
charges to mortality rates, and because mortality rates had
decreased, the increased COI charges violated the policies. Id.
at 1059. The district court agreed, concluding that the term
16 No. 12-1816
“cost of insurance” itself was tied to mortality when the COI
provision stated that the “monthly cost of insurance rates, and
any change in the monthly cost of insurance as provided
herein, are and will be determined on a uniform basis for
insured of the same age, sex and classification for all policies
issued with like benefits and provisions.” Id. at 1053. Given the
evidence that Conseco had “vastly increased the COI
rates … in the face of declining mortality rates,” the court
found summary judgment inappropriate because there
remained disputed issues of fact as to whether these increases
were “wholly divorced from mortality rates.” Id. at 1062. Aside
from the obvious difference that Lincoln Benefit has never
raised Dr. Norem’s COI rates, Conseco is not particularly
helpful because the court neither considered the meaning of a
COI provision stating rates would be “based on” certain
factors, nor did it read the contract as limiting Conseco to
considering exclusively mortality factors. Rather, it held simply
that “cost of insurance” generally should not be “wholly
divorced” from mortality. But Dr. Norem has not demon-
strated, nor could he, that Lincoln Benefit’s COI rates are
utterly unrelated to mortality or to the four factors listed in the
COI provision of his policy. Rather, he insists that the COI rate
be based exclusively on those four factors, a guarantee that, as
discussed above, does not appear in his policy.
Likewise, we are not persuaded by the rationale of the
district court (also in California) in the companion cases of Yue
v. Conseco Life Ins. Co., No. CV 08-1506 AHM, 2011 WL 210943(C.D. Cal. Jan. 19, 2011) (“Yue I”) and Yue v. Conseco Life Ins.
Co., 282 F.R.D. 469 (C.D. Cal. 2012) (“Yue II”). Both cases dealt
with a putative class action alleging breach of contract against
No. 12-1816 17
the insurer for raising COI rates under universal life policies
providing that “[c]urrent monthly cost of insurance rates will
be determined by the Company based on its expectation as to
future mortality experience.” Yue I, at *2 (emphasis in original).
In Yue I, the court construed that language as limiting Conseco
to considering only “mortality experience” and not factors
such as policy lapse and persistence rates. Id., at *8. In Yue II,
the court reiterated this position when granting the plaintiffs
a preliminary injunction preventing Conseco from implement-
ing a COI rate increase. Yue II, 282 F.R.D. at 480–84. Much like
the district court in Conseco, supra, the court found it unlikely
that the insurer could prove that a COI rate was “based on”
expected mortality experience when mortality rates had
decreased and the COI rate was increasing. Id. at 481–82. Thus,
using essentially the same dictionary definitions that we
referenced above, the court rejected the contention that the
increased COI rates were “based on” mortality given the
inverse relationship plaintiffs had demonstrated between the
expected mortality rates and the COI rate. Id. (“[I]f expected
mortality rates decreased, there could not be an increase in COI
rates if they were ‘based on’ expected mortality rates.”); see also
id. at 482 (“The policies state that COI rates would be ‘based
on’ expected mortality rates. Instead, the COI rates in the
above chart are clearly based on the amount of losses or profits
to the insurer.”) Although the court in Yue II did analyze the
phrase “based on” and conclude broadly that it limited the
insurer to making mortality experience a fundamental compo-
nent of its COI rate, the court was not considering a provision
like Dr. Norem’s with a list of factors for the insurer’s consider-
ation. And, like in Conseco, the insured had shown that the COI
18 No. 12-1816
rate was in fact increasing when “mortality,” which was
explicitly given as the reference point for the COI rate, was
decreasing. Dr. Norem’s COI provision of course says nothing
about “mortality experience” as the basis for the COI rate, nor
has Dr. Norem proven some kind of inverse relationship
between sex, issue age, policy year, and payment class and his
actual COI charge. Yet another case cited by Dr. Norem, Jeanes
v. Allied Life Ins. Co., 168 F. Supp.2d 958, 974 (S.D. Iowa 2001),
rev’d in part on other grounds 300 F.3d 938 (8th Cir. 2002), is
distinguishable on similar grounds: a “based on” clause
referring to “mortality experience” and a lawsuit focused on an
increase in rates—in Jeanes allegedly as a means to maximize
executive bonuses. Finally, we are not persuaded by Bezich,
No. 12-1816/02C01-0906-PL-73, supra, which simply concludes
without elaboration that the phrase “based on” is ambiguous
and as such must be construed in favor of the insured. Without
actually defining the phrase “based on,” the court reasons that
an ordinary policyholder would interpret the phrase as a
limiting phrase that “limited the COI rate to mortality factors
only.” Id. at 7. No explanatory justification is given for this
limitation, which does not in fact appear in the policy.
These cases imply that a for-profit life insurance company
should not be allowed to make a profit on its COI rates. This
approach, however, seems disconnected from the reality of
insurance. Certainly no one expects that an auto or home
insurer should make no profit on the premiums charged.
Similarly, it is not unreasonable in a universal life insurance
policy to consider profit as a secondary factor in calculating the
COI rate, as no one is suggesting that Lincoln Benefit is not a
for-profit entity. And as a more general matter, no one would
No. 12-1816 19
expect to be able to enter into a business contract in which the
consideration covered only the cost of the services rendered
and nothing more—yet this is what Dr. Norem is in essence
proposing with his suggestion that the COI charge should be
strictly limited to what he calls “mortality” expenses.
As should be obvious by now, we find the reasoning of the
cases advanced by Lincoln Benefit more convincing. These
cases hold generally that absent a promise to use a specific
formula when calculating a COI rate, an insurer is not bound
to consider only those factors listed in a COI provision. See
Thao, 2013 WL 119871 at *2 (rejecting plaintiff’s assertion that
insurer must consider only factors listed in COI provision
when setting its COI rates where the provision did not impose
specific constraints on the process used to calculate rates);
Coffman, 2011 WL 4550152, at *3-4 (policy deducting charge for
“expected cost of mortality” allows insurer to exercise its
discretion to charge less than maximum monthly rate and does
not dictate what factors must be taken into account in making
that determination); Baymiller, 2000 WL 1026565, at *2 (express
language of insurance policies do not limit insurer to consider-
ing insured’s “sex, age and rating class” where policies dictate
no specific formula to calculate COI charges and promise only
that rates will be below the guaranteed rates). This interpreta-
tion comports with the common understanding of the phrase
“based on” and is also the most reasonable way to construe the
language of the COI provision as a whole. See Profitt, 845
N.E.2d at 718–19 (rejecting plaintiff’s claim of ambiguity and
concluding that insurance policy declarations were subject to
only one reasonable interpretation); cf. Midway Park Saver, 976
N.E.2d at 1072 (noting that if court reviews extrinsic evidence
20 No. 12-1816
and determines there is only one reasonable conclusion, the
issue may be decided as a matter of law). Thus, Lincoln Benefit
is entitled to summary judgment on Dr. Norem’s claim that its
method of calculating COI rates is in breach of the insurance
policy.
III.
For the foregoing reasons, we AFFIRM the judgment of the
district court.