AMBULANCE CHASERS AND A LACK OF RESPONSIBILITY

January 20, 2010 by Sheryl J. Moore

BY SHERYL MOORE

Ask anyone who has been in the insurance business for more than a decade about class-action lawsuits and you’ll likely hear that they’ve had experience with at least one (be it “vanishing premiums,” underfunded UL, or annuities).

These lawsuits have been around for a long time and are an unfortunate part of the insurance business. The lawyers that specialize in class-action work make their money by pursuing lawsuits where a group of people with similar injuries sue the defendant. Ordinarily, when we think of class actions, we think of the pharmaceutical industry (certain ED pills casing blindness) or corporate giants (major software companies over-charging in an anti-competitive environment). However, the insurance industry has become a target for lawyers looking to benefit from this litigation.

And that is really what it is all about: lawyers benefitting. Think about it- what did people receive when that aforementioned software company settled? A measly $30? Guess how much the lawyers made on that settlement? In a review of 20 percent of the states’ actions in that settlement, the average attorneys’ fees requested was $65 million. Still doubting who truly benefits from class action lawsuits? Read on.

I recently conducted research of 44 class-action lawsuits in the insurance industry from 2002 to present. Settlements on these suits ran as high as $22 million. Policyholder benefits ranged from a return of premiums paid to a return of premiums plus 4.15 percent interest. Now, that is not too shabby, but the attorneys’ fees on these suits ran as high as $6.4 million each. I think we can all agree that the attorneys are the ones who made out like bandits in these lawsuits, not the policyholders.

These lawsuits are typically propagated by commercials asking if you’ve been “injured or harmed” by a life insurance company. What could be better than “free money,” right? Unfortunately, this attitude ends up hurting the very people class-action suits are supposed to benefit: policyholders. The insurance company has to pass along increased costs of doing business through higher costs for insurance.

Often the basis of class-action lawsuits in the insurance industry is product misunderstanding or failure to disclose product terms adequately. In my review of these lawsuits, insurance companies have largely done a good job of disclosing the terms of the contracts, and have done so in laymen’s terms. The lawyers claim that the policyholder did not know that their money would be “tied up” for 10 years. Really? On page two of the contract, it clearly displays a 10-year surrender charge penalty in 14-point type. Some attorneys have argued that the policyholders did not understand the maturity date in the contract. Apparently they don’t either, as extending this date as long as possible is always in the policyholders’ favor. Ultimately, policyholders themselves bear responsibility. People should always read any contract and ask questions before they sign.

So, we know how lawyers feel abou the class-action suits (like they are winning the lottery), and we know how policyholders feel (like they just won a second scratch-off lottery ticket on a scratch-off lottery ticket) but how about the insurance companies? I would say panicked is an appropriate descriptor.

The instant the insurance company’s name is published with the words “class-action” next to it, the company’s name is tarnished and suddenly the target of offensive media. Class-action lawsuits end up being so costly from a policyholder perception standpoint that most insurance companies settle their suits just to get their names out of the negative press.

Insurance class actions have reached an entirely new level of foulness. I recently had the occasion to witness a form of legalized blackmail when 0ne state’s attorney general decided to take on the major players in the indexed annuity market. Despite a staggering lack of wrongdoing (with the exception of one company), the insurance companies marketing these products settled quickly to avoid negative publicity. All the while, the “blackmail” was boosting the political aspirations of the young attorney general.

Lawyers are motivated by the big payoff. Policyholders are motivated by the “free money.” In the end, we all end up paying the the lawyers keep getting richer and richer.

Sheryl Moore is president and CEO of AnnuitySpecs.com and LifeSpecs.com, an indexed product resource in Des Moines. She has more than a decade of experience working with indexed products, and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at Sheryl Moore.

This article was done at the request of, and in remembrance of, Bo Johnson of FIG Marketing. Bo served the indexed annuity industry with his strength, knowledge, and ethics. His friendship will be missed by many.

To those who knew him, Bo Johnson was courageous, optimistic, a loving father and devoted husband. Berry Holland Johnson Jr. (known as ‘Bo’ to his peers), 37, of Cornelius, N.C., died December 5 at his home, surrounded by his family. Bo passed away after a relentless and brave fight against lung cancer, but left an indelible impact on the lives around him- family, peers, agents, and clients. He is survived by wife Christi and daughter Addi.

Click here for a PDF of this article.

ORIGINALLY POSTED AT INSURANCE NEWS NET MAGAZINE ON JANUARY 1, 2010 BY SHERYL J. MOORE.