Two recent California federal court decisions have held that insureds’ loss of “peace of mind” when life insurance policies lapse constitutes irreparable harm sufficient to warrant granting a preliminary injunction where the other requirements for a preliminary injunction are found to be satisfied.  In an April 26, 2012 blog post, I wrote about Yue v. Conseco Life Ins. Co., 2012 U.S. Dist. LEXIS 46565 (C.D. Cal. Apr. 2, 2012), a Central District of California decision granting a preliminary injunction against Conseco Life, in favor of a class of life insurance policyholders.  The court concluded that, although money damages could compensate heirs if a policy was improperly cancelled, a policyholder’s loss of “peace of mind” and “security” from lapse of the policy would constitute irreparable harm.  A judge in the Northern District of California has now reached essentially the same conclusion with respect to irreparable harm in another class action, also brought against Conseco Life.  From the perspective of the insurance industry, this is a potentially disturbing trend if it continues.

The Northern District of California case, In re Conseco Life Insurance Company Life Trend Insurance Marketing and Sales Practice Litigation, No. C 10-02124 SI, 2012 U.S. Dist. LEXIS 99859 (N.D. Cal. July 17, 2012) involves a claim that Conseco improperly increased cost of insurance (COI) charges on “LifeTrend 3” and “LifeTrend 4” policies, allegedly in breach of the terms of the policies.  The increased COI charges, when implemented, likely would result in some class members allowing their policies to lapse because they could not afford to pay what would be necessary to keep their policies in force.  A central issue in dispute was whether, as a matter of contract interpretation, an increase in COI rates could be based only on an increase in mortality rates, which had not occurred (according to the opinion, mortality rates had gone down since the class members’ policies were issued).  The court found that the plaintiffs were likely to succeed on the merits of their breach of contract claim because it found the particular policy language at issue ambiguous on this point and, in the absence of relevant extrinsic evidence, construed the policy against the insurer.  Id. at *25-32.

The portion of the opinion that I see as potentially having a broader impact on the industry was the court’s analysis of irreparable harm.  The court granted an injunction with respect to one subgroup of policyholders and denied an injunction for a second group.  The court’s analysis focused on the “peace of mind” that life insurance potentially can provide, reasoning as follows:

With respect to the first subgroup — those whose accumulation account values will be exhausted before the end of trial — the Court agrees with th[e] analysis [of Judge Motz of the Central District of California], and adopts it here. For this subgroup, the fact that the policyholders will lose their insurance without substantial payments constitutes irreparable harm. This is particularly true for those plaintiffs who cannot afford the substantially increased COI charges. For example, plaintiff Myrna Noland will soon be charged $472 per month, and her account will be depleted by the end of next year. Browne Decl. ¶ 19. According to her supplemental declaration, she is unable to afford these payments. Noland Decl. ¶ 4. She, like others in the subgroup, will lose the peace of mind that comes with life insurance. That loss cannot be remedied by money damages after the fact.

Conseco  argues that plaintiffs have not provided evidence that all of the one hundred members in the first subgroup will find the payments unaffordable, or otherwise provide evidence that all of them will face irreparable harm. Def.’s Opp. at 19. That is not necessary. Plaintiffs have provided three declarations from the first subgroup, all of whom have stated that they cannot afford the payments now. Noland Supp. Decl. ¶ 3; Sroka Decl. ¶ 9; Fowler Decl. ¶ 7. Between this evidence and plaintiffs targeted subgroup, they have sufficiently demonstrated the affiants are representative of the subgroup. See LaForest v. Former Clean Air Holding Co., 376 F.3d 48, 57 (2nd Cir. 2004) (affirming district court’s acceptance of six affidavits on behalf of six hundred classmembers). The Court does not find it necessary that the plaintiffs declare that all one hundred are unable to afford the increased payments. Even if some could technically afford the payments, many may be unwilling to do so for fear of diverting funds from other, more pressing expenses. They will still lose their life insurance before trial. Indeed, Judge Matz issued a preliminary injunction covering the entire class – not, as here, a small, targeted group of policyholders who will face complete depletion of their accounts before the end of trial.

For the second subgroup — those who are facing COI charges in excess of $400 per month but whose accounts will not be depleted before trial — the Court finds that plaintiffs have not established a likelihood of irreparable harm. This group will not be required to make additional payments in order to keep their insurance. That they face a difficult decision as to whether to surrender now and retrieve the guaranteed cash value of their accumulation accounts or continue to incur high COI charges is a type of harm, but it does not rise to the level of those who will lose their insurance without affirmative payment. The members in this group, like Brady and McNamara, still have a choice to remain insured; and, if they so choose and plaintiffs prevail at trial, they will likely receive monetary damages that can remedy the harm. Nobody in the second subgroup will lose their insurance due to inability to pay, nor have to divert funds from other of life’s necessities to keep their insurance. See Los Angeles Mem’l Coliseum Comm’n v. Nat’l Football League, 634 F.2d 1197, 1202 (9th Cir. 1980) (“It is well established . . . that such monetary injury is not normally considered irreparable.”). The Court therefore finds that preliminary injunctive relief is inappropriate for this subgroup.

Id. at *39-42 (emphasis added).

The Yue and In re Conseco Life decisions, if followed, have the potential to make insurers more susceptible to preliminary injunctions than other large corporations, based on a rationale that seems weak to me.  To the extent that insurance provides policyholders with peace of mind, that is because they expect that, when they die (in the case of a life insurance policy) or when some other type of covered event occurs (in the case of other types of policies), money will be paid by the insurer.  To conclude that cancellation or lapse of a policy causes irreparable harm, where it can easily be remedied by payment of monetary damages equivalent to what would have been paid if the policy had remained in effect, seems inconsistent with the basic definition of irreparable harm.  This rationale also seems to treat insurers differently from other kinds of businesses that consumers also can place some trust and confidence in.