South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
DOI vs. Liberty Life Insurance Company

AGENCY:
South Carolina Department of Insurance

PARTIES:
Petitioner:
South Carolina Department of Insurance

Respondent:
Liberty Life Insurance Company
 
DOCKET NUMBER:
01-ALJ-09-0585-CC

APPEARANCES:
n/a
 

ORDERS:

Order

STATEMENT

On December 17, 2002, Matilda Singleton and Lawrence Singleton (collectively referred to herein as “Movants/Intervenors”) filed with this court a Motion for Leave to Intervene in this matter. The purpose of the motion was: (1) to request this court to stay the adoption of any proposed benefits for beneficiaries and policyholders of policies issued by Liberty Life Insurance Company (“Liberty/Respondent”), as set forth in the Joint Statement of Stipulations and Issues filed with this court on November 1, 2002, and/or: (2) to request this court to issue an order enjoining the Respondent from implementing any benefits, remedy or relief to its policy holders who are members of the class in the action captioned Willie B. Martin, et al. v. The Liberty Life Insurance Company, Civil Action Number: 00-CP-40-3000.

Subsequently, the South Carolina Department of Insurance (“Department”) and Liberty filed a Joint Motion to Approve Settlement with this court on January 29, 2003 (“Joint Motion”). In their Joint Motion, the Department and Liberty ask this tribunal to review and approve a Regulatory Settlement Agreement (“Settlement Agreement”) which provides “for benefits for policyholders, a charitable contribution, and an administrative payment to the Department.” The provisions of the Settlement Agreement are summarized in the Joint Motion.


Having two motions before it, this court, in the interest of judicial economy, issued an Amended Notice of Hearing on both the Motion to Intervene and the Joint Motion to Approve Settlement by Order dated February 14, 2003, notifying the parties that both motions would be heard by the court, in accordance with their filing dates, at 10:00 a.m. on February 24, 2003. Both parties and the proposed Intervenors were given the opportunity to present evidence, including testimony, and argue their respective positions.

After listening to the arguments of the parties and the Intervenors, Matilda Singleton and Lawrence Singleton, the court found they had standing to intervene and made them parties for the limited purpose of objecting to this tribunal’s consideration of and approval of the Settlement Agreement.

After a complete review of the record, including the memoranda on file, and having considered the arguments of the parties and the Intervenors, this court approves the Settlement Agreement.

BACKGROUND

In June 2000, the Department instituted a market conduct examination to determine whether the underwriting of Liberty’s existing block of industrial life insurance was impacted by the race of the applicant(s). On October 23, 2001, the Department’s Chief Market Conduct Examiner (“Examiner”) issued a Report on Target Multi-State Examination as to Market Conduct Affairs of Liberty Life as of June 30, 2000 (“Report on Examination”). The Director of the Department subsequently issued on December 19, 2001 an Order Adopting Report on Examination. Thereafter, Liberty served its request for a contested case proceeding based on both the Report on Examination and the Order which adopted the Report on Examination.

On March 5, 2002, both Liberty and the Department filed Summary Judgment motions. Arguments were heard on the motions on March 20, 2002 and an Order was issued by this tribunal on August 23, 2002. This tribunal held that S.C. Code Ann. §§ 38-55-50 and 38-57-120(1) (Supp. 2001) prohibited discrimination on the basis of race, and that Liberty, by using race-based premiums for industrial life insurance policies, had violated S.C. Code Ann. §§ 38-55-50 and 38-57-120(1) (Supp. 2001).


While awaiting a hearing on the merits to determine the appropriate penalty to be assessed against Liberty, Matilda Singleton and her son, Lawrence Singleton, filed a motion to intervene on December 17, 2002.[1] On January 29, 2003, the Department and Liberty filed a joint motion to approve a settlement which the parties had agreed to.

CLASS ACTION IN CIRCUIT COURT

On May 29, 2001, in the case captioned Willie B. Martin, et al. v. The Liberty Life Insurance Company, Civil Action Number: 00-CP-40-3000, the Hon. L. Casey Manning, Judge, Fifth Judicial Circuit, issued an Order certifying a national class action of all African-Americans who had purchased discriminatory industrial life insurance policies from Liberty, or any insurance company or block of business acquired by Liberty. The class action complaint in Martin alleges, that Liberty targeted low income, uneducated, unsophisticated minority segments of the population and marketed for sale to them industrial life insurance and other debit products.[2] Further, the class action alleges that Liberty continues to charge and collect race-based premiums from African-Americans in South Carolina and other states in which it does business.[3] On that same date, Judge Manning denied Liberty’s motion to stay the class action pending conclusion of the administrative proceedings with the Department. Liberty appealed Judge Manning’s order denying the stay of the class action. The South Carolina Court of Appeals dismissed the appeal on March 27, 2002.

In late 2001 Liberty notified the circuit court and the plaintiffs in the class action that, beginning on December 1, 2001, it intended to implement a “Benefit Dividend Program” which would provide for enhancements or benefits for the discriminatory policies. The proposal provided for the following:


1. Liberty would pay a benefit dividend equal to 30 % of the policy benefits to African-American policyholders whose policies reflected race distinct mortality data;

2. Liberty would pay the benefit dividend to African-American policyholders at the time of death, maturity, or when a policyholder sought to surrender the policy for cash in the future;

3. Liberty would pay the benefit dividend to African-American policyholders who had died within the prior seven (7) years;

4. Liberty would not pay the benefit dividend to policyholders who had already surrendered their policies for cash, or those who had allowed their policies to lapse prior to December 1, 2001;

5. Any acceptance of the benefit dividend payment by a policyholder would not result in a waiver or compromise of the claims asserted in the class action in circuit court or in the action pending in the Administrative Law Judge Division.

As a result of Liberty’s intent to implement this Benefit Dividend Program, the plaintiffs in the class action moved to enjoin Liberty from implementing any benefit program or other enhancement to the policies during the pendency of the class action.

The motion was heard by the Hon. Alison Renee Lee. Notwithstanding Liberty’s argument that the benefits to be provided under the Benefit Dividend Program would not result in a waiver or compromise of the claims asserted in the Martin class action or in any action pending before the Administrative Law Judge Division, Judge Lee issued an Order dated December 12, 2001 which granted plaintiff’s motion for injunctive relief.[4] In effect the Order prohibited Liberty from putting in place the proposed Benefit Dividend Program. She stated that it appeared that the Benefit Dividend Program was “designed to address Plaintiffs’ allegations that Liberty charged higher premiums to African-Americans than other similarly situated policyholders.” Further, Judge Lee made a number of findings, among which the following are germane to the motion now before this court:


3.                  Because Liberty Life’s Benefit Dividend program seeks to address and resolve certain claims in this action, it represents a compromise of this action within the meaning of Rule 23 (c). Rule 23 (c) requires that any compromise or settlement with the Class must be submitted for approval by the Court. Implementation of the program seriously affects the Court’s ability to monitor and approve any potential settlement and to manage the litigation.

4.                  Here, Liberty Life may not evade this Court’s oversight and review by a unilateral ‘voluntary’ benefits program that may, as a practical or legal matter, reduce the Class Members’ ability to obtain full and fair relief in the certified class action.

5.                  Additionally, the proposed Benefit Dividend payments, which constitute an enhancement, or increase, in the benefits under the policies, may also conflict wit the relief sought by the Class Members since Plaintiffs seek injunctive and equitable relief entitling the Plaintiffs and Class Members to recover as refunds premium overcharges paid on the policies with interest and enjoining Defendant from collecting discriminatory premiums in the future.

6.                  Since the payments proposed do not include all of the Class Members as defined by this Court, I find this factor could also lead to confusion and misunderstanding among the Class Members.

TESTIMONY

Diane H. Irving.


At the hearing on February 24, 2003, this tribunal heard testimony from Diane H. Irving, the Chief Market Conduct Examiner with the Department (“Ms. Irving”). Ms. Irving has held this position with the Department for the last six years and has been employed with the Department for the last twenty-four years. She served as the chief examiner in this examination of the records of Liberty which began on July 5, 2000.[5] The examination was concluded on March 12, 2001 and the report (“Report on Examination”) was issued on October 23, 2001.

She testified that there are about 162,700 policies[6] which were issued by Liberty to policyholders who paid the premiums based on their race. Approximately 56,546 of these policies were sold to South Carolina residents who were African-American. The remainder were sold to residents living in other states who were also African-American.[7] These policies are either presently owned by these policyholders or were owned by these policyholders to or for whom benefits have been paid in the past.

Ms. Irving testified that the Department has made a determination that the Regulatory Settlement Agreement between Liberty Life Insurance Company and the South Carolina Department of Insurance, acting as the Primary Regulatory Negotiator for and on behalf of each of the Insurance Regulators adopting this Regulatory Settlement Agreement, is a fair and reasonable settlement. She noted that the independent consulting firm of Saylor and Saylor had reviewed the Settlement Agreement and agreed with the Department that it was fair and reasonable.

She noted that pursuant to § V. B. of the Agreement, Liberty will make payments at the time of the claim to in-force policyholders[8] as of the Settlement Implementation Date as follows:

1. increase the face amount of the policy by one third in the event of a death claim;

2. increase the face amount of the policy by one third for endowment policies that mature; or

3. increase the gross cash surrender benefit payable by one third before reduction by any outstanding loan or other indebtedness.


Further, Ms. Irving noted that § V. C. of the agreement, entitled “Claims, Endowments, and Cash Surrender Payments paid from January 1, 1986 to Settlement Date,” requires Liberty to make payments to identifiable beneficiaries or policyholders who received a claim, endowment, or cash surrender payment where the date of the original payment was made between January 1, 1986 and the date of the Settlement Implementation Date.[9] The payment would be one third of the original payment plus simple interest from the date of the original payment at the rate of 4 % per annum.

Further, Liberty would create a fund consisting of One Million Dollars ($1,000,000.00) for the payment of an additional benefit payment to policyholders or beneficiaries who received a claim, endowment, or cash surrender payment where the date of the original payment was prior to January 1, 1986. The base benefit amount would be one third of the original payment plus simple interest at the rate of 4 % per annum.

As a part of the Settlement Agreement, Liberty would make a charitable contribution in the amount of Two Million Dollars ($2,000,000.00) and pay to the impacted states that adopted the Settlement Agreement the sum of $ 436,036.00. See §§ VII and VIII.

Robert E. Evans.

Mr. Evans, the president of Liberty, also testified at the hearing. He has been the president of Liberty since March 1999 and was employed with the Fleet Financial Group and The Travelers Company prior to this employment.

Mr. Evans oversaw the settlement negotiations on behalf of Liberty. He stated that Liberty will exercise due diligence to locate all beneficiaries or policy-owners to whom benefits have already been paid to ensure they are paid the additional benefits due to them under the Settlement Agreement.

ARGUMENTS AND DISCUSSION

Intervenors.


The Intervenors argue in this matter that Liberty does not contest that it charged African-Americans premiums that were one-third higher in cost than those charged to Caucasian policyholders for the same insurance products. Further, in their class action complaints, they allege that Liberty continues to charge and collect race-based premiums from African-Americans in South Carolina and other states in which it does business. Also, they note that this court in its Order dated August 23, 2002 held the following:

In light of these guiding principles, I find that S.C. Code Ann.§§ 38-55-50 and 38-57-120(1) prohibit discrimination on the basis of race. As such, it is clear that (Liberty Life), by using race-based premiums for the industrial life insurance policies at issue in this case, has violated S.C. Code Ann. §§ 38-55-50 and 38-57-120 (1) (Supp. 2001).

Intervenors posit that if this tribunal authorizes the implementation of the benefits as proposed in the Settlement Agreement, its effect may compromise, diminish or settle the benefits to which they and other class members are entitled to if they prevail in the class action. Further, they believe that any Order from this court which adopted the Settlement Agreement would be in direct contravention to the provisions of Judge Lee’s Order which granted the injunctive relief against Liberty.

Intervenors further note that a similar class action case [10] involving race-based premiums was concluded by an Order from the circuit court which approved a settlement agreement between the insurance company, the class action members and the Department. In that case, the class action members received additional benefits than those proposed in this matter. For example, the insurance company agreed:

1. to cease its prior practice of selling discriminatory policies, bringing them to a race neutral status; and

2. to pay an additional 2 % as an additional benefit.

Intervenors argue that the comparable relief awarded to the class members in that case is more beneficial than the “benefits” proposed by Liberty in this Settlement Agreement.

Further, they note that one of the allegations in the Martin class action asks for rescission of


all policies which were issued in violation of South Carolina’s Anti-Discrimination laws. Thus, if rescission is allowed, those class action members who owned such policies could recover all the premiums heretofore paid which would typically represent between two to three times the face value of the suspect policies, rather than an enhancement of one-third of the face value.

A thorough review of the Order by Judge Lee notes some of her concerns about the initiating of the benefits by Liberty. They were that (1) most of the class members were elderly; and (2) most of the class members had limited education and business sophistication. To prevent any undue influence over these class members, Judge Lee felt the need to enjoin Liberty from initiating the benefit program since it would allow Liberty to have direct communication with the class members. Further, she noted that Liberty intended to continue defending the class action. Also, she noted that the benefit dividend program payments had not been reviewed but had been unilaterally determined by Liberty.

This tribunal has reviewed the Settlement Agreement in detail and has listened to the testimony of the chief examiner of the books and records of Liberty, as well as that of its president. No testimony was presented by the Intervenors. The agreement meets with the approval of the Department and of Liberty and this tribunal finds that it is fair and reasonable. Further, the agreement provides an additional safeguard: there can be no payment of benefits nor any communication by Liberty with any policy owner or beneficiaries under a policy subject to the Settlement Agreement until such time as the injunction issued by Judge Lee in her Order dated December 12, 2001 has been modified allowing and authorizing such.

This court finds the Settlement Agreement fair and reasonable and incorporates all its provisions into this Order as a part and parcel thereof. However, in light of the pending class action and Judge Lee’s injunction, this court feels constrained to issue a stay of this Order pursuant to ALJD Rule 29(D) and S.C. Code Ann. § 1-23-380(A)(2) (Supp. 2002), which will prevent the parties herein from implementing any of the provisions of the Settlement Agreement pending a modification of the injunction issued by the Court of Common Pleas for Richland County, State of South Carolina, on December 12, 2001.


ORDER

IT IS HEREBY ORDERED that the Motion to Approve Settlement Agreement is hereby granted. This court finds the Settlement Agreement fair and reasonable and incorporates all its provisions into this Order as a part and parcel thereof.

IT IS FURTHER ORDERED that this Order is hereby stayed pursuant to ALJD Rule 29(D) and S.C. Code Ann. § 1-23-380 (A)(2) (Supp. 2002), pending a modification of the injunction issued by the Court of Common Pleas for Richland County, State of South Carolina, on December 12, 2001.

AND IT IS SO ORDERED.

____________________________________

Marvin F. Kittrell

Chief Administrative Law Judge

Columbia, South Carolina

March 11, 2003



[1] Ms. Singleton is a class member in the class action filed in circuit court (Martin). Further, Ms. Singleton recently filed (February 19, 2003) with several others a class action in federal court (Matilda Singleton, McLaurin “Mack” Wade, and Ernest Barber, Jr., on behalf of themselves and on behalf of all others similarly situated v. Liberty Life Insurance Company, Civil Action Number: 3: 03-535-10).

[2] Liberty constructed the industrial and other insurance policies with small face values (typically between $250.00 and $500.00), charging weekly or monthly premiums often under $1.00, and marketed these policies through agents who were given exclusive territories, known as “debit routes.” The agents would visit the homes of policyholders residing within their routes to collect the premiums.

[3] See p. 2 of Judge Lee’s Order dated December 12, 2001.

[4] Judge Lee’s Order is on appeal to the South Carolina Court of Appeals.

[5] The Agreement states in § II. A. that in June 2000, the South Carolina Department of Insurance, working with the Insurance Regulators for the States of Kentucky, Louisiana, North Carolina and Ohio (“Primary Regulatory Working Group”), began a Target Multi-State Examination into Market Conduct Affairs of Liberty Life Insurance Company on June 30, 2000).” The Agreement further states in § II. C. that the “Members of the National Association of Insurance Commissioners (“NAIC”) agreed that the Primary Regulatory Working Group would investigate the matters that were the subject of the Examination and would, if appropriate, seek to obtain a multi-state settlement with respect to these regulatory issues.”

[6] Based upon records from 1985 to date which the Department found to be credible.

[7] These policyholders are also members and/or are represented by the class members in the class action.

[8] Approximately 120,000 of the policies were in force in June 2000 and were sold to residents in various states.

[9] These policies numbered approximately 42,000.

[10] Mozell Powell, et al. v. Atlantic Coast Life Insurance Company, Civil Action Number: 00-CP-40-3723, Richland County Court of Common Pleas, a class action involving similar issues as this class action, a settlement agreement was entered into by the insurance carrier, the state Department of Insurance and the class action legal counsel on October 7, 2002.


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