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Note: Jonathan Ross and others (Insureds) brought a putative class action on behalf of those who bought a life insurance policy from AXA Equitable Life Insurance Company (Insurer), a company located in the state of New York. Insureds allege that Insurer’s annual disclosures were misleading due to unaccounted for shadow transactions. Specifically, Insurer reported reinsurance transactions with a captive insurer, which is a company owned by Insurer’s parent company and usually located in another jurisdiction. However, the reserve credit demonstrated in the report was based on “undisclosed or inadequately disclosed guarantees and indemnifications from an affiliate.” Insureds allege that, through shadow transactions, Insurer “used [letters of credit] backed by undisclosed or inadequately disclosed parental guarantees to lower its aggregate reserves for life [insurance] contracts” that are required by New York insurance regulations. According to Insureds, using this technique, Insurer’s “assets appeared to provide policyholders with greater protection against loss than was actually the case.” Insureds argued that through these transactions Insurers were portrayed as more financially stable than they actually were, demonstrated by the increase in Insurer’s risk-based capital ratio represented in Insurer’s annual statements. Insureds allege that those assessing the company or making purchasing decisions relied upon the representations made by Insurer. Insureds also allege that they have paid higher premiums on their policies in comparison to the security they are receiving.

A motion was brought by Insurer to dismiss the case, while Insureds moved for a class certification. The United States District Court for the Southern District of New York, Furman, J., dismissed the case. The Judge found that Insureds lacked standing to bring this suit against Insurer. The Judge reasoned that they must prove that at least one of the Insureds faced an injury-in-fact. The Judge stated that the “right to full and accurate disclosure” is not considered an injury-in-fact. Additionally, the Judge stated that the Insureds bargained for the premium price paid and it did not cause them any injury. The Judge noted that Insureds theory of injury, “that they face…a risk of harm in the future — namely, the risk that [Insurer], by virtue of its shadow insurance transactions, will be unable to pay [Insureds’] claims when they are eventually made” is purely speculative. The Judge found that “in order for [Insurer’s] shadow insurance transactions — specifically, its failure to disclose parental guarantees in securing reserve credits for its reinsurance transactions — to cause [Insurer] to become unable to pay [Insureds’] claims when they are due, several intervening events (many entirely independent of the disputed transactions themselves or any alleged effects of the same) would have to occur. Most significantly, the captive reinsurer — which presumably is required by its own regulator to hold significant reserve capital, even if it was ultimately a parental guarantee and not that capital that supported [Insurer’s] ability to obtain a reserve credit — would first have to default on its reinsurance obligations despite whatever surplus capital it holds.” Even if that were to occur, the Judge noted that a series of events that would have to occur to render the letter of credit an inadequate form of security was so unlikely and hypothetical that it failed to meet the requirements that a potential injury be impending. Therefore, the Judge, without addressing the legality or propriety of Insurers conduct regarding the shadow insurance, dismissed Insureds complaint for lack of standing. [JSG/gmc]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.