A New Player in Cost of Insurance Challenges: The Tax Cuts and Jobs Act

Cost of insurance (COI) complaints premised on the Tax Cuts and Jobs Act (TCJA) do not appear to be slowing down. Approximately six class actions have been filed claiming that enactment of the TCJA in 2017 resulted in a substantial “windfall” for insurers. The plaintiffs allege that insurers breached their insurance contracts by failing to pass on savings realized as a result of the TCJA, which reduced the federal corporate tax rate from 35% to 21%. Four class actions were filed in the last nine months alone. The most recent action, Dubin v. Sun Life Assurance Co. of Canada, contains many of the same allegations as the previously filed complaints.

The class actions contain a new twist on now familiar failure-to-decrease COI allegations: that the tax cuts from the TCJA should have resulted in a significant reduction of COI deductions. Insurers, the plaintiffs allege, experienced not only improved mortality since 2017 but also benefited from a 14-percentage-point decrease in the tax rate. Several actions allege that insurers have in fact continued to increase COI deductions based on pre-TCJA rate scales notwithstanding improved mortality and tax experience touted in their financial statements.

Each complaint relies on policy language that expressly lists taxes among the enumerated factors on which COI rates are based, arguing that this creates a symmetrical obligation to lower rates when tax expectations improve. Indeed, several of the complaints draw a comparison to the litigation that ensued in the 1990s following the enactment of the Revenue Reconciliation Act of 1990 (DAC Tax Reform Act), where insurers that had not enumerated taxes as a COI factor were successfully challenged for passing along tax increases. The DAC Tax Reform Act litigation prompted insurers to add language to their policies expressly enumerating taxes and expenses as COI factors. The plaintiffs claim that the contracts do not permit an insurer to simply ignore improvements in its future expectations, while reserving the right to increase charges if expectations worsen. The plaintiffs liken this approach to a “heads I win, tails you lose” scenario to the detriment of policyowners.

While company expenses are also a COI factor listed by many companies, the Dubin complaint claims that it is “all but impossible for any deterioration of the defendant’s expectations for the persistency or expense factors to have offset the magnitude of the 2017 tax cuts’ positive impact and improvement in mortality expectations.” Thus, the improvement in mortality and tax liability should have led to a significant decrease in the COI rates used to calculate COI charges for the plaintiff and members of the proposed class, but did not.

The majority of these actions are largely in the early stages, so it remains to be seen how courts will rule on the substantive TCJA allegations.