Reserves

In a summary order, the United States Court of Appeals for the Second Circuit has affirmed the dismissal of two “shadow insurance” putative class action lawsuits against Axa Equitable Life Insurance and Metropolitan Life Insurance on the basis that the plaintiffs lacked standing under Article III of the United States Constitution to sue them in United States District Court.  The Complaints alleged that the insurance companies misused captive reinsurers domiciled in foreign jurisdictions to avoid higher reserve requirements of U.S. jurisdictions, resulting in the misstatement of their financial information and increased risks for plaintiffs.  The District Court had dismissed the suits based on the failure of the plaintiffs to establish Article III standing.

The Court of Appeals found that the Complaints failed adequately to allege that the plaintiffs had suffered injury-in-fact, a necessary element of Article III standing.  First, the court rejected plaintiffs’ argument that allegations that the companies had violated New York Insurance Law section 4226 sufficiently alleged injury-in-fact because of injury “inherent in the statutory violation.”  The Court held that “[t]he mere fact that an insurer may make a misleading representation does not require or even lead to the necessary conclusion that the misleading representation is material or even likely to cause harm.”  Second, the Court held that to establish standing plaintiffs had to allege that the injury-in-fact was concrete, particularized, and “actual or imminent, not conjectural or hypothetical.”  (Citing Spokeo, Inc. v. Robbins, 136 S.Ct. 1540 (2016).  The Court found that the harm alleged in the Complaints was speculative and hypothetical, insufficient to establish standing.

For readers interested in a deeper reading of this appeal, following are links to the recording of the oral argument at the Second Circuit and some of the briefs of the parties in the consolidated appeal: Appellants’ principal brief; Axa’s brief; MetLife’s brief; and Appellants’ reply brief.

Appellate oral argument:

Ross v. Axa Equitable Life Insurance Company and Robainas v. Metropolitan Life Insurance Company, Nos. 15-2665, 15-3504, 15-3553 and 15-4189 (2d Cir. Feb. 23. 2017).

This post written by Rollie Goss.
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Plaintiffs alleged that AXA Equitable Life Insurance Company violated New York insurance law prohibiting misrepresentations by insurers of their financial condition, because AXA had not disclosed “shadow transactions” in its filings with the New York Department of Financial Services (“NYDFS”). NYDFS defines “shadow insurance” as the use of captive reinsurers in foreign jurisdictions with lower reserve requirements to do an “end-run around higher reserve requirements.” Plaintiffs contended that AXA was not as financially sound as it had represented because in failing to disclose “shadow transactions,” AXA received higher ratings from rating agencies and was able to post fewer reserves thus selling a product that had undisclosed risks and created an “increased risk to the insurance system as a whole. . . .”

The court denied class certification and granted AXA’s motion to dismiss for lack of Article III standing. Plaintiffs did not allege that their premiums were higher because of the alleged “shadow transactions” nor that they had relied upon AXA’s representations in filings with the NYDFS. Violation of rights created by state law (as opposed to federal law), standing alone, does not allege an “injury” sufficient to establish Article III standing. Plaintiffs needed to have established that at least one of them had suffered an “invasion of a legally protected interest which is . . . concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” The Court also explained that since plaintiffs never alleged that they would not have purchased the policies had the disclosures been made or that they had suffered any financial harm because of the misrepresentations, the alleged risk of harm was only in the future and was a very tenuous risk at that. Jonathan Ross v. AXA Equitable Life Insurance Co., Case No. 14-CV-2904 (USDC S.D.N.Y. July 21, 2015).

This post written by Barry Weissman.

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