Conseco hoping to settle: Class action accuses insurer of misleading its customers about life insurance costs

Conseco Inc. appears close to resolving a class-action lawsuit that encompasses 75,000 polices and accuses the company of duping customers about the cost of insurance.

The Carmel-based company said in a regulatory filing that it has entered settlement talks “in an attempt to avoid the risks and costs of protracted litigation” and has set aside an undisclosed amount of money toward resolving the matter.

At issue are so-called Lifetime and Lifestyle universal life insurance policies purchased by customers nationwide in the 1980s and ’90s. Plaintiffs-including Edwin “Jake” Garn, a former astronaut, U.S. senator and insurance executive-charge Conseco unfairly changed the way it calculated the cost of the insurance in 2003 and 2004, resulting in a sharp increase in monthly charges.

“Based on [company] commentary, it appears to me that a settlement could be close,” said Jukka Lipponen, an analyst who covers Conseco for New York-based Keefe Bruyette & Woods.

The policies at issue were sold by Massachusetts General Life Insurance Co. and Philadelphia Life Insurance Co. before Conseco purchased the companies.

Plaintiffs say the companies failed to adequately disclose a discount factor. That discount initially kept costs low, but premiums skyrocketed when Conseco imposed the change, said Jay Kennedy, an Indianapolis attorney representing the plaintiffs.

Conseco then demanded that policyholders either pay the higher premium or surrender their policies and sign a release waiving rights to future claims, he said.

This left some policyholders in a bind. They couldn’t afford the higher premiums, but they also had grown older and thus had a hard time finding new policies for reasonable prices, Kennedy said.

The complaint also said the change imposed allowed Conseco to add $360 million to its balance sheet.

Conseco denies the allegations and promises a vigorous defense, the company said in its first-quarter filing with the Securities and Exchange Commission. Conseco spokesman Jim Rosensteele declined to elaborate but said the company no longer sells the policies.

About 86,500 policies were subject to the change. The class-action case involves 75,000 policies, of which 51,000 are still active, Kennedy said.

The policy totals amount to a small slice of the business of Conseco Insurance Group, an arm of the company that has more than 2 million active policies. Life insurance makes up about 40 percent of the total, Rosensteele said.

The class-action lawsuit doesn’t specify the amount of damages plaintiffs seek. But it does say they want a refund for the increased charges and they want Conseco to reinstate its old method for calculating the cost of coverage.

The case, filed in U.S. District Court, Central District of California, involves a consolidation of several lawsuits, including one filed in 2004, with Garn as lead plaintiff, in federal court’s Southern District of Indiana.

Kennedy said another lawsuit over the policies is pending in Hamilton County court, waiting for the outcome of the bigger class action.

A settlement could deliver a dose of good news to a company hit recently by disappointing earnings and the pending departure of another CEO, William Kirsch. Analysts say settlements generally wind up costing less than what a plaintiff originally sought.

They also quantify an uncertainty for investors trying to judge a company’s value.

“You give people more comfort in that they’re not going to be-at least in that issue-hit down the road,” said Mark Finkelstein, director of equity research for Chicago-based Cochran Caronia Waller Securities.

However, for now, the company is offering little insight into what a settlement might cost.

Earlier this month, Conseco reported first-quarter profit of $55.8 million, down 21 percent from the same quarter a year earlier. Those results included an after-tax expense of $9.6 million “related to certain litigation reserves,” according to a company press release.

Companies typically say little about litigation reserves because they don’t want to tip their hand on how much they might be willing to pay, said Mike Whitfield, who follows Conseco for Hahn Capital Management in San Francisco.

Lawyers involved with the classaction case have met a few times this year to discuss the settlement and agreed to keep talking after a May 11 conference, according to U.S. District Court filings.

If settlement talks fall through, a trial is set to begin Oct. 24.