Dennis Norem v. Lincoln Benefit Life Company
2013 U.S. App. LEXIS 24810
| 7th Cir. | 2013Background
- Plaintiff Dennis Norem bought a variable universal life insurance policy from Lincoln Benefit in 1994 and filed a putative class action alleging breach of contract over how the insurer calculated the monthly cost-of-insurance (COI) charge.
- The policy’s COI clause states the COI rate “is based on the insured’s sex, issue age, policy year, and payment class” and adds: “The rates will be determined by us, but they will never be more than the guaranteed rates shown on Page 5.”
- Lincoln Benefit admits it uses other factors (e.g., lapse/persistence assumptions, commissions, administrative costs, profit) when setting COI rate scales, but the rates have never exceeded the guaranteed maximums in the policy.
- Norem’s claim: the phrase “based on” should be read as limiting Lincoln Benefit to consider only the listed factors, so considering undisclosed factors breaches the policy and inflated COI charges harmed policy values.
- The district court granted summary judgment for Lincoln Benefit, concluding under Illinois law that “based on” does not imply exclusivity and the guaranteed maximum rates constrain insurer discretion; the Seventh Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the COI clause limits Lincoln Benefit to using only the listed factors (sex, issue age, policy year, payment class) when setting COI rates | Norem: “based on” means exclusively limited to those four factors; use of other undisclosed factors breaches contract | Lincoln Benefit: “based on” identifies principal components but does not preclude use of additional reasonable factors; guaranty cap preserves a substantive limit | Court: “based on” is not exclusive; it describes principal components; insurer may consider other factors so long as rates stay below guaranteed maximums |
| Whether the COI clause is ambiguous, requiring construing against insurer or extrinsic evidence | Norem: ambiguity exists and should be construed in insured’s favor | Lincoln Benefit: language is unambiguous in ordinary meaning; no need to rewrite contract | Court: phrase has ordinary dictionary meaning (principal/supporting elements), not exclusivity; no ambiguity that would defeat summary judgment |
| Whether allowing other factors renders COI clause or other charge provisions meaningless or permits double-dipping | Norem: permitting other factors undermines listed charge distinctions and could double-count expenses | Lincoln Benefit: policy does not tie particular expenses to specific listed charges; pricing is holistic and industry practice supports multiple inputs | Court: no textual support that each charge must correspond to a single expense; insurer reasonably may consider multiple inputs in pricing |
| Whether cases cited by Norem control or require a different outcome | Norem: other district courts have held similar “based on” clauses limit insurers to mortality or listed factors | Lincoln Benefit: other authorities differ on facts and contract language; those decisions are not controlling | Court: distinguished opposing cases (different clause language, factual records); declined to adopt view that insurers cannot consider profit or other reasonable inputs |
Key Cases Cited
- Hess v. Kanoski & Assoc., 668 F.3d 446 (7th Cir. 2012) (undefined contract terms given their plain, ordinary meaning)
- Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204 (Ill. 1993) (undefined policy terms receive dictionary/plain meaning under Illinois law)
- Elson v. State Farm Fire & Cas. Co., 691 N.E.2d 807 (Ill. App. Ct. 1998) (elements of breach of contract under Illinois law)
- Lee v. Allstate Life Ins. Co., 838 N.E.2d 15 (Ill. App. Ct. 2005) (discussion of COI clause language in interlocutory/class-certification context; not dispositive on merits)
- Yue v. Conseco Life Ins. Co., 282 F.R.D. 469 (C.D. Cal. 2012) (construing a COI clause referencing mortality and finding insurer’s increases inconsistent with that textual basis)
- In re Conseco Life Ins. Co., 920 F. Supp. 2d 1050 (N.D. Cal. 2013) (denying insurer summary judgment where plaintiffs showed COI increases appeared divorced from mortality; distinct factual posture from this case)