Sacramento Bee
(CA) August 15, 2019
A judge is urging
CalPERS to settle a major lawsuit over price increases for its long-term care
insurance policies, suggesting the system could have to pay a lot of money if
the lawsuit goes to a jury trial in October.
The lawsuit, filed
in 2013, alleges CalPERS violated contracts when it hiked premiums by 85
percent for about 100,000 public employees after promising stable prices in
marketing materials. CalPERS has said it had the authority to increase the
rates and did so solely to keep the plans sustainable.
Superior Court
Judge William Highberger issued a tentative ruling last month saying he was
inclined to decide CalPERS raised rates for an impermissible reason for a group
of about 85,000 policyholders with a unique plan benefit.
Those policyholders
bought "inflation protection" plans, which featured steady increases
to their benefits to cover the rising costs of long-term care -- coupled with
promises that premiums would stay the same.
They agreed to pay
about twice as much in premiums as policyholders with more basic plans, and
CalPERS' marketing materials said their premiums would be "locked
in." Marketing materials came with graphs that showed a flat-line
projection for future premiums as policyholders aged.
Highberger said he
is inclined to rule that the marketing language means CalPERS may not raise
rates simply because they promised an inflation protection benefit. He didn't
include roughly 18,000 policyholders who are part of the suit's class but
didn't purchase the extra benefit.
If the lawsuit goes
to trial as scheduled on Oct. 30, a jury will decide whether CalPERS did or
didn't increase premiums specifically because of the inflation protection
benefit. The jury could decide whether all, none, or part of the increase was
specifically due to the benefit, which would determine how much money CalPERS
would have to pay, if any.
Plaintiffs have
estimated the lawsuit could cost CalPERS $1.2 billion if the retirement system
loses.
"There is a
very serious risk that a money judgment for a rather large amount of money will
be issued in due course in this case," Highberger wrote, saying he agreed
with plaintiffs' interpretation of the "your premiums will not
increase" language.
CalPERS maintains
it had the authority to selectively raise rates despite the language in the
marketing materials.
"While we
respectfully disagree with Judge Highberger's tentative ruling that the
insurance policies limited CalPERS' ability to increase premiums, he did opine
that increases are permitted in certain situations," CalPERS spokesman Joe
DeAnda said in a prepared statement. He said CalPERS intends to prove that the
increase "was one of those situations, and hence that it was consistent
with the judge's ruling and was therefore permissible under the policies."
DeAnda said the
outcome of the lawsuit wouldn't affect the rest of the retirement system's
benefits. The $375 billion fund administers retirement benefits for about 2
million people, including pensions for about 596,000 retirees.
Highberger's
tentative ruling said a settlement would "necessarily involve the state's
executive branch, particularly the Department of Finance, and the
Legislature."
He wrote that an
inability by CalPERS to pay claims could "create an obvious default by an
arm of the state in the fulfillment of its contract obligations. This, in turn,
could seriously impair the credit rating of the state."
CalPERS' struggles
with long-term care insurance aren't unique. Highberger's tentative ruling
cites the challenges of pricing a new type of insurance in his explanation of
how CalPERS ended up raising rates so dramatically in the two-part 85 percent
increase in 2015 and 2016, which followed other rate increases in prior years.
While many insurers
offered the plans in the 1990s, premium increases and insurer losses drove most
out of that line of business, according to the AARP.
"We will
continue to explore all legal and other options to maintain the viability of
the long-term care insurance program, and will not enter into an agreement that
would compromise the right of our policyholders to get the benefits to which
they are entitled under their policies," DeAnda said in the statement.
(c)2019 The
Sacramento Bee (Sacramento, Calif.)
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Sacramento Bee (Sacramento, Calif.) at www.sacbee.com
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