Court File and Parties

Court File No.: CV-14-502296CP Date: 2016-09-20 Ontario Superior Court of Justice

Between: Wendell E. Allen and Linda Allen, Plaintiffs – and – The Manufacturers Life Insurance Company, Defendant

Counsel: Won J. Kim, Megan B. McPhee and Aris Gyamfi for the Plaintiffs Jeffrey S. Leon and Ilan Ishai for the Defendant

Proceeding under: Class Proceedings Act, 1992

Heard: September 20, 2016

Perell, J.

Reasons for Decision

1. Introduction

[1] Pursuant to s. 29 of the Class Proceedings Act, 1992, the Plaintiffs, Wendell Allen and Linda Allen, move for approval of a settlement in this certified class action against The Manufacturers Life Insurance Company (“Manulife”).

2. Factual Background

[2] Manulife is an insurance company licensed to do business throughout Canada. In 2004, it took over the life insurance business of The Maritime Life Assurance Company (“Maritime”), including the TermPlus policies that are the subject of this action.

[3] Mr. Allen is a retired 68-year-old former truck driver and welder. His wife is retired from her work at the West Parry Sound Health Centre.

[4] In July 1986, the Allens purchased a TermPlus life insurance policy from Maritime for Mr. Allen with a $200,000 face value and monthly premium of $138.97 (the “Policy”). They also purchased, as a rider, a TermPlus policy for Mrs. Allen, with a face value of $93,044, and monthly premium of $38.52 (collectively the “Policies”).

[5] TermPlus policies are adjustable policies. Under the policy, the insurer will set up and maintain an account to hold an “Accumulation Amount”, reflective of the net from the additions of the policyholder’s payments of premium amounts and subtractions of charges for insurance (mortality charges) and other expense charges. The premiums are set higher than the anticipated mortality and expense charges, in the expectation that the Accumulation Amount will generate interest and grow over time.

[6] On January 8, 2014, Manulife wrote the Allens to advise them due its error, they had not received adjustment notices and that, as a result of falling interest rates, the current premium that they had been paying had been insufficient to sustain the Policy. The Allens had made all premium payments. Up until January 2014, they were never notified that higher premiums were required to sustain the Policy. They also did not receive an Adjustment Notice on any Policy Renewal Date.

[7] The letter of January 8, 2014 stated:

Due to an error on our part we have not sent you the quinquennial adjustment notices. As a result of the falling interest rates and market conditions since issue, your current premium has not been sufficient to support the insurance amount and therefore, as indicated on previous annual statements, your policy values are in a negative position.

[8] The letter showed “Current values” of the Accumulation Amount of negative $15,837.41 for Mr. Allen’s Policy, and negative $486.46 for Mrs. Allen’s Policy. The Plaintiffs were offered three options for each of their Policies. With respect to Mr. Allen’s Policy, the letter stated:

Option 1: Maintain current face amount of $200,000 Premium required until August 2016: Annual Premium $7,282.28 Monthly Premium $656.41

Option 2: Decrease face amount to $100,000 Premium required until August 2016: Annual Premium $3,681.64 Monthly Premium $332.35

Option 3: Maintain current monthly premium of $138.97 and reduce the face amount to $40,350.

[9] With respect to Mrs. Allen’s Policy, the letter stated:

Option 1: Maintain current face amount of $93,044 Premium required until August 2016: Annual Premium $1,881.58 Monthly Premium $170.34

Option 2: Decrease face amount to $50,000 Premium required until August 2016: Annual Premium $1,011.12 Monthly Premium $92.00

Option 3: Maintain current monthly premium of $38.52 and reduce the face amount to $21,000.

[10] As a retired couple, the Allens could not afford to more than quadruple their premiums, or reduce the face amount of their Policies to a fifth of what they had originally contracted for in order to sustain life insurance coverage. They were also at the stage in their lives where giving up their Policies and purchasing new life insurance elsewhere was no longer an option.

3. The Class Action

[11] On April 15, 2014, the Allens sued Manulife.

[12] The Allens sued for breach of contract. They commenced a proposed class action. They alleged that Manulife failed to properly administer the policies in accordance with the policy provisions. In particular, they alleged that Manulife failed to review and provide adjustment notices for the Policies at the five-year Renewal Dates, when the existing premiums became insufficient to sustain the face value of the Policies because of changing interest rates.

[13] After being served with the Statement of Claim, Manulife undertook an investigation and determined that only seven TermPlus policyholders were sent a letter such as the ones received by the Allens in January 2014. However, it discovered that there were other TermPlus policyholders who did not receive at least one renewal notice.

[14] Manulife decided it should rectify the more general issue of missed renewal notices for all potentially affected TermPlus policyholders.

[15] Manulife retained defence counsel and gave instructions to resolve the claim. Manulife never filed a Statement of Defence or indicated an intention to contest certification of the action as a class proceeding. From the beginning it sought to reach a resolution that would put its policyholders in at least the same – if not better – position than they otherwise would have been, had no renewal notice been missed.

4. The Settlement Process

[16] In July 2014, the parties commenced settlement discussions.

[17] In June 2015, an agreement in principle was reached, and Manulife delivered two copies of a DVD containing confidential documents to assist in a due diligence investigation conducted by expert forensic accountant, Mr. Bob Ferguson, who had been retained by the Allens to review Manulife’s calculations and to ensure that impacted policyholders were not excluded from the settlement.

[18] The parties continued settlement discussions during the due diligence process.

[19] After the Plaintiffs were satisfied with the outcome of Mr. Ferguson’s investigation, the settlement framework was finalized in April 2016, and a Settlement Agreement was signed on June 23, 2016.

5. The Settlement Agreement

[20] The main terms of the Settlement Agreement are as follows:

• Manulife will top up amounts in policyholders’ Accumulation Amounts and/or make adjustments as necessary to return Class Members to the position they would have been in, had all proper adjustment notices been received. Depending on the elections made by eligible Class Members with respect to remedies, the monetary value of the settlement ranges between $1,597,118 and $2,030,272.
• The total number of Class Members eligible for remedies under the proposed Settlement Agreement is approximately 170, spread out across the following three groups:
  • Group 1: The Accumulation Amounts of Group 1 policyholders will be topped up to the level it would have been as of June 30, 2016, had the policyholder: (1) received all proper adjustment notices and elected each time to pay the higher premium to receive the same coverage; and then (2) paid those premiums to the next Renewal Date.
  • Group 2: This group consists of policyholders who elected reduced coverage prior to missing an adjustment notice and those who elected reduced coverage after missing an adjustment notice. The former subset of Group 2 policyholders will receive a top up in the Accumulation Amount to the level it would have been had all proper notices been provided and had they elected to pay the higher premium to maintain the reduced coverage. The latter group will receive a top up of the Accumulation Amount to what it would have been if all proper notices were received and the policyholder elected to pay the higher premium to the Renewal Date on which he or she elected reduced coverage. As of the Renewal Date, policyholders in the latter subset of Group 2 may elect to reverse his or her election and restore the original coverage amount on the condition that the policyholder pays the difference in premium between what was actually paid and what should have been paid to maintain that amount.
  • Group 3: This group consists of former policyholders whose TermPlus policy terminated as a result of surrender or lapse, plan change or conversion, or as a result of a death claim.
    • Top ups for this group will be determined in the same manner as policyholders in Groups 1 or 2, as applicable. These top ups will be calculated from the TermPlus policy termination date until June 30, 2016 with 0.5% interest, and paid into the new policy. If the new policy cannot accept additional premiums, the top up will be in the form of a lump sum payment.
• Manulife will offer to reinstate policies that were terminated due to surrender or lapse. If accepted, the Accumulation Amounts will be topped up to the level they would have been at as of June 30, 2016, had all adjustment notices been received and the policyholder elected to pay the higher premium.
  • This benefit will be granted on the condition that the policyholder pay all adjusted premiums from the last Renewal Date and return any cash surrender value that was received.
  • If the policy reinstatement is not accepted, the Accumulation Amounts will be topped up to the level it would have been had the policyholder received all notices and elected to pay the higher premium to the policy termination date.
  • If a policyholder elected extended coverage and/or let the policy lapse, the top up will be reduced in accordance with the outstanding (lower) premiums.
• Death claim: If holders of policies that were terminated as a result of a death claim elected reduced coverage on a Renewal Date after missing an adjustment notice, the Defendant will pay an additional death benefit equal to the difference between the original coverage amount and the reduced benefit paid. Interest will be paid at a rate of 0.5%, from the date of the original death claim to June 30, 2016.
• For Class Members belonging to an enumerated group, but with unique circumstances that render the remedies inappropriate, special remedies are defined and set out in “Schedule C” to the Settlement Agreement.
• All interest and persistency credits that would have otherwise been added pursuant to the TermPlus contract will be included in the top up calculations.
• Any commission expenses charged to policyholders between January 1, 2005 and the date of a court order approving the Settlement Agreement will offset the commission expense charged when removing that charge when recalculating the Accumulation Amount following the top up.
• If a Class Member incurs an income tax liability as a result of a settlement top up that would not have otherwise been incurred, the Defendant will ensure that the Settlement Benefits still put the affected Class Member in at least the same position that he or she would have been had all proper renewal notices been received.
• Manulife will disseminate the notice of settlement approval and implementation via direct mail to each member of the Settlement Class.
• Manulife will administer the Settlement Benefits by depositing top ups and adjustments directly into the eligible policyholders’ Accumulation Amounts within 90 days of the Implementation Date if no election is required from the policyholder, or within 90 days of an election if one is required by the policyholder.
• Class Counsel will seek Court approval for payment by the Defendant of an Honorarium to the Allens, up to a total maximum of $5,000.
• Manulife will pay the professional fees of Mr. Ferguson ($214,890.43).
• Manulife will pay Class Counsel fees and disbursements as approved by this Court. (To date, an agreement about the precise quantum of Class Counsel fees sought has not yet been reached.)

[21] Class Counsel and the Allens recommend the settlement for approval. There were no objections from Class Members to the proposed settlement.

6. Certification

[22] On June 28, 2016, the action was certified as a class proceeding for settlement purposes.

[23] The common issue certified for settlement was:

Did the Defendant fail to provide one or more Adjustment Notice or Notices to certain holders of a TermPlus life insurance policy that, pursuant to the policy contracts, ought to have been provided?

[24] Mr. and Mrs. Allen were appointed Representative Plaintiffs and the Class was defined as:

All Persons who fall under one of the following categories of current or former TermPlus policyholders, and any former TermPlus policyholder who missed an Adjustment Notice that he or she should have received and whose policy lapsed or was terminated within a year of receiving a subsequent Adjustment Notice (the “Class”).

[25] A Settlement Class was defined for the Class Members eligible for Settlement Benefits under the proposed Settlement Agreement as follows:

(a) all Persons who fall under one of the following categories of current or former TermPlus policyholder, as determined by the Defendant and confirmed through Due Diligence; (i) TermPlus policyholder who missed one or more Adjustment Notice(s) that he or she should have received, and who never elected a reduced insurance coverage amount; (ii) TermPlus policyholder who missed one or more Adjustment Notice(s) that he or she should have received, and who elected a reduced coverage amount; and (iii) TermPlus policyholder who missed an Adjustment Notice that he or she should have received and whose policy lapsed or was terminated within a year of receiving a subsequent Adjustment Notice.

[26] Kim Orr Barristers P.C. was appointed Class Counsel.

[27] At the certification motion hearing, a notice plan for the settlement approval hearing was approved.

7. Settlement Approval

[28] Section 29(2) of the Class Proceedings Act, 1992, provides that a settlement of a class proceeding is not binding unless approved by the court. To approve a settlement of a class proceeding, the court must find that, in all the circumstances, the settlement is fair, reasonable, and in the best interests of the class: Fantl v. Transamerica Life Canada, [2009] O.J. No. 3366 (S.C.J.) at para. 57; Farkas v. Sunnybrook and Women’s Health Sciences Centre, [2009] O.J. No. 3533 (S.C.J.) at para. 43; Kidd v. Canada Life Assurance Company, 2013 ONSC 1868.

[29] In determining whether a settlement is reasonable and in the best interests of the class, the following factors may be considered: (a) the likelihood of recovery or likelihood of success; (b) the amount and nature of discovery, evidence or investigation; (c) the proposed settlement terms and conditions; (d) the recommendation and experience of counsel; (e) the future expense and likely duration of the litigation; (f) the number of objectors and nature of objections; (g) the presence of good faith, arm’s-length bargaining and the absence of collusion; (h) the information conveying to the court the dynamics of, and the positions taken by, the parties during the negotiations; and (i) the nature of communications by counsel and the representative plaintiff with class members during the litigation. See: Fantl v. Transamerica Life Canada, supra, at para. 59; Corless v. KPMG LLP, [2008] O.J. No. 3092 (S.C.J.) at para. 38; Farkas v. Sunnybrook and Women’s Health Sciences Centre, supra, at para. 45; Kidd v. Canada Life Assurance Company, supra.

[30] In determining whether to approve a settlement, the court, without making findings of fact on the merits of the litigation, examines the fairness and reasonableness of the proposed settlement and whether it is in the best interests of the class as a whole having regard to the claims and defences in the litigation and any objections raised to the settlement: Baxter v. Canada (Attorney General) (2006), 83 O.R. (3d) 481 (S.C.J.) at para. 10. An objective and rational assessment of the pros and cons of the settlement is required: Al-Harazi v. Quizno’s Canada Restaurant Corp. (2007), 49 C.P.C. (6th) 191 (Ont. S.C.J.) at para. 23.

[31] The case law establishes that a settlement must fall within a zone of reasonableness. Reasonableness allows for a range of possible resolutions and is an objective standard that allows for variation depending upon the subject-matter of the litigation and the nature of the damages for which the settlement is to provide compensation: Parsons v. Canadian Red Cross Society, [1999] O.J. No. 3572 (S.C.J.) at para. 70; Dabbs v. Sun Life Assurance Company of Canada (1998), 40 O.R. (3d) 429 (Gen. Div.). A settlement does not have to be perfect, nor is it necessary for a settlement to treat everybody equally: Fraser v. Falconbridge Ltd. (2002), 24 CPC (5th) 396 at para. 13; McCarthy v. Canadian Red Cross Society (2007), 158 ACWS (3d) 12 (Ont. S.C.J.) at para. 17.

[32] The design of the approval process requires the court to carefully scrutinize any proposed settlement. The design of the approval process: (a) requires the proponents of the settlement to justify it; (b) provides an opportunity for those affected by the settlement to be heard; and (c) requires the court to evaluate the settlement and make a formal order. This design is meant both to deter bad settlements and also to ensure good ones that achieve the goals of the class action regime; namely: access to justice, behaviour modification, and judicial economy.

[33] The settlement in the immediate case is excellent. It puts Class Members in a position that is at least equal to but often better than the position that they otherwise would have been in if they had received the Adjustment Notices in accordance with the policy. All Class Members who missed a requisite adjustment notice due to Manulife’s error receive 100% recovery under the settlement, without any deduction for Class Counsel, expert, or administration fees. Under the settlement, the Class Members are credited for having paid increased premiums over the years to sustain their policies when in fact they did not pay such increases.

[34] The Class Members have secured benefits that went beyond what they could have achieved at a trial. There is a streamlined administration process with adjustments being directly made to the Accumulation Accounts of the Class Members.

[35] In the immediate case, having regard to the various factors that the court must consider in approving or rejecting a settlement, I conclude that the settlement is fair, reasonable, and the best interests of the Class Members. I approve the settlement.

8. Honorarium

[36] The Allens were fully involved in the litigation and the settlement process. I am satisfied that the honourarium request is appropriate and should be granted.

9. Conclusion

[37] For the above reasons, I grant the Allens’ motion.

Perell, J. Released: September 20, 2016