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Whether insurance companies that sold life insurance policies to Plaintiffs with "vanishing premium" features may be liable to Plaintiffs for violation of New York General Business Law § 349, or in the alternative, for common law fraud because the insurance companies did not completely disclose to Plaintiffs the possibility that Plaintiffs would have to continue making premium payments after the date set by the companies for the premium payments to end.


Yes. While the behavior of the insurance companies did not rise to the level of common law fraud, Plaintiffs may seek recovery under New York General Business Law § 349 because the marketing practices used by the insurance companies are likely to mislead a reasonable consumer.


The Court ruled on two cases with nearly identical issues in this opinion. In the Gaidon action, a purported class of Plaintiffs sued Guardian Life Insurance for preparing misleading "vanishing premium" illustrations for Plaintiffs, which Plaintiffs allege they relied upon in purchasing the polices from Guardian. Plaintiffs brought suit after Guardian informed them that they would have to make premium payments beyond the date specified in the "vanishing premium" illustrations. The trial court granted Guardian's motion to dismiss based on the pleadings, and the Appellate Division affirmed. The issues in the Goshen action are nearly identical, except that Goshen Plaintiffs formed a certified class and their action was dismissed upon Defendants' motion for summary judgment after discovery had been completed. The Appellate Division upheld the Goshen dismissal, relying on its decision in Gaidon. The Court of Appeals upheld the Appellate Division's dismissal of the Gaidon and Goshen Plaintiffs' common law fraud claims while reversing the Appellate Division's dismissal of both Plaintiffs' General Business Law § 349 claims.

"Vanishing Premium" insurance policies invest the policyholder's premium payments in order to create an accumulation of money in the policy. If market conditions meet the projections set out in the "vanishing premium" plan, then the policyholder will not need to make additional premium payments after a certain point, as these will be paid out of the accumulated investments. If market conditions change, however, the policyholder may have to continue making premium payments for the duration of the policy. Plaintiffs in both actions maintain that they were not informed of this risk when they purchased the policies, despite language on sheets accompanying the "vanishing premium" illustrations and in the policies themselves stating that the vanishing premium dates were not guaranteed and were subject to changes in market conditions.

In upholding the Appellate Division's dismissal of Plaintiffs' common law fraud claims, the Court held that the insurance companies' incomplete disclosures regarding the risks associated with the "vanishing premium" plans were insufficient to meet the "misrepresentation or material omission" element of a common law fraud claim, which must be proven by clear and convincing evidence. While the Court recognized that some other jurisdictions have reached the opposite result, it noted that courts have narrowly defined common law fraud to cover conduct that is nearly criminal in nature.

The Court did, however, hold that the insurance companies' behavior might violate General Business Law § 349, because that statute contemplates deceptive practices that do not necessarily rise to the level of common law fraud. Specifically, the Court determined that the applicable test is whether the insurance companies' representations and omissions were likely to mislead a reasonable consumer acting reasonably under the circumstances. The Court found that the insurance companies' actions could mislead reasonable consumers on the facts as alleged by Plaintiffs, because the very purpose of the companies' marketing scheme was to convince perspective purchasers that the vanishing date would conform to each purchaser's expectation, even though the companies knew such results were unlikely. Thus, the Court ruled that the Appellate Division should not have dismissed Plaintiffs' claims as a matter of law.

Justice Bellacosa dissented from the Court's holding on the General Business Law § 349 claims. He argued that the disclaimers written on the insurance policies and their accompanying material as well as common sense would prevent any reasonable consumer from being deceived into believing that the vanishing timelines were guaranteed. Thus, the Appellate Division's dismissal of Plaintiffs' claims as a matter of law was justified. Furthermore, Justice Bellacosa was concerned that the majority's broad interpretation of § 349 was not supported by the statute's legislative history and would lead to excessive litigation.

Prepared by the liibulletin-ny Editorial Board.