A federal court judge decided against Pacific Life Insurance Co. this week in a case involving the delayed exchange of a variable life insurance policy, ordering the carrier to pay Branch Banking & Trust Co. $259,926, plus interest.
Judge John G. Heyburn II of the U.S. District Court in the Western District of Kentucky provided his opinion on the firms' closing arguments Tuesday. Pacific Life will appeal the decision at the 6th U.S. Circuit Court of Appeals, according to the insurer's spokesman, Tennyson Oyler.
“Our goal is that the appellate court will further address the aspects of securities laws and the nature of variable insurance products that Judge Heyburn was not able to reconcile with existing Kentucky laws,” Mr. Oyler wrote in an e-mail.
For now, the March 29 decision closes two years of litigation between BB&T and Pacific Life. BB&T, acting as a trustee of the Charles A. Brown and Elise A. Brown Irrevocable Life Insurance Trust, filed the suit after the bank decided in August 2008 to perform a 1035 exchange of a Pacific Life variable life insurance policy for one from John Hancock Life Insurance Co.
Under Section 1035 of the tax code, the accumulated funds in one insurance policy can be directly transferred from one policy to another without creating a taxable event.
Pacific Life acknowledged receiving the request in September 2008, when the policy's surrender value was $779,818, according to court documents.
However, a dispute over paperwork between BB&T and Pacific Life held up the transfer request for three months. In that period, the market plummeted and the policy's value fell by $259,926, according to the suit. The bank argued that Pacific Life violated its contractual obligations to perform the 1035 exchange without delay.
BB&T claimed that the insurer's requirements, including one that the transaction be signed off by a John Hancock corporate officer and notarized, stalled the exchange, according to the suit.
Pacific Life argued that BB&T could have prevented its losses if it had moved the policy's investments into a fixed-asset or money market account.
The bank's attorney, David A. Calhoun of Wyatt Tarrant & Combs LLP, countered that at the time, BB&T had no idea when or whether the market would recover from its free fall.
“If you sell out and move into cash, then you've taken an unrealized loss and converted it into a realized loss if the market came back,” he said.
Last November, Judge Heyburn decided in favor of BB&T, noting: “The policy's surrender provision [gave the insured party] an outstanding, irrevocable right” to transfer his or her funds to another carrier.
He cited a state Court of Appeals decision saying that a “surrender provision is a continuous, irrevocable offer which becomes a binding contract when accepted by the policy.”
“There can be no doubt that the circumstances have conspired to Pacific's disadvantage,” Mr. Heyburn wrote in his March 29 opinion. “Had this dispute arisen under different market circumstances, we would not be at this contretemps.”
