The suits involve the ghoulish secondary market in life policies, which boomed from 2004 to 2008 as thousands of old people sought to make fast cash by taking out multimillion-dollar policies on their own lives to sell to investors. Tens of billions of dollars worth of insurance changed hands. Under the deals, the investors pay the premiums until the insured person dies, at which point they collect the death benefit.
Since the bust in the market, insurers have portrayed themselves as the victims. They have filed hundreds of lawsuits over the past two years seeking to cancel policies they say weren't intended as estate-planning tools, as buyers purported, but were instead meant to enrich investors speculating on old people's lives. The industry also asked regulators to stop investors from wagering with their products.
Now, some investors are striking back. They are asserting that insurers' own agents and managers encouraged investor-driven sales to boost their compensation, and that the industry cried foul only when faced with big payouts on the policies and bond-market declines that made some policies less profitable than expected.
The investors want the insurers to be forced to honor the contracts, or to refund all of the premiums they have paid. Some are seeking punitive damages. The claims appear in filings in state and federal courts nationwide, involving dozens of policies.
The life policy secondary market was one of many sent reeling by the global financial crisis of 2008-09, but it also has been hurt by revised actuarial tables, which show older people living longer, and the mounting litigation.
Apart from several hundred suits that have been filed by insurers, suits also have been filed by relatives of some of the deceased elderly, alleging that death benefits belong to the family members.
With much of the litigation in early stages, legal experts say it is unclear how effective investors' new counterattacks will be. Investors could face big losses if policies in their portfolios are canceled, leaving them with nothing to show for their expenditures.
The insurers contend they are acting in the name of good public policy: State insurable-interest laws require an insurance buyer to have a bigger stake in the insured person's continued well-being than in his death.
Investors in a pair of cases in California scored a victory in November when a state-court judge in Santa Barbara ruled they had met the minimum pleading standards necessary to move forward with their fraud claims against Hartford, Conn., insurer Phoenix Cos. Those two lawsuits involve about 30 policies totaling more than $260 million in face amount.
"Phoenix denies the allegations and looks forward to its day in court," said David McDowell, a lawyer representing Phoenix.
In the lawsuits, investment entities Olive Tree Holdings LLC and XLI Holdings LLC allege that Phoenix, around 2005, "embarked on a concerted effort to regain momentum in its sale of life-insurance products."
The insurer targeted old people to buy high-face-value policies that the insurer "knew were likely to be resold" to investors, in a "scheme" aimed at generating large commissions and bonuses for its agents and managers, the suits contend.
The suits assert that three Phoenix representatives, including a regional manager, communicated in 2006 to an XLI executive that Phoenix was willing to issue large policies to people who wanted to resell them to investors.
But after Olive Tree and XLI bought rights to various Phoenix policies, the insurer attempted to rescind almost all of those policies and said it was entitled to retain the premiums that had been paid, the suits allege.
Mr. McDowell, the Phoenix lawyer, while declining to comment on individual elements of the plaintiffs' case, said: "Like the rest of the life-insurance industry, when Phoenix became aware of the threat [of stranger-originated life insurance] toward the end of 2005, it started to take steps to keep this business from getting in the door."
Meanwhile, in a lawsuit in state court in Tarrant County, Texas, a different set of investors alleges that insurers including American International Group Inc. similarly once welcomed stranger-originated policies as a way to boost revenue.
AIG "relaxed or disregarded their own underwriting guidelines, disregarded any issues or 'red flags' raised in the underwriting process," and "did not seek information that they now contend, after the fact, to be material," according to the lawsuit. The policies in dispute were mostly issued in 2007.
In court filings, AIG denies the allegations and has alleged misrepresentation and fraud on the part of the investors. The company declined to comment.