Great-West Lifeco Inc. plans to defend “vigorously” a class-action lawsuit alleging it unlawfully used policyholders’ money to help finance its $2.95-billion acquisition of London Insurance Group Inc. in 1997.

The class action, which was recently certified in an Ontario court, is in response to a pair of transactions in November 1997 in which $180 million and $40 million from the participating policyholders’ accounts of London Life Insurance Co. and Great-West Life Assurance Co., respectively, was removed and put toward the acquisition costs of LIGI, London Life’s parent.

The class is made up of 1.6 million London Life policyholders and 130,000 Great-West policyholders who held policies beginning in November 1997. They are being represented by London, Ont.-based law firm Harrison Pensa LLP and Paul Bates of Bates Barristers in Toronto.

In a statement of claim, the policyholders allege the financial assistance was “unlawful” and contrary to the Insurance Companies Act. They further allege it unfairly disregarded the interests of the participating policyholders and violated corporate governance principles.

The class action describes the transactions as a “scheme whereby the participating policyholders were ‘guaranteed’ expense savings in consideration of payments made by the participating accounts.”

The class action, brought by two former London Life actuaries, demands that Winnipeg-based Great-West repay participating policyholders all benefits derived from the two transactions, appropriate interest or other compensation for the opportunity cost of the removed funds, disgorgement of any benefits obtained by the defendants from the use of the funds and an order compelling the payment of dividends, bonuses or other benefits to the class.

The participating accounts are invested pools of money that earn a return and should, under normal circumstances, yield a dividend to participating policyholders. The plaintiffs are claiming 11 years, and counting, worth of negative effects caused by the two transactions. None of the allegations have been proven in court.

“The companies strongly deny the plaintiffs’ allegations made in the claims and are vigorously opposing the lawsuits,” says Marlene Klassen, assistant vice president of communication services at Great-West. “We believe the participating account transactions were beneficial to the participating accounts and fair to participating policyholders.”

Klassen adds that Great-West obtained favourable opinions on the transactions from two external actuarial firms, one of which was acting in the capacity of an independent actuary retained at the request of the Office of the Superintendent of Financial Institutions, as well as the appointed actuaries of both London Life and Great-West.

In its statement of defence, Great-West denies the plaintiffs are entitled to any financial relief: “The concept of the [participating] account transaction was based upon the savings that would result from the integration of the businesses of London Life and Great-West. Anticipated reductions in the cost of administrative functions would represent extraordinary long-term benefits to the [participating] account.”

Great-West, which is being represented by Toronto-based Torys LLP, says there were other anticipated benefits for each of the so-called “par” accounts. The merger of two of the industry’s larger players provided them a leading position in markets in which they competed, enhancing the market presence of the par accounts, Great-West says.

“The par account transaction did not affect the total assets or surplus of the par account. Nor did it adversely affect the dividend expectation of par policyholders,” the statement of defence says.

In a written decision granting the certification, regional senior justice Lynne Leitch of the Ontario Superior Court of Justice says the move achieves access to justice and is the only process by which the class can obtain the remedies it’s after if it succeeds in its claims.

The suit alleges that governance failure at Great-West played a significant role in the transaction. The plaintiffs’ statement of claim says Section 458 of the Insurance Companies Act “did not permit a debit or transfer from the participating accounts of a life insurance company in respect of projected expense savings to assist with acquisition costs incurred by a purchaser of the life insurance company. The allocation of projected cost savings to the participating accounts contravened the ICA.”

The potential impact of the class action on Great-West is not yet certain. However, there was undeniably an effect on the company’s share price. Within days of the class action being certified on Feb. 29, the stock’s value plummeted to a 52-week low of $30.16. It fell even further as March progressed, falling as low as $28.62 a share — a far cry from its 52-week high, set less than five months earlier, of $37.67.

@page_break@Bryan Schwartz, a law professor at the University of Manitoba, says that the certification of the class action is no indication of its chances or how big the potential payout might be if it’s ultimately successful.

“It doesn’t change the underlying laws or the measure of damages if the claim is found to be valid in the end,” he says. “Some [class actions] start up and don’t go very far; some proceed to very large judgments.”

But seasoned plaintiffs’ lawyers say certification of a class action significantly affects the bargaining positions of the parties. Dimitri Lascaris, a partner at London, Ont.-based litigation firm Siskinds LLP, says the power of a certification motion is that the defendants are confronted by the claims of many people in a single lawsuit that has passed a significant procedural hurdle and is now going forward.

“The stakes have gone up exponentially once you have a certification decision,” Lascaris says. “There is significant pressure on the defendant to settle because of the exposure it now has.”

Derrick Coupland, a partner in Blacksheep Strategy, a Winnipeg-based branding consulting company, doubts Great-West will suffer significantly from a reputation or branding perspective as a result of the class action, regardless of the outcome.

“A lot of this will be corporate and legal background noise at the consumer level,” he says. “The value proposition of Great-West or life insurance companies in general is probably premiums, some kind of expectation of benefits and service-related issues — none of which is going on with the lawsuit. I would be surprised if there was much of a brand impact.”

Life insurance is a “fairly low category engagement” for consumers, which means they do not become more involved in or knowledgeable about the sector than necessary.

The one possible negative repercussion that could arise from the lawsuit, Coupland says, is that potential customers may think twice about taking out life insurance policies with Great-West subsidiaries; corporations may do the same concerning group policies. IE