NEW YORK — Two legal decisions this month related to equity index annuities make clear that plaintiffs must attack specific annuity provisions or standardized marketing materials in order to show the “commonality” needed for class action certification.
Allegations that the entire EIA product was deceptively marketed by insurers or that individual adviser representations were misleading probably don’t have enough commonality to justify a class action, industry observers noted.
In one case, the U.S. District Court in Honolulu refused to certify a class action with about 700 members — all in Hawaii — against Sioux Falls, S.D.-based Midland National Life Insurance Co., finding that there were insufficient “common issues,” because advisers selling the EIAs used widely varying sales techniques.
The court’s denial of class certification in the case backs the position that the determination of whether an adviser has done something inappropriate must be made on a “sale by sale” basis, noted Robert “Bo” Phillips, a Los Angeles-based attorney with Reed Smith LLP of Pittsburgh.
“The Hawaii ruling is also significant because it rejects the notion that plaintiffs can prove classwide injury simply by attacking the design or performance of an annuity product,” said Mr. Phillips, who represented Midland in the suit.
Jim Bickerton, a partner with the Honolulu law firm Bickerton Lee Dang & Sullivan, which represented the Hawaii plaintiffs, said the decision is being appealed.
In the second case, the 8th U.S. Circuit Court of Appeals in St. Louis upheld certification of a 400,000-member national class action against Allianz Life Insurance Company of North America. The court ruled that there were “common issues” because all of the plaintiffs were challenging the legality of the Golden Valley, Minn.-based insurer’s “upfront bonus” incentives, which it allegedly touted as a way for clients to offset investment losses, surrender penalties and income taxes.
Standardization in focus
“The difference between the two cases is that the Midland plaintiffs attacked the EIA product as a whole, whereas the Allianz plaintiffs focused on the bonuses,” said Jason Doss, an attorney with Page Perry LLC in Atlanta who represented the Allianz plaintiffs. “Allianz used standardized written sales materials, while Midland reps made no standardized misrepresentations,” he added.
“Each annuity sale appears to be a highly individualized transaction,” the judge in the Midland case wrote. Advisers with different backgrounds and training gave different sales presentations and created unique written materials, the judge added.
The plaintiffs are free to pursue individual actions, but they can’t sue as a class, the Hawaii judge concluded.
The gist of the allegations in the Allianz case is that the bonuses weren’t “upfront and immediate” as the company had claimed but rather were available only if clients held the annuity for five years and then annuitized over a period of 10 years, Mr. Doss said.
“Allianz Life has always taken great care to disclose the terms and features of our annuity products, especially as they relate to the bonus benefits,” said company spokesman Jim McManus. “We disagree with the comments made by plaintiff’s counsel which do not accurately represent our products and their features.”
Precedential value debated
There have been several other potential class actions filed against Allianz, Midland and other EIA insurers, but industry observers differ about whether the latest two cases set a precedent.
“Other cases may have other issues,” Mr. Doss said. Judges consider the facts of each case when determining suitability for a class action, he noted.
“The Hawaii federal court dealt a blow to plaintiff’s class action lawyers on the mainland whose lawsuits depend on product defect allegations,” Mr. Phillips said.
Plaintiff’s attorneys who specialize in securities class actions received another setback last month when the Supreme Court held that plaintiffs must show convincing evidence of possible fraud for the case to move forward.
“I don’t think [the Hawaii case] sets a precedent at all,” said someone familiar with EIA litigation, who asked not to be identified. “[The Hawaii judge] made it clear many times that he viewed that action as distinct from the mainland cases and of no value as precedent.”
The anonymous individual noted that other EIA class actions have been certified, and others will be.
But an attorney not involved in any EIA litigation said that the rulings in both cases were in line with class action certification procedures.
It is harder to obtain class action status in “omissions” cases — such as the one in Hawaii — in which plaintiffs allege that certain information was withheld or that certain oral statements were made to them, noted Steven Cooper, a shareholder with Anderson Kill & Olick PC in New York. “A class is more likely to be certified where written materials such as a prospectus [were] given to everyone,” he said.
“Variability in agents’ sales presentations — many of which focus on only the most favorable characteristics of annuity products — is likely to cause insurers more grief than protection,” said David Macchia, chief executive of Wealth2k Inc., a Hingham, Mass., strategic-marketing firm for annuities.
“The best protection for insurers is to put compliant sales presentation tools in their agents’ hands in advance as part of a strategy to pre-empt this type of litigation,” he added.