1) DOL Regs. got you worried? If so, we highly recommend you check out www.pomplanning.net.
2) Did you see my othr newsletter this week titled: Whole Life vs. 529 Plans–The Truth? If not, you can read it by clicking on the following link:
Court Certifies Class Action Suit against ING over FIA Sales
This case is somewhat shocking. The outcome is not certain, but the fact that several claims not only made it by Summary Disposition (dismissal) and that a Class Action was actually certified is really something to pay attention to.
Summary: In a nutshell, Plaintiff is alleging that ING’s marketing material about how the product credited returns and dealt with the bonus did not match up with what the contract actually said and how the product actually performed.
Plaintiff alleges that the ING indexed annuity brochure was false and misleading when it stated that “100% of your premium is put into the contract.” This allegation is nuanced but very interesting. As anyone who’s sold a FIA knows, the money doesn’t go to work in the index itself. The insurance company buys income producing bonds and the income from those bonds are used to buy options on a stock index which then drive the investment returns.
There are two items of interest in this case. 1) That it even made it through Summary Disposition (dismissal). I’ve never seen a case where the insured sued the insurance company over a FIA because the money itself wasn’t actually invested in the index. 2) That the class action was actually certified. This could be a huge headache for ING.
Case facts: ERNEST O. ABBIT vs. ING USA ANNUITY AND LIFE INSURANCE COMPANY
Plaintiff, an 83-year old retired senior citizen, bought a FIA from ING with an effective date of September 28, 2010. Plaintiff ING FIA offered five crediting strategies. He chose monthly averaging. The product also came with a 5% bonus.
Plaintiff alleged that the ING indexed annuity brochure was false and misleading in the following respects: (1) the statement that “100% of your premium is put into the contract” was false and misleading because under the annuity’s complex derivatives structure, Plaintiff immediately lost over $100,000 of his retirement savings value on the first day of his investment; (2) the contract “would not receive interest credited on the full premium, as represented;” (3) the five percent premium bonus promised by Defendant was not immediately credited to the annuity; (4) the five percent premium bonus was not “protected” as promised, and could be “diminished;” and (5) Plaintiff would not receive compounded interest as set forth in the contract.
According to Plaintiff, Defendant designs its indexed annuity products to “systematically deprive ING annuity holders of retirement savings and earnings potential.” Plaintiff alleges that subsequent to signing Defendant’s annuity contract (“the Annuity Contract”), Plaintiff received false and misleading “year-end” and “annual” statements that inaccurately accounted for the bonus and daily interest credits promised to Plaintiff under the Annuity Contract. Specifically, Plaintiff alleges the following false and misleading representations on his year-end and annual statements: (1) the “Cash Surrender Value” of the annuity was materially understated; (2) the “Minimum Guaranteed Contract Value” of the annuity was materially understated; and (3) the statements falsely claimed that the Cash Surrender Value included a Surrender Charge. Plaintiff bases his allegations of understated statement values on allegations that the reported annuity values reflected charges or reductions not provided for by the contract and did not accurately account for the bonus and daily interest credits promised under the annuity contract. Plaintiff alleges Defendant has “purposefully targeted a vulnerable class of senior citizens for sale of these derivatives, embedded in ING’s indexed annuities.” Plaintiff further alleges that Defendant concealed material facts surrounding the annuities’ true asymmetric valuations from investors, and failed to train its sales force to either understand, appreciate, or disclose to consumers the true valuations of the derivatives embedded in Defendant’s annuity contracts.
Actual initial allegations in first complaint*
On September 25, 2013, Plaintiff filed a Class Action Complaint alleging eight causes of action against Defendant: (1) Breach of Contract and Breach of Good Faith and Fair Dealing; (2) Breach of Fiduciary Duty; (3) Financial Elder Abuse in violation of California Welfare & Institutions Code section 15600, et seq.; (4) Fraudulent Concealment in violation of California Civil Code section 1710, et seq.; (5) Concealment in an Insurance Contract in violation of California Insurance Code section 332; (6) Unlawful, Deceptive, and Unfair Business Practices in violation of California Business & Professions Code section 17200, et seq.; (7) Unfair, Deceptive, and Misleading Advertising in violation of California Business & Professions Code section 17500, et seq.; and (8) Failure to Supervise. On November 25, 2013, Defendant filed a motion to dismiss all causes of action in the Complaint. (Dkt. No. 6.)
Summary Disposition Outcome
The following counts were dismissed:
-Breach of Implied Covenant of Good Faith & Fair Dealing
The following were NOT dismissed:
-Breach of Express Contract
-Second Cause of Action – Breach of Fiduciary Duty
-Financial Elder Abuse
-Statutory Unfair Competition
Comments: The breach of fiduciary duty claim that was not dismissed should trouble every insurance carrier and potentially insurance agents. Normally there is no fiduciary duty between insurance carrier and the insured. The course stated that “an insurer-insured relationship may give rise to a fiduciary duty where other acts or representations form a fiduciary relationship.” Plaintiff alleged that Defendant promises investors continued commitment, thanking them for ongoing trust and confidence in Defendant as their “preferred financial services provider.” The court is going to allow the court or a jury to decide if there was a fiduciary relationship.
To read the actual decision on Defendant’s Motion for Summary Disposition, click here.
*In May of 2014 Plaintiff amended his complaint to include four more counts: (8) Failure to Supervise (against ING); (9) Declaratory Relief re Qualifying Securities (against ING); (10) violations of the California Securities Act (against ING); and (11) Control Person Liability (against ING U.S.). (ECF No. 20.)
Class Action Certified
The fact that this case is certified as a Class Action Suit should be very scary to the entire insurance industry. To read the court’s decision to allow certification to be part of this suit, click here.
Plaintiff sought to certify a class action for the following counts:
(1) Breach of the Implied Covenant of Good Faith and Fair Dealing;
(2) Breach of Fiduciary Duty;
(3) Fraudulent Concealment;
(4) Violation of Unfair Competition Law;
(5) Violation of False Advertising Law (“FAL”);
(6) Declaratory Relief re Qualifying Securities;
(7) Violations of the California Securities Act
The above counts are a general class for all persons or entities that, when a resident of California, purchased a Secure Index fixed index annuity contract from ING USA Annuity and Life Insurance Company within the applicable statute of limitations.
The California Seniors Subclass
Plaintiff also sought that a subclass be certified for all members of the California Class that were age 65 or older on the date of purchase. Plaintiff proposes to certify this California Class for: (1) Violation of Financial Elder Abuse Law.
Interesting fact: Plaintiff testified at his deposition that he did not read or review the brochure in detail prior to purchasing the annuity and did not understand it. Plaintiff reported that he relied more on independent financial advisor Matthew Copley than on any written materials in deciding to purchase his contract.
-Breach of Contract
-Security Law Violations
Class certification denied:
-Breach of the Implied Covenant of Good Faith and Fair Dealing
-Breach of Fiduciary Duty
My best guess at an outcome?
My guess is that the damages to each Plaintiff will be proved to be very minor and that ING will settle the case for a small amount per class member. That will still be a large dollar amount in total which will give the Plaintiff’s attorneys a nice payday and reason for them to accept settlement.
As an attorney I understand the games that are played with lawsuits in general and class action lawsuits specifically. If an attorney can get by Summary Judgment and get a class certified, there almost certainly will be a large payday waiting for the law firm. This is not an abuse of process, but it’s not a process that will give the non-lawyer a warm and fuzzy feeling about the legal system.
There are plenty of real abuse cases out there with www.stopirarescue.com being the most abusive sale in the industry today with www.section79plans.net being the second most abused. Hopefully someday a class action lawsuit will be filed on behalf of clients harmed by agents peddling and insurance companies offering support for these types of sales.