Court Quashes Challenge To Bonus Annuity Feature

By Linda Koco
Annuity News

A federal court has sided with a lower court in rejecting allegations of fraud and misrepresentation in the marketing of a 10 percent bonus annuity feature in a fixed index annuity.

In a decision rendered last week, the Ninth Circuit Court in Los Angeles tossed out those allegations, noting that the policy issuer, EquiTrust Life, “delivered precisely what it promised.”

A bonus provision essentially increases (“bonuses”) a contract’s account value by a specified percentage, typically in the first policy year. In this case, the bonus was 10 percent.

According to the court, the index annuity’s 10 percent bonus was accurately described in the EquiTrust annuity materials and properly credited to the policyholder’s account.

Of interest to FIA agents

FIA agents and advisors will likely find value in the decision for several reasons. One is that the appeals court found the bonus was “accurately described.” Bonus provisions periodically come under fire from FIA opponents who contend curtailments in other parts of bonused index annuities render the value of the bonus questionable if not misleading. As will be seen below, a variation on that argument was the kernel of the original case but did not hold up under U.S. court scrutiny at either the district or circuit court levels.

Second, the case did not involve the conduct of an agent or agency. As the Ninth Circuit put it, the complaint was “based entirely on the language of the annuity contract and the EquiTrust marketing materials; he [the plaintiff- appellant] makes no claim of misrepresentation by the insurance agency that sold him the annuity.”

Finally, the decision effectively ends a “putative class action” over the index annuity at the center of the case. Such an action is filed by one or more aggrieved parties who claim to have suffered a similar wrong or loss. If the court disagrees with the complaint, the case won’t get certified as class action lawsuit. In this case, the lower court “denied class certification as moot,” the Ninth Circuit noted.

Had the sought-for certification gone through (which it did not), the unwanted publicity surrounding it would have been the concern for agents. Specifically, the resulting class action could have stirred up questions and uncertainties about annuities or bonus programs and other associated features.

The Ninth Circuit’s decision comes at a time when bonus provisions in index annuities are popular features. For example, nearly 70 percent of index annuity sales in third quarter 2014 offered a premium bonus, according to the Sales & Market Report from Wink Inc. The sales for such products were up 3 percent over the previous quarter, Wink reported.

The percentages do vacillate from quarter to quarter, but tend to hover in the 60 percent to 70+ percent range. As recently as third quarter 2012, nearly 81 percent of index annuity sales offered a bonus feature, Wink figures indicate.

According to various industry experts, the bonus feature often appeals to individuals who also elect a guaranteed lifetime withdrawal benefit or other income rider as part of their retirement income plan. They like the idea of the bonus bumping up the annuity’s account value at the get-go, so as to increase their potential for receiving a bigger income stream in retirement (depending on policy performance and other factors).

In third quarter 2014 sales, the bonuses being offered on index annuities ranged from 0.5 percent to 12 percent, depending on product, according to Wink.

Some case details

The Ninth Circuit decision was on appeal from the United States District Court in Arizona. Brought by Paul Harrington, the putative class action concerned an EquiTrust MarketPower Bonus Index Annuity that he had bought from an insurance agency in 2007.

The initial premium was $432,530.92, according to the court. The 10 percent premium bonus added $43,253.10 to the accumulation value in the first year. The surrender charge ran 14 years.

In 2009, Harrington alleged that the carrier’s marketing of the annuity violated the Racketeer Influenced and Corrupt Organizations (RICO) Act. The racketeering activities alleged by Harrington were mail and wire fraud related not only to the annuity’s premium bonus — the focus in this article — but also to two other issues: application of the market value adjustment feature, and alleged “circumvention” of state nonforfeiture laws.

The Ninth Circuit affirmed the lower court’s judgment rejecting all three allegations. In addressing the premium bonus issues, the court held that:

• No duty to disclose pricing policies: It is a “settled premise that a seller generally has no duty to disclose internal pricing policies or its method for valuing what it sells.”
• No fiduciary role:  “Harrington does not allege that EquiTrust was a fiduciary or that some statute required the disclosure of its internal pricing policies. In the absence of such a relationship, there is no duty to disclose that the annuity may provide lower index credits than might have been available in an alternative product without the bonus feature.”
• Promise not illusory: “The bonus increased Harrington’s accumulation value without requiring him to deposit additional funds, allowing him to withdraw more money without penalty than otherwise would have been possible. The promise of a ‘bonus’ was thus not, as Harrington claims, illusory.”
• Not fraudulent: “Nor is it clear that Harrington would have been better off absent the bonus feature. If the index credits were regularly low, Harrington’s investment would outperform a non-bonus annuity that provided the possibility of higher credits. The district court thus correctly concluded that use of the term ‘bonus’ was not fraudulent.”

According to the federal government’s United States Courts website, “a court of appeals decision usually will be the last word in a case, unless it sends the case back to the trial court for additional proceedings, or the parties ask the U.S. Supreme Court to review the case.”

Annuity News Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].