On February 23, 2009, the U.S. District Court for the District of Minnesota denied class certification in Avritt v. Reliastar Life Ins. Co., No. 07-1817 (D. Minn. Feb. 23, 2009), a case in which plaintiffs challenged the manner in which interest was credited to fixed annuities. (Please click here for the opinion.) The annuity contracts in question provided for a guaranteed minimum interest crediting rate, with discretion for the insurer to credit additional interest. Plaintiffs alleged that the insurer’s practice of paying lower interest rates on “old money” and higher rates on “new money” (i.e., banding) violated various duties of good faith, loyalty, and fair dealing. They further alleged misrepresentations and omissions in statements about the interest rate crediting practices. The court found that Plaintiffs could not meet their burden under Fed. R. Civ. P. 23 to establish that class certification was appropriate.

The fixed deferred annuities purchased by Plaintiffs guaranteed a specified interest crediting rate, typically 3½%, and allowed for higher interest crediting rates as may be set by the insurer’s board of directors in its discretion. The contracts contained a provision stating that “[t]here may be more than one interest rate in effect at any time.” Consistent with that provision, the insurer grouped premiums paid into “bands” based on when they were paid. Interest crediting rates varied from band to band, but premiums in the same band received the same treatment, subject to periodic adjustment of interest rates for each band.

Plaintiffs alleged that the insurer marketed its annuities on the basis of the higher rates on premiums in the most recent bands (“new money”) while increasing its profits by paying lower rates on older bands (“old money”). Plaintiffs claimed that this practice breached the provisions of the annuity contracts and that the insurer failed to disclose this practice, made false and misleading statements about the practice, and submitted inadequate filings regarding this practice to state regulators.

In an earlier ruling in 2007, the court had dismissed Plaintiffs’ claims for breach of fiduciary duty, tortious breach of duties of good faith, loyalty and fair dealing, and violation of the California Consumer Legal Remedies Act. It also dismissed in part the claim for violation of the California Business and Professions Code (CBPC), but allowed Plaintiffs to proceed on the remainder of that claim, as well as claims for breach of contract, unjust enrichment and violation of the Washington Consumer Protection Act (WCPA). Plaintiffs sought to certify under Rule 23(b)(2) or 23(b)(3) a class of California residents who were purchasers or holders of or beneficiaries under relevant annuity contracts issued from 1992 to 2002.

The court rejected certification under Rule 23(b)(2) on the grounds that injunctive relief was not the predominant relief sought. It then turned to Rule 23(b)(3), under which certification is appropriate only if “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” The court found that Plaintiffs had not met their burden of establishing that common questions predominated over individual questions as to any of the four remaining claims:

  • With respect to the breach of contract claim, the court found that because the annuity contract did not specify any interest-crediting formula, Plaintiffs would need to rely on their argument that the contractual duty of good faith and fair dealing required applying a particular formula. Because this theory was based on the expectations of the parties, individual proof of the expectations of individual class members would be required.
  • Plaintiffs’ WCPA claim required them to show, among other things, “a causal link between the unfair or deceptive act and the injury suffered.” The court found that “[b]ecause Plaintiffs’ WCPA claim centers on allegations of non-disclosure and misrepresentations, evidence of reliance by individual class members will be relevant to proving causation.” Plaintiffs’ claims under the CBPC unfair competition law required a similar showing of causation.  
  • Plaintiffs devoted “little attention” to their unjust enrichment claim and thus failed to show that common issues predominated as to that claim.  
  • Individual proof would likely also be required for various defenses, including statute of limitations, ratification, estoppel, waiver and laches, particularly given the 14-year gap between the start of the class period (1992) and the filing of the action (2006).  

Rule 23(b)(3) also requires a finding that “a class action is superior to other available methods for fairly and efficiently adjudicating the controversy,” before a court can certify a class. The court found that the need for individualized proof would “render management of a class action difficult and reduce or eliminate the efficiencies typically associated with class litigation.” A further reason for not proceeding with a class action in this case was the fact that the Washington Court of Appeals had recently held that a nationwide class was appropriate in a case making similar claims against the same defendant (prior to Northern Life’s merger into ReliaStar) and thus, another class action would possibly be duplicative, placing an undue burden on the defendant. Curtis v. Northern Life Ins. Co., 2008 WL 4927365 (Wash. Ct. App. 2008). (Please click here for the opinion.) Finally, the court noted that concerns about feasibility of individual lawsuits were mitigated by the availability of attorneys’ fees under some of the claims being pursued.